If you want to succeed in business, you need to set financial goals. But more than that, you need to set the right ones.
How do I know? After all, I was never going to be a business owner.
When I was four, Dad already knew I’d be a physicist. He’d share with me popular science topics he’d read about, which fascinated me, though I’d get frustrated when I’d ask him a question and he didn’t know the answer.
The great thing about Dad was that he didn’t BS me. When he didn’t know, he said so.
Many years later, after I’d become a Ph.D. physicist, he’d be the one asking me to explain things in physics, and I’d do so in layman’s terms.
I miss Dad and our conversations.
But getting back to business, I was going to be a researcher, and frankly looked a bit down on people who chose to go into business.
They say, “If you want to make G-d laugh, tell him your plans.”
Twenty-two years in, I realized my academic career had hit a dead end. I resigned my position and took a job with a small engineering consulting firm. Just under 2 years later, they had to let me go. Realizing this was the best proof that job security had become a myth, I opened my own small consulting business.
Can you hear G-d chuckling yet?
Two years later, I opened a second, parallel business, through which I bought an office suite and started renting out office space to other professionals.
Is it just me, or is the laughter getting louder?
Another 5 years, another parallel business, this one as a financial strategist for professionals.
I’m pretty sure He’s guffawing now…
The Importance of Goals
You can think of life a bit like being on a river.
You can let the current carry you, but sometimes you hit rocks, rapids, or even a waterfall. Sometimes, with no fanfare the river simply goes where you don’t want to be.
That’s why goals are so important.
They help you figure out if the river you’re on is going in a direction that’s right to you, and whether you need to be rowing with all your might to avoid hitting rocks or going over a waterfall.
They also help you figure out when you’ve succeeded, so you know it’s time to pull your boat to the bank.
How to Set Goals that Work
I’m sure you’ve heard of SMART goals.
No, not smart goals, in lower case.
Upper case SMART goals, as in S.M.A.R.T., standing for Specific, Measurable, Achievable, Realistic, and Time-bound.
Why are these so important?
Specific means the goal is clearly defined and unambiguous. If it isn’t clearly defined, you could mistakenly think you’ve met it when you’re way off.
Measurable means you can easily determine if you’ve met the goal. If your goal isn’t measurable, determining you’ve met it becomes a subjective exercise.
Achievable is self-explanatory. If your goal isn’t achievable, you’ve set yourself up for failure.
Realistic is related to achievable, but speaks beyond what’s theoretically possible, to what you’re likely to want to spend the time, money, and effort to accomplish.
Time-bound is what differentiates a goal from a dream or vision. As they say, “Goals are dreams with deadlines.” It also prevents you from procrastinating. If your goal is to finish reading a specific 300-page book, imagine not defining your goal with a due date. You could read a page a month, finishing the book in 25 years.
Not much of an accomplishment, right?
Or you could put it off for 25 years and only then crack it open if you haven’t gone and died by then.
If you want to make reading that book a SMART goal, you’d set a deadline of say 3 weeks. That would make your goal Specific (finish reading that particular book), Measurable (you’ve read all the pages), Achievable (nothing impossible about reading 15 pages a day for 20 days), Realistic (assuming it’s a book you want to read), and Time-bound (within your 3-week deadline).
How to Set the Right Financial Goals
Now that we know why goals are important, you know you should set some for yourself. Think of this like knowing you want to climb a tree.
With the SMART structure, you know how to create goals that can work. Think of this like knowing how to find and climb a good ladder that lets you reach the lower branches of a tree, and how to find and use the right safety gear (climbing without safety gear shouldn’t appeal to us adults as much as it did when we were 6).
The next and most important piece is how to find the right tree to climb – how to set the right goals.
The 1st Super-Simple Guideline
As a business owner, you want to make sure your business supports your overall life goals. To do this, you need it to provide you with enough money.
Does setting revenue goals do that?
The answer to that is, it depends.
Say you need $100,000 to cover your current annual expenses, plus setting aside money for the future, plus having fun in the present. Would having your business bring in $1 million in annual revenue make that possible?
Maybe, but then again, maybe not.
If your business expenses are $950,000, then that $1 million in revenues would be woefully short of what you need. If your business expenses are just $100,000, you’d be fine with much less than $1 million in revenue.
