Have you set big, lofty financial goals for 2023? And if so, how did you come up with those numbers?
Setting financial goals is incredibly helpful so you have something to strive for, but setting the right goals is vital. If they’re not realistic, you’re bound to feel frustrated mid-year, throw up your hands and give up.
Let’s avoid that by setting your goals with intention and research. Answer each of these questions and write down any numbers and calculations so you have them handy.
What was your revenue in 2022?
Start with your revenue from last year. Knowing where you’re starting, you can more easily gauge where you’ll end this year.
If your revenue was $75,000 in 2022, making $250k this year is probably a pretty big stretch. But hitting $120k is likely doable if you’ve been planning for that growth. Think about what your revenue was and what you’d like to see this year.
What were your average monthly expenses in 2022?
Knowing your expenses will make a big difference in your overall profits this year. Going back to the previous example, $75,000 in revenue is pretty good if your expenses were only $10k. But if you’ve been leasing equipment and paying contractors to share the workload, your expenses might be close to your revenue point—dipping deep into your profits.
It’s important to note what your expenses are, then analyze them to see if there’s anything you can let go of. That might help you decide if you need to raise prices, though remember that increasing prices doesn’t mean that you’ll increase your profitability (but it might be a good start).
Have you made any additional purchases or monthly commitments?
You’ve reviewed your expenses from last year, but have you committed to any ongoing monthly (or yearly) expenses for this year? If you joined a membership or mastermind or course/program, you might have a monthly or yearly recurring charge that you need to account for in your 2023 expenses. Be sure to keep this in mind when determining your overall expenses.
How much do you want to pay yourself in 2023?
Everyone, regardless of whether they’re a business owner or employee, deserves to be paid a living wage. What is a living wage? It’s the amount of money you need to make to live the (realistic) lifestyle you want.
Earning a living wage as a business owner has its own set of mindset challenges, but I want you to think about how much you’d like to bring home this year to pay for the things you need and want: your home, car, basic living expenses, and extras that are nice to have like a family vacation or a splurge every once in a while.
Determining Your Goals
Once you have your 2022 revenue, your expense total, and know what you want to bring home in your owner’s pay this year, it’s time to get to work determining what your business’s revenue needs to be to get there.
If you’re new to Profit First, you generally should allocate 50% of your revenue to Owner’s Pay, 5% to Profit, 15% to Taxes, and 30% to Operating Expenses. (Use our Profit First Overview downloadable to help you determine your own percentages.)
Do the math to find out if your current operating expenses are actually 30% of your 2021 revenue. If not, where does your revenue need to be to make that happen?
Here’s the equation to figure that out:
EXPENSES divided by 30% (.3) = REVENUE YOU NEED
So if your expenses are $50k a year, you will need $166,666 in revenue to cover your expenses. And that also means that your owner’s pay (at 50% of revenue) would be $83,333 for the year.
Does that sound doable to you? Where do you need to make adjustments in your revenue to make the numbers work?
Of course, we’re also advocates of setting a goal that’s challenging so you’ll push yourself to new levels. Set your realistic goal based on these calculations as your “good” goal, then challenge yourself to push harder with a “better” and “best” goal for your revenue.
A few important things to keep in mind:
- As your revenue grows, so will your expenses. You’ll need to add new tools and equipment to your business, hire team members, maybe upgrade your physical space.
- It’s okay if your allocation percentages look different than the typical percentages. If you can only allocate 1% to Profit each month right now, start there! Then increase the percentage each quarter.
- Reevaluate your allocations each quarter to ensure that you’re only adding to Operating Expenses that you’re actually going to use. Because we all know Parkinson’s Law…and if the money is there, so will the temptation to spend that money. If your revenue ends up being higher than expected, you’ll want to adjust allocations so you don’t have extra money tempting you in that OPEX account.
Starting off the year on the right financial foot is important. You want to set yourself up for success and challenge yourself to grow throughout the year. And if you have big purchases you’d like to make in your business, having a Profit First professional on your side is key.
Are you ready to set your goals for 2023 and get your accounts set up right? Let’s talk!