Trying to set goals for a business that is very dynamic can seem impossible, but it’s not.
Early in our business, we used the fact that it was so dynamic as a reason to not even try. Our work was 95% labor reimbursable and most of what we sold (consulting and custom development) came to us as customer requests without any sort of guarantees or contracts. We had no reasonable assurances the amount of work our clients would give us on a week to week basis much less have any sort of visibility in the future to try to set goals and projections.
We told ourselves that since it was impossible to know what the clients would do, it did not do us any good to even try. We also told ourselves since we were trying to grow infinitely, there was no reason to set a goal. Both seemed like compelling arguments at the time (after all, who really wants to do that crap), but it was pure bullshit. At best we were being ignorant, at worst — just plain lazy.
One of the main differences in moving from an independent contractor/consultant to running a business is that you now have the responsibility to make some amount of effort to stay a little bit ahead. You now have families who are dependent on you for their well-being. It’s the single most rewarding thing about owning a business but it comes with a responsibility.
How much you stay ahead is up to you, and those goals/predictions should be constantly adjusted and tweaked as they need to be, but you owe it to your employees to do your best to make sure you are not one bad moment away from telling them they are out of a job. Once you start hiring people, it is no longer about you, it is about them.
Over the years I’ve come up with several different methods for trying to set targets on things that are super dynamic, but the one method that always works for me is what I call my Gut+3 method, which I internally abbreviate as G3.
The G3 method is simple and can be done in 15–30 minutes.
- First, take your gut feeling
- Then take 3 measurable predictable metrics
- Average the 4 results
- Experiment & Tweak
For the remainder of this article, I will use a sample worksheet I created to help set financial targets for our consulting division, which largely consists of reimbursable work (time & materials) on a request-by-request basis. We wanted to try to create a measurable to predict whether the business needed to Hustle (get more sales) or Help (get more bandwidth) by using a 3-month lookahead.
Going with your gut
The reason that I use my gut feeling as a component in my method is that as an owner of a business or division, you generally have a feeling for how the business will do. Many times, you are not even able to show how you will get there on paper, but you have been in the business or job for so long, you have learned through experience what to expect. This experience should not be taken lightly.
In some planning and forecasting circles, this is considered worthless but I disagree completely. The intuition and gut-feeling of an entrepreneur can be what separates them from their competition and their peers. If the trajectory of a business could be completely generated by formulas and predictions, running a profitable business (and investing in the stock market) would be much easier.
It’s also important to list out your gut feeling before you do any sort of calculations. This should be a number that internally just feels right.
Choose 3 methods
Next, I chose 3 methods that could be used to try to come up with a number using a formula. The specific formulas you use are completely dependant on your type of business, but for us, there were three that make the most sense. If you can’t come up with three, or only three, methods, that is okay. I have found 3 to be the perfect combination of helpfulness and simplicity.
First I calculated out what a good week would like on a per-client basis, and projected that out.
Then, I looked at the team makeup as a whole and used their cost to the business to determine what the desired profit should be. For this division, we expect our margins to be near 30%. Since the work in this division is 100% labor, we do not have to factor in equipment or materials to our formula but you may need to include those for accurate measure.
*cost should include salary, taxes, burdens, and any other benefits
For our third and final method, we looked at the division as a percentage of the organization. Based on market research, and internal goals, we determined that we would expect this division to compromise about 20% of our total revenue.
Average it all out
Experiment, Measure, & Tweak
Once you have the number, start using it immediately. The goal at this stage is to get a baseline and then start using real-life data to measure how accurate the number is. There is nothing more important to creating accurate measurements than to start using them.
“Better a diamond with a flaw than a pebble without.” — Confucius
Over time, we have found that in general, you can get over 80% accuracy using this method, no matter how dynamic the business model is. Even more importantly, you can use methods such as the G3 method to get a little bit ahead of the curve and be on the lookout for potholes in your business road trip. After all, being the lookout for problems coming your way is a critical job function of being a leader of a team, project, or business. It’s what you signed up for and it’s why you get the big paycheck.
Don’t be Lazy.
Just because something is difficult to predict does not mean you shouldn’t try.
Just because you can’t predict with 100% accuracy, does not mean you shouldn’t at least attempt to get some level of accuracy.
Just because something is hard, doesn’t make it impossible.