The better number to track then is profit, rather than revenue.
Another reason for this is that if you decide you need to grow your business, an opportunity that arises may be counter-productive if it increases expenses faster than it grows revenue.
That’s your first simple guideline – ignore the flashy stuff and concentrate on what actually matters.
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The great thing about Dad was that he didn’t BS me. When he didn’t know, he said so.
The 2nd Super-Simple Guideline
Here we go back to the two related parts of SMART, Achievable and Realistic.
Both of these admonish us to (borrowing from a folk expression back home) not try to jump higher than our belly button.
Your goals must not be so aggressive that you can’t achieve them, whether at all or with the resources you’d be willing to expend on the effort. That would simply set you up for failure and disappointment.
On the other hand, making your goals too easy robs you of motivation, letting you do the equivalent of falling asleep on your boat and letting the current carry you.
That’s your second simple guideline – make your goals aggressive enough to motivate you to do hard work, stepping beyond your comfort zone, but not so aggressive that you give up on them.
Sometimes, all that latter piece takes is relaxing the deadline a bit. While doubling your profit in one year may be far too aggressive, doing so in 7 years requires ~10% increase each year – far more doable.
However, note that at some point, even a 10% annual increase may no longer be realistic for you. For example, my consulting practice profit margin is above 90%, and I’m already working full time at the highest hourly rate my main client will accept.
Increasing profits by 10% would thus require me to work more than full time. Repeating that increase annually for 7 years would gradually push me to work 80-hour weeks – unrealistic in the extreme. If I decided to pursue such a goal, I’d need to change how I run my business, which leads me to the 3rd guideline.
The 3rd Super-Simple Guideline
If a goal is important enough that you don’t want to give up on it, but it looks unrealistic, change the rules.
Star Trek’s “Kobayashi Maru test” is an excellent reference here. In brief, Kobayashi Maru was a no-win-scenario test in the fictional Starfleet Academy. Its intention was not to see who can win, but rather to stress cadets and see how they react under such stress.
After (predictably) failing, and then failing a second time, cadet James T. Kirk took the KM test a third time, becoming the first cadet to ever defeat the scenario. This after surreptitiously reprogramming the simulation to allow a win. Defending against claims of cheating, Kirk responded he didn’t believe in no-win scenarios.
Coming back to our non-fictional world, in the example of my own consulting company, if I decided to set a goal of increasing my profits by 100% (or even 25%), I’d need to change the rules of my game.
For example, I’d need to find enough additional work that I could gradually hire employees, paying them enough to make them happy, and charging clients enough over the labor cost that my profit goal becomes achievable.
The 3rd guideline is thus to always have at least an idea of how to start working toward achieving your goal, even if that requires changing the rules of your game.
SPONSORED: Find a Qualified Financial Advisor
1. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to 3 fiduciary financial advisors in your area in 5 minutes.
2. Each advisor has been vetted by SmartAsset and is held to a fiduciary standard to act in your best interests. If you’re ready to be matched with local advisors that can help you achieve your financial goals, get started now.
The great thing about Dad was that he didn’t BS me. When he didn’t know, he said so.
The Bottom Line
There are several important lessons about business financial goals.
First, it’s important to set them. Second, they need to be SMART. Third, you need to follow the 3 simple guidelines above to make sure you’re setting the right goals – in other words (with a nod to my dogs), you want to make sure you’re barking up the right tree.
This article originally appeared on WealthTender.com and was syndicated by MediaFeed.org.
More from MediaFeed
50 investment phrases, decoded
Any new endeavor — from rock climbing to investing — means getting familiar with new words and phrases. Some investment terms may seem complex, but this list will take the mystery out of the most common investing terminology, so you can feel even more confident as you start your investing journey.
Related: Is there such a thing as a safe investment?
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Alpha is used to gauge the success of an investment strategy, portfolio, portfolio manager, or trader compared with a relevant benchmark. You may also hear alpha defined as “excess return” in that it refers to returns that can be attributed to active management, over and above market returns.
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An asset is anything that holds value that can be converted to cash. Personal assets might include your home, a car or other valuables. Business assets might include machinery or patents. When it comes to investing, assets are typically the securities you invest in.
