We all have goals for our business, but sometimes we forget how important it is to clearly define these goals. This is especially true when it comes to financial goal setting for small businesses, where often financial goals are only vaguely defined or based too heavily on assumptions. Many small business owners may keep a mental list of goals, but in order to learn from your goals and build your business through goal setting, it is important to understand why you should set goals, what sort of goals to set, how to track them, and what you can do with this information.

For this webinar I was joined by Tom Misson, Vice President and Senior Business Leader for Mastercard Worldwide, who manages the U.S. Small Business segment. Here, we discuss the importance of clearly defined goals, and how these goals can help you grow you business and achieve financial success.

The full audio and slide deck are included above, and the full transcript can be found below:

Sabrina Parsons: Hi everyone. This is Sabrina Parsons, CEO of Palo Alto Software. I’m going to introduce to you our guest from MasterCard. I just want to let everybody finish signing on here. I know sometimes people transition from one meeting to the next. I’m just going to give it about 30 more seconds here and then we’ll actually get started.

In the meanwhile, I want to go over some housekeeping so that you guys know how to interact with us. Attendees, you will all be muted. This is so that we don’t get a lot of external noise. Sometimes people’s computers or environment can be very noisy for everybody else.

If you want to interact with us and ask questions, you’ll see on your Go To Webinar toolbar that you have usually it’s on the right side of your screen that there is a little place called Questions where you can actually ask the question. Go ahead and ask your questions as they come up.

We have Peter Thorsson from BizDev here at Palo Alto Software and he will be facilitating those questions for myself and Tom from MasterCard and what we’ll plan to do is answer most of the questions at the end of the webinar, but there may be some questions that are just asked and are perfect for the content that we’re giving at that moment, so we may answer a few questions throughout. Don’t get nervous if you don’t see your questions answered right away. We will try to get through all the questions at the end. The other thing is we will make the webinar available to everyone who registered for the webinar in a recorded format after the fact, we’ll e-mail it out so you’ll get all the slides and all the content afterwards, so that you could share it with anybody else, and if there’s questions that we don’t get to, we’ll try to address those in the e-mail that we send out about the content.

That kind of gives you a good sense of how we’ll going to go about those webinar today, and with that, I’m going to go ahead and get started and welcome you to this webinar given by Live Plan and MasterCard. The topic is, “Grow Your Business by Setting Financial Goals.”

We’re really going to help you understand how to set goals, why to set goals, and which goals you should track. So, we’ll get started right away. The first thing I want to do is introduce Tom Misson from MasterCard. He’s the vice-president and senior business leader of U.S. Commercial Products in the small business segment. Tom, welcome, we’re so glad to have you with us.

Tom Misson: Thank you Sabrina. I appreciate the introduction and I’m glad to be here. I think that Sabrina and I have some interesting information to share with you today. I think everybody knows the topic of the webinar today, grow your financial goals, and why don’t we just dive in.

Sabrina Parsons: Great.

Tom Misson: I’ll take the first slides and then Sabrina will take over from there and I’ll [inaudible 3:33] as we go through them. The first slide, “Goals Help Achieve Financial Success.” Now, why do we say that? Goals are important because regardless of where business is in the business cycle, small businesses need goals. They need goals because goals keep things moving. Goals help small businesses maintain a success of their business and the maintaining the success of their business is key and it’s key because one of the main reasons that business fail is because they don’t have a plan. They don’t think of their goals. Goals are just things that come into their mind while they’re halfway through doing something and that’s not really the way to achieve success.

So it’s important to set time aside to think about goals. Think about things in goals to make an action list on what you’re trying to achieve. Make a commitment to actually get those goals achieved and don’t knock yourself out if you don’t achieve your goals. Best efforts are what are most important. I don’t know if you want to add anything to that Sabrina but those are mine.

Sabrina Parsons: No, I think Tom hit that now and ahead there and I think for all of you who are listening, the one thing that I hear a lot from small business centers is “Oh yeah, I’ve got the list, they’re all in my head,” and I think Tom is exactly right.

Goals are going to help you achieve your success but you really have to very purposely think about those goals and identify them and having them all in your head may sound like, “Yeah, I’ve got it,” but it’s just not the same as actually putting it down in black and white.

