Effective business plans include financial objectives: ways to measure the fiscal performance of a firm that demonstrate the owners’ ability to pursue their business objectives and prove the organization’s long-term viability to various stakeholders: employees, customers, suppliers and creditors. While at the most basic level the balance of receipts and payments indicate commercial gain or loss, a small business can use a variety of specific objectives to appraise its value, emphasizing one or a combination of some measures over others depending on the business structure, such as the number of owners responsible for the business, the nature of the industry or the types of financing used to raise capital.
Usually the most widely used objective, most firms look to maximize profits to recompense investors for taking a risk in the venture. Managers should measure both profit levels: gross profit, or the total revenue minus direct costs of the product or service in question; and net profit, or the income left after operating expenses. Managers can focus on improving different aspects of their operations by determining which margin runs too thin.
If a business has lower overhead or strong backing, it can focus on cash flow through sales and pricing strategy rather than profits to grow the customer base, maintain market share or deter competitors.
If a business operates with investment from private or venture capital (rather than institutional loans), it may focus on maximizing the overall value of the business. The business can demonstrate potential wealth not only by accentuating revenue but by managing assets such as real estate, capital equipment or intellectual property to ensure adequate returns on investment.
With unstable financial markets and jittery investors, a business may divert available revenue, curtail expenditures or even delay expansion in order to reduce or eliminate debt and the costs involved with servicing that debt, be it interest rates on loans or paying dividends to stockholders.
Exercising Management Discretion
Small businesses, particularly sole proprietorships wholly owned by their management, may choose to trade off accountability to creditors or achieving maximum revenue or profits for greater control over their enterprise. To meet their own financial objectives, they can mix and match from a menu of measurements outlined above plus liquidity (the ability to acquire cash flow) and flexibility (the means to move resources within the firm, such as between projects or product lines).
- business activity image by peter Hires Images from Fotolia.com