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An asset class is a group of investments with similar characteristics that is likely to perform differently in the market than another asset class. Types of asset classes include stocks, bonds, real estate, currencies and more. Given the same market conditions, stocks and bonds often move in opposite directions. Most financial advisers recommend you invest in multiple asset classes in order to have a well-diversified portfolio and minimize risk.
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An asset allocation fund is a diversified portfolio consisting of various asset classes. Most asset allocation funds have a mix of stocks, bonds and cash equivalents. These types of funds can be popular as some advisors stress the importance of having diverse portfolios to minimize potential losses.
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Beta refers to how risky or volatile a security or portfolio is compared with the market overall. Calculating the beta of the stocks in your portfolio can help you determine how your portfolio might respond to market volatility. You can also gauge the beta of a stock to help determine how much risk it might add to your portfolio.
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A bear market occurs when the market declines, typically when broad market indexes fall 20% or more in two months or less. Bear markets can accompany a recession, but not always. They often signal that investors feel pessimistic about their investments’ ability to make money and the market’s ability to rebound.
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A bull market is the opposite of a bear market, meaning prices are rising or are expected to rise for extended periods of time. Bull markets usually mean security prices are rising for months or even years at a time.
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Blue chip companies are generally thought to be well-established, financially sound, and therefore high-quality investments. Blue chip stocks are typically large companies, and many of them are household names. In some cases, blue chips may be more expensive to invest in since they can be considered relatively stable and likely to grow.
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When governments or corporations need to borrow money they issue bonds. Investors who buy the bonds are effectively loaning that entity cash, which will be repaid according to the terms of the bond (e.g. a 10-year bond with an interest rate of 3%). Bonds are often considered to be relatively stable, lower-risk investments compared with stocks.
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An investment broker, whether a person or a firm, acts as a middleman to help investors buy and sell securities. Brokers may be necessary because some securities exchanges only allow members of that exchange to make an investment order. A broker’s primary function is to help clients place trades, although many brokers also help clients with market research and investment planning.
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You’ve probably heard that you should aim to have a diversified portfolio. That means investing in a range of asset classes that are likely to behave differently under different market conditions, in order to mitigate risk. A portfolio of only stocks, for instance, could be more vulnerable to market volatility than a portfolio that also included bonds, real estate, commodities and so on.
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When a company shares their profits with investors, these are called dividends. Dividends are often paid in cash (although they can be paid in stocks). Some companies — e.g. many blue chip firms — pay dividends, but not all companies do. Ordinary dividends are taxed differently than qualified dividends, so you may want to consult a tax professional if you own dividend-paying stocks.
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Also called fractional share investing, dollar based investing is a way for investors to buy partial shares of stocks. Instead of buying shares of a company, you instead invest a dollar amount. Dollar based investing is a great way for smaller investors to buy into popular companies that they may otherwise be priced out of.
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EBITDA is a way to evaluate a company’s performance that is considered more precise than simply looking at net income. EBITDA stands for: earnings before interest, taxes, depreciation, and amortization. To calculate EBITDA, use the following formula: Net Income + Interest + Taxes + Depreciation + Amortization.
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EBIT is a simpler way to calculate a company’s profits than EBITDA, as it’s only one part of the EBITDA equation (literally!). It stands for “earnings before interest and taxes.” It’s calculated using this formula: Net Income + Interest + Taxes.
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EPS stands for earnings per share, which is a common way investors measure how well a stock is performing. EPS is calculated by finding a company’s quarterly or annual net income and dividing it by the company’s outstanding shares of stock. Increases in EPS can be a sign that the company’s profit performance is on the upswing, whereas a decrease can be a red flag for investors.
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Exchange-traded funds, or ETFs, are similar to mutual funds in that the fund’s portfolio can include dozens or even hundreds of different securities, and investors buy shares of the fund. Unlike mutual funds, ETF shares can be traded like stocks throughout the day (mutual fund shares are traded once a day). Most ETFs are considered lower-cost, passive investments because they track an index, although there are actively managed ETFs.
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An expense ratio is an annual fee investors pay to cover the operating costs of mutual funds, index funds, ETFs and other types of funds. Fees are typically deducted from your investments automatically (you don’t pay a separate charge), and they can reduce your returns over time so it’s wise to shop around for lower fees. Expense ratios are calculated using this formula: Total Funds Costs / Total Fund Assets Under Management.