Tom Misson: Okay, let’s go onto the next slide. The slide titled “Goals Help Make Better Decisions” and why do goals help make better decisions? Basically, it requires thinking and that’s a struggle for small businesses. They’re constantly doing things to keep their business going, that the thinking part is sometimes difficult, but it’s extraordinarily important. It’s important because it’s just an essential part of sound management. It’s an essential part of what running a business should be, and it’s pretty obvious why goals make better decisions or help make better decisions.

The thought processes is pretty simple. What is it that you want to achieve? What are the potential ways to accomplish what you want to achieve as a business owner? How long will it take you to achieve those and what are the implications of not being successful? Those are things that help you make better decisions and are so important in establishing and growing a business.

Sabrina Parsons: Exactly and again, I think Tom is giving you that big picture to help you understand, and it goes back to what I was saying about the goals in your head. If they’re in your head, they’re also easier to move around in very nebulous sort of way.

But if you put them down on paper and then understand, “Did I reach my goal? Why didn’t I reach my goal? How can I reach my goal?” and actually get at the underlying assumptions that made you put those goals down on paper.

What is it about your business that made you think you’re going to make it this much in sales and yet somehow you didn’t achieve that. Can you get in there and understand wow, did I have some assumptions that maybe were off a little bit?

Again, it’s great to have Tom at MasterCard here because I think he’s giving you that really great big picture of this is what you have to do and too often, those of us from small business feel like we’re doing a million things at once. The urgent things get done and the important things like putting those goals down and then using those goals to make decisions often fall off your plate because your plate is stacked so high.

Tom Misson: Okay.

Sabrina Parsons: Go ahead, Tom.

Tom Misson: I was going to say I’m going to let you take this one.

Sabrina Parsons: Okay, great. In terms of goals help you make better decisions, they also help you get out of making decisions through gut feelings, and all of us who run small businesses understand that feelings, sometimes you have to use some gut feelings, but they’re actually informed gut feelings.

You don’t just make decisions without looking at data, yet if you don’t put goals down, if you don’t understand why you want to reach those goals and then you don’t gather data to understand whether you’ve achieve your goals, then we’re getting into more specifically a little bit later on what are goals, and what kinds of things you should set as your goals because we can get pretty specific, but if you don’t do those things, you end up running your business through gut feeling and that’s not the way any of us, I’m sure, want to run our business, but it’s what ends up happening.

Tom Misson: The only thing I want to add is that sometimes your gut feeling is really not gut feeling but it’s a feeling that emanates from what I would call business seasoning, right?

There’s a difference between gut feeling about something and then a belief based on experience and knowledge and just being part of the business community. The latter, the business seasoning, is good as long as it is supported with data. The gut feeling as you say if that’s acted on without really thinking through the consequences of that can really lead to a very not positive outcome.

Sabrina Parsons: Exactly. So, the other thing that happens with gut feelings and not really outlining very specifically what the goals are for your business and not setting your goals is you manage and make decisions by gut feelings and those gut feeling are often times based on bad assumptions.

Of course, it was too easy not to use the Dilbert comic strip here because Dilbert is great with all kinds of things like that and I love this particular one where not only is he talking about unrealistic assumptions at the end of it, basically the conclusion is, “Oh yeah we know that that’s not there, but just assume that it’s there.”

While it’s comical, unfortunately it happens way too often when we run small businesses and we don’t really take that time to step back, look at the big picture, set the goals that we want to achieve and then get that data and understand why those goals were set.

Because time and time again, when I do that with small businesses we start to uncover, not everywhere I mean small business owners tend to be really good at understanding their business, they’ve been running it, but I will always uncover one, two, or three bad assumptions. Things that a small business owner thinks are happening with their business, and because they think that, they continue to think that and it almost becomes a rule goal right?

An example is a business that we worked with that is a dog boarding business. The woman who ran the business was absolutely certain that the dogs that boarded were her biggest money makers. While the clients who boarded dogs actually brought the most money in, boarding the dogs is quite expensive and so the actual margin on the dog boarding ended up way less than the margin on the dogs that just came for doggy day care during the day.

Not until we sat down and I made her go through all her goals, set her goals and then a quarter later came back and looked at did you achieve your goals and let’s look through where didn’t you achieve your goals, did she realized that she had this totally wrong assumption about the profit centers of her business.

That’s what happens with gut feel and bad assumptions. You end up basically creating this reality for your business that might not be a reality, and that’s why some business owners get to a point five, 10 years into running their business and they feel stuck. They don’t feel like their business is growing and they don’t know what to do, and what they’re not realizing in this is that if you take this time and you set your goals, you start to uncover areas where you can improve your business. It’s actually not this insurmountable kind of big Everest type mountain that you have to climb. You start finding the little mole hills that you can actually attack and deal with.

