Financial health goal

For example, to measure the financial health of the company, we are indeed big fans of using net profit as a goal. In order to achieve a desired net profit, everyone in the company can take some role in contributing to increasing the revenues or decreasing the expenses that consequently result in the company’s “bottom line.” In this case, the company is like the fabled Golden Goose. The Golden Goose produced golden eggs only when she was healthy. So too must everyone contribute to the health of the company in order for the desired net profit to be produced.

There are plenty of alternative choices, of course, for a financial measure for your company goal for the current time period. We spoke about the possibility of using revenues as your goal when capturing market share. Depending upon the nature of your business, you might choose to focus on some specific line of the income statement, such as the gross profit or the overhead expenses. Alternatively, you might want to focus on the balance sheet, and look to generate higher cash flow by better management of your inventory or accounts receivable.

A Client Story

One of our clients was a manufacturer of machinery used in the pulp and paper industry. They served clients all over the world, often in remote locations that lacked the modern conveniences that we take for granted.

The managers of the business were highly skilled and experienced. They knew how to determine what their clients needed, and they knew how to design, manufacture, and install the equipment that would meet those needs. They were true pros, and they worked hard every day to keep their business growing.

In their zeal to grow the business, however, they had taken their eye off the on-going need to generate cash flow. More specifically, they had accumulated excessive inventory, and their customers were taking too long to pay them.

As a result, their cash was tied up in the goods sitting on the warehouse floor and in the goods and services they delivered to their customers, who hadn’t yet paid them. They were moving at a fast rate, but the cash wasn’t coming home.

Consequently, in their quarterly goal-setting exercise, the managers agreed to both inventory and accounts receivable goals, in addition to their normal net profit goals. And these goals were tied directly to the managers’ performance rewards.

You can probably see where this is going. Once they were focused on these new goals, the managers made great progress at improving cash flow by reducing inventory and accounts receivable.

And the company owner smiled happily while he wrote the reward checks.

Whether you choose goals such as these or not, we advise you to choose goals that are affected by as many people in your organization as possible. You want to create an environment that allows everyone to contribute to achieving the goal.

For example, companies frequently establish a sales, or revenue, goal for the coming year. After all, all businesses want to grow, and this makes logical sense. Unfortunately, not everyone in the company can influence the desired sales level, or can be convinced that their involvement actually matters in moving the sales needle.

That’s why we like to see the company goals related to net profits. Virtually everyone can contribute to the profitability of the company.

..................Content has been hidden....................

You can't read the all page of ebook, please click here login for view all page.
Reset
18.222.120.133