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Free cash flow is the money a company has after it has paid its expenses. This number is important to investors because it can show them how likely it is that a company could have extra cash for dividends or share buybacks. A continuous decrease in free cash flow over a few years can also be a red flag to investors.
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Growth stocks are shares in a company that’s growing faster than its competitors, typically showing potential for higher revenue or sales. Growth stock companies may be considered leaders in their industry.
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Hedge funds are usually managed by an LLC or limited partnership that invests in securities and other assets using money from multiple investors. Hedge funds tend to be more risky and expensive than mutual funds or ETFs, which often makes them accessible to more wealthy investors.
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Index funds are a type of mutual fund that invest in securities that mirror a particular index, such as the S&P 500 Index or the MSCI World Index. Indexes track many different sectors, from smaller U.S. companies to big global companies to various kinds of bonds. Each index acts as a proxy for how that market sector is performing; the corresponding index funds reflect that performance.
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The interest rate is the amount a lender charges to borrow money — and it can also mean the amount your cash earns in a savings, money market or CD account. The baseline interest rate in the U.S. is set by the Federal Reserve. This rate in turn influences savings rates, mortgage rates, credit card rates and more. Generally, when the Federal Reserve lowers interest rates, the stock market tends to rise.
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A large-cap company has $10 billion or more in market capitalization. These companies are often considered industry leaders, and are relatively conservative, low-risk, and safe investments. A company’s stock may be considered large cap, mid cap or small cap.
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Market capitalization, or market cap, is the value of a company’s total outstanding shares. It’s often used to measure a company’s value and build a diversified portfolio. You can calculate market cap by multiplying the number of outstanding shares by the current price per share. Companies with lower market caps usually have more room to grow and usually are associated with newer companies, meaning they can also be riskier.
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Mid-cap companies are usually between $2 billion to $10 billion in market capitalization, putting them somewhere between small- and large-cap companies. Many mid-cap companies are in a growth phase, making them attractive to some investors who believe the company may grow into a large-cap over time, although this is not guaranteed to happen.
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Mega-cap companies are the largest companies you can invest in, with a market value of $1 trillion or more. Mega-cap stocks are typically industry leaders and household name brands, like Apple or Microsoft.
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Mutual funds may invest in stocks, bonds and other securities — or a combination of these (e.g. a blended fund). Mutual funds can also be industry-specific (such as a mutual fund consisting only of energy stocks, green bonds, or tech companies and so on).
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When talking about investing, net income usually refers to how much a company makes (or its total losses) after it has paid all its expenses. Net income is therefore usually calculated by subtracting a company’s expenses from its revenue. Investors may want to know a company’s net income because it can help determine how profitable the company is, although EBITDA (defined above) is another measure.
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Not all stocks are publicly traded. These “private” stocks, often called over-the-counter stocks, usually have to be traded through a broker. Companies may offer OTC stocks if they don’t meet the requirements to be traded publicly. Such companies are often startups or other small companies. So, while these companies may eventually grow to be able to trade publicly, investing in them also carries the risk that they may fold or even engage in fraudulent activity since the market is far less regulated than publicly traded markets are.
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Investors commonly use P/E or price-to-earnings ratios to gain insight into how profitable a company is compared to its stock price. In other words, price-to-earnings ratios can help investors decide if the price of a stock is worth it when compared to how much a company is making.
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Banks are likely to offer their best customers — those with the best credit histories and the lowest risk of defaulting — a prime interest rate for a loan. The prime interest rate is generally the lowest rate the bank will offer. A bank’s criteria for determining their prime interest rate may vary, but most banks consider the federal funds rate when setting any interest rate.
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Portfolio management simply refers to how you select and manage the investments in your portfolio. There are many different management styles, such as active or passive, growth or value. Additionally, you can elect to manage your own portfolio or hire an individual or group to manage it for you.
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A preferred stock means investors own shares in a company and get scheduled dividends, similar to how bond interest payments work. Preferred socks may not fluctuate in price like common stocks do, meaning they are often less volatile and risky.
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You probably know what profit and losses are, but do you know how to read a company’s P&L or profit & loss statement? It can help you determine a company’s bottom line, as it can show you how well a company is doing compared to its peers in the same industry. If you’ve never read one before, this article about profit & loss statements could give you some tips on what to look for.