Tom Misson: Yes, so Sabrina what I heard that is it sounds like what you’re saying is kind of the lesson from this slide is, don’t get so emotional and convince yourself about a conclusion or an opportunity that is just ringing in your head, is so strong and compelling—ensure that the data supports that. I think that the dog boarding example is a perfect one and one right on target.

Sabrina Parsons: Exactly, we’ll go onto the next slide. I apologize, we’re having a little trouble with this, there we go. What goals to set? I mentioned that we were going to get into some specifics about goals to set. Goals sound really kind of big picture. What are goals? You hear goals a lot in terms of, my goal is to, when you’re a kid your goals is to graduate from high school and go to college, or your goal is to get into this industry, or get that job or my goal is to make enough money to buy that house. Some really big picture goals.

Think about your business goals more in terms of, say, health and wellness goals that you might set personally for yourself. I like to think about the goals you set for your business and the goals setting around there about kind of like FitBit for business. Anybody here have those, or the Nike Fuel band, all these very popular wristbands that track your movements and help you get fit and healthy, they don’t really work really well unless you set goals. Unless you tell your Fitbit or your Nike Fuel band I want to lose weight, I want to lose body mass, I want to run a marathon.

You basically outline your goals and then the FitBit or the Fuel Band or any of the other competitors which ever ones you may have, then starts to help you and track what you’re actually doing and then tell you, you’re never going to do that unless you increase your activity by this, unless you start going four days a week and etc. etc., so without studying those fitness and health goals, those activity bracelets really don’t do that much except tell you what happened.

It’s the same thing in your business. If you don’t set goals, your financials only tell you what happened. They don’t give you that insight as to why or what you need to still do to achieve the goals. Everyone should set financial goals.

This means you need to set goals in sales and expenses. How much am I going to sell? How much am I going to spend? We really encourage you to think about your sales lines in terms of those big major categories. Don’t set a sales goal or a sales forecast with a hundred line items in there. It’s going to drive you crazy.

Think about no more than 10 categories, preferably five and under, and put your business into those categories and then set goals for those categories and say in dog boarding, don’t say luxury boarding, small dog boarding, weekly boarding, just say dog boarding. That is probably enough, and as you start to bring your business, you’ll start to understand where you might need a few more details. But goals need to not be set on a hundred items because you’ll never be able to manage that.

So think about sales goals. I would say you want sales goals in a monthly format for the first year. Let’s say you’re starting now, you might want to do monthly sales goals only until December because we’re already in May, if your fiscal year and your calendar year are the same. Generally speaking, you want 12 months of sales goals for your fiscal year that your currently in, and you’d probably want to set those goals a couple of months before your fiscal year starts, and then you probably want two more years of goals just to give you that big picture of where you’re going. But those goals should just be in years. You don’t have to go into the detail of the months. You’ve got a three year forecast with your goals, monthly for the first 12 months, and then yearly for the next two years.

It’s the same thing with expenses. Again, do not put 300 lines of expenses as your goals. Think about big categories: salary, marketing, sales, rent, utilities. If you have a business where you have a lot of vehicles out in the street, gas is probably something you want to track. Think about the things as a business owner that you keep track in your head.

Every small business owner that I talk to has things in their head that they keep track of. Those are the things that become your goals. They will all say, “Oh yeah, yeah, I know that if my gas bill is over this I’m in trouble and if I don’t get at least 30 clients a month, I’m in trouble.” Those are your goals. Take them out of your head and put them down in black and white, and these days preferably not with a pen and paper. Preferably using some sort of software tool, Excel, some sort of spreadsheet. Our company has some great tools but it doesn’t matter what you use, just use something.

You want to do the same thing with gross margins, and if you’re not sure what your gross margin should be, you can go find that out. You can find your industry, find out what the SIC code is or the NAICS code is for your industry, and you can find out what the average gross margin is for the business that you’re in.

Then you can look at yours and see where you are and set goals based on that information. It’s all based on data and it could be, gross margin is a place that I have helped so many businesses really gain a whole lot of profit of understanding that they were paying too much for cost of goods, or they weren’t looking at all the cost of goods so they thought the gross margin was better than it was, but then the profit wasn’t what it should have been. So really think about it. The gross margin is really the sales minus cost of goods, there’s your gross margin. That’s what you actually make on each item before you add in all your other expenses.