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Companies that offer stocks, bonds and mutual funds to investors are required to file a prospectus with the Securities and Exchange Commission that provides details about the investment they are offering (e.g. the expense ratio, the constituents of a fund and more). Investors can use the prospectus to better understand a given security and how it might fit in their portfolio, or not.
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A recession is a period of economic contraction. The National Bureau of Economic Research (NBER) defines a recession further as a decline in monthly employment, personal income, and industrial production. As an investor, a recession may indicate a drop in the value of your portfolio, although this may be temporary: When looking at the history of U.S. recessions, the stock market has typically rebounded after recessions.
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Real estate investment trusts (REITs) are a way that investors can further diversify their portfolios. Instead of having the responsibility of managing an investment property yourself, you can invest in REITs, which are generally large-scale real estate projects that investors can help fund in exchange for partial ownership. Most REITs are publicly traded and pay dividends to investors.
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When looking for a company’s net income statement, you may come across the term “retained earnings,” also sometimes called unappropriated profit, uncovered loss, member capital, earnings surplus, or accumulated earnings. In general, retained earnings is the amount of money a company keeps and potentially reinvests after it gives its investors a dividend payout.
As an investor, knowing whether a company had positive retained earnings can help you determine how much money it has to continue growing. If its retained earnings are negative, that could be a sign the company is in debt and may not be a good investment.
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Return on equity, sometimes called return on net worth, can help investors compare how well companies are managing their stockholders’ contributions. You can calculate it using this formula: Net income/Average shareholder equity. A higher return on equity can signal to investors that a company is managing its money efficiently.
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Return on investment (ROI) is just that: the return you get after making an investment in a stock, bond, mutual fund, and so forth. Investors generally hope for a positive ROI, meaning that their investment has made a profit. While a good ROI will vary depending on the type of investments you’re making, some investors look to the historic return of the stock market (about 7%) as a barometer.
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A small-cap company usually has a market cap of $250 million to $2 billion. Investors may be attracted to a small-cap company because they believe it has growth potential or may be undervalued.
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SPAC stands for special purpose acquisition company. SPACs are shell companies that list shares on an exchange to raise money so they can merge with a privately held company. Once the merger between the public SPAC and the private company is complete, that company is now in effect a public company — which is why a SPAC is sometimes called a backdoor IPO. Many companies may elect to use SPACs instead of traditional IPOs because they are often faster and less expensive.
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If you’ve made it this far, you probably know what a stock is. To review, a stock is a way to buy a piece of ownership into a company. You can buy and sell your stocks depending on whether you anticipate your stocks will decrease or increase in value.
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A stock exchange is the place where you buy, sell, or trade stocks. Common U.S. stock exchanges are the New York Stock Exchange (NYSE) and the Nasdaq.
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A stop-loss order can help investors have more control over their stocks. When a stock reaches a certain price that you choose, your broker will sell, buy, or trade that stock. Having a stop-loss order can help you limit how much money you make or lose in the stock market.
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A target date fund is a type of mutual fund that includes a mix of asset classes to provide investors with a portfolio that adjusts over time to become more conservative as they age. Target date funds are often used to help investors plan their retirements. Target funds are typically constructed around various target retirement years (e.g. 2030, 2040, 2050) so investors can pick a date that corresponds with their hoped-for retirement.
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A value stock is a stock that investors believe is undervalued and/or inexpensive compared to its past prices on the stock market or with its competitors. Investors may consider a stock’s price-to-earnings ratio to help them determine if something is a value stock.
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Venture capital is money a startup uses to grow its business. This money usually comes from private investors or venture capital firms. Investors may elect to invest venture capital into startups they believe have the potential to be profitable with time.
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Yield is another way of referring to the return of an investment over a set period of time, expressed as a percentage. You may hear the term in relation to bonds (e.g. high-yield bonds), but yield is more accurately a measure of the cash flow an investor gets on the amount they invested in a security during that time period, and is different from total return.
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Getting familiar with a few key investing words and phrases can go a long way in helping you gain confidence when you’re new to investing. Getting fluent with investing terminology is like any other pursuit — there’s a learning curve at first, but the terms will feel more natural as you move forward and start investing regularly.
Learn more:
This article originally appeared on SoFi.comand was syndicated by MediaFeed.org.
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