You always want to have goals on cash. How much money do you need in the bank all the time to make sure your safe. You’ve got to have your safety cushion. Your AR, accounts receivable and AP, accounts payable you want to set goals on how long is it going to take you to collect money from your clients and how long is it going to take you to pay.

On the accounts payable, sometimes you don’t have a choice. People will tell you; but as you get in business and stay in business and develop vendor relationships, you might be able to push that from due upon receipt to 15 days, to 30 days, maybe even to 45 days if you’ve got a great relationship with your vendor. You’ve got to look at that stuff because it affects the cash in the bank.

On accounts receivable, what I see all the time is businesses that have a lot of accounts receivable with the days to get paid averaging 90, a 100, a 120 days. There are some businesses that that will be the case, but there are many, many businesses where that’s the case because you’re not aggressive enough about your collections and when I say aggressive, it doesn’t mean you have to be impolite or nasty or anything that’s going to annoy your customers. You just have to get in the habit of reminding them and making sure that they understand. That when you say that 30, you really do mean that 30 and that this is just doing business, and there’s right ways to do that but often times, I look at something with a small business and they don’t even realize. They’re going, “Oh my God, really? It’s taking 90 days on average, but my invoice is the saying that 30” so yeah, they might say that but if you don’t focus in on that and you don’t understand that, set your goal.

Again, look at benchmarks for your industry. You can get those NAICS codes and SIC codes and then understand what your industry is seeing on average days to get paid, and if your average days to get paid are way beyond the industry, then you know that you can push that back. You know that customers will be okay with that, and they’re used to you paying a little bit faster, at the end of the day we’re all people who all have budgets and bank accounts at home. If you know that you don’t have to pay right away, you’re not going to pay them right away so make sure your customers know, “actually yeah, I really do mean that 30. Please, otherwise I’m going to do an interest charge.”

Direct cost. That’s what it actually cost you to sell. You’ve got to understand that. You’ve got to put in all your costs and set your goals and again, this is where those assumptions and bad assumptions come into place. When you actually pencil everything out, a lot of times people aren’t, could be everything they should be putting into direct cost or they’re putting too many things in and so then you’re giving a blurry gray picture of your business.

Net profit, at the end of the day it doesn’t matter how much we sell. It matters to all of us as small business owners what is our profit at the end of the day, right? Most of us are not doing this as nonprofits. Most of us are doing this because we have a great service, we have a great product, we think that it’s something that is good for people, but at the end of the day, we need to and want to make money. We have families to support, bills to pay, dreams to support, and that means we need to make a profit. You’ve got to set goals on how much profit do I want to have this year, next year, and three years out and then understand that that’s realistic and figure out how to get there.

And I know I’ve talked a lot so leave a little space here for Tom to jump in.

Tom Misson: Yeah, I think you hit it. I mean what I summarize is that the message from the slide here is make a commitment. Make a contract with yourself to set financial goals. Don’t rely on what’s in your head at that moment because what’s at your head at that moment may not be the number that you thought of last week. It’s important to write them down, as you said it’s important to track them on a monthly basis, and it’s important to think ahead so that you have some strategic stretch goals in mind as well.

Sabrina Parsons: Great, wonderful. We talked a little bit about sales. Sales drive your business. If you don’t sell, you don’t have a business. At the end of the day, this is one of the most important goals to set and it will then inform all the rest of your financial goals. Based on what you want to sell, you’ll figure out everything else comes into play, so start there. That’s the most important place to start and when you’re thinking about your sales goals, you’ve got to think through some of these questions. How many?

It could be hours if you’re a service business, you’re selling hours. You’re selling people time so how many hours are you going to sell? What’s realistic? How many hours did you sell last month? Same month, last year, the full last year, look at your history because that will help inform your goal setting and you forecasting. What is reasonable in the future, in the near future, based on your past?

Pricing, a lot of times people don’t look at pricing for a very long time. They set the pricing and then they keep it there or they go the other direction. They consistently mess with their pricing all the time. Both of those issues can bring problems to your business. You definitely want to always be looking at pricing. What are your competitors doing? How are your pricings? Why are you pricing? Do you want to be the lowest price? Do you want to be the highest quality? Pricing tells a lot to your customers and drives the strategy behind your sales. Who are you trying to sell to, and what is their expectation of value and price? Think about it and visit it every year when you do your forecast and you set your sales goals, revisit your pricing.

Is it the right pricing? If you’re doing anything online and selling online, use all the great tools that are available to test things. Test out different pricing and see, there may be a price going up which you convert more customers but it’s so much lower than it’s not worth it to you. That you rather have the price be higher because you make more money that way because every customer cost you more money or it might be the other way around, that by lowering your prices, the conversion of new customers is such that you make way more money.

Anytime you can, try and do some very specific thought out tests, and I would recommend you definitely test your pricing at least once a year but a couple of times a year is probably a good way to think about it and every business is going to be able to test pricing in different ways. Some businesses have lots of responsibilities to test pricing, but if you have not raised your prices in six or seven years, it’s time to think about raising your prices. Economy is recovering, people are doing better, now is the time.

In sales, think about, who your most profitable customer is? Just like I mentioned this dog boarding business, the woman who ran it thought that her profitable customers were the boarders and it turns out it was the doggy day care customers, right? Those were the people who are actually giving more to the bottom line. Those were the people that she wanted to go out and get more of because they contributed faster to her profits.

Then I always mention CAC, customer acquisition cost. As you think about sales, think about who you have to sell to and think about how expensive it is to attract those customers. Now, you’ll get into the actual cost of goods in other goals that you set and then managing it but it’s always something you need to consider as you think about sales and as you think about potentially selling to a different type of customer. Before you commit to that, understand is that realistic? Do I have the money to acquire that type of customer or should I just try to do a better job with the customers that I already have where I already understand the cost to acquire them?

Tom, I don’t know if you have any additions there.

Tom Misson: I would just add a couple of points. I think that you’ve mentioned keeping your ear to the grind stone and understanding what your competitors are doing, there’s some great tools out there that are relatively inexpensive that have come to the market just very recently, that will give you insights into how your competitors are doing. I’m not trying to give a commercial for MasterCard product because there are other products out there but Master Card for example has a product called Market Vision. What Market Vision does is if you subscribe to it and you accept cards as part of the type of payments that you bring in to your business. You can get a sense of how your peers are doing. You’ll get a report on how you’re doing versus how your peer set is doing, not your competitor next door but a bunch of competitors within your geographic area.

You can get a sense of things like what their average purchase price is, what their average sale price is. You can get a sense of how many times people are walking into their store if it’s a retail shop.

You can get a sense of what days of the week are most busiest. You can use these inputs to help set your sales goals to help drive your business forward. At the end of the day you may think you’re doing terribly but when you look at what your [inaudible 31:40] may be doing very well.

I think looking at what your peers are doing, using some of the new technology that’s available to help gain insights into that is very valuable as well.

Sabrina Parsons: Great.

Peter Thorsson: I think we got one question for you both if you don’t mind on the customer acquisition cost points. In terms of calculating customer acquisition cost, our question is, should they include sales, salary, sales commission in that cost or other sort of overhead. Is that how you get that cost or is it just marketing efforts?

Sabrina Parsons: That’s a great question. I know everybody hates to hear this word because it is not a straight forward answer, it does depend. It depends on your business, how you’re selling.

If you’re a business that sells primarily through sales people, your customer acquisition cost should be looking at sales base salary plus commission. What does it take to close that sale? How long is the lead time?

How many hours does a sales person have to work on a deal and then what is that commission that you’re giving to the sales person. If you’re selling primarily online then your customer acquisition cost can sometimes be very simple.

If you are looking at your pay per click online ad spend to acquire a customer, then your customer acquisition cost is what does it actually cost to acquire a customer who’s clicked on a Google ad, come to your site and actually decided to purchase? How much money do you spend a month on pay per click, divided by the number of customers who actually purchased on your website through that pay per click funnel?

That one’s actually pretty easy one but it’s amazing how few businesses are actually looking at it. Use that pay-per click customer acquisition cost to inform how much money you say you spend on pay per click. The beauty of pay per click is pay for performance.

You don’t pay unless someone clicks. You shouldn’t pay if when someone clicks, they don’t buy anything at all. Don’t pay for that key word, move on to a different key word or pay less for that key word.

If you are selling on a website but you don’t do pay per click, then your customer acquisition cost is going to include things like what does it take to run your website, do you have a web developer, is there a hosting cost for your site?

Do you have a designer? How many hours a month are they putting in to your website and then look at that and get a sense of the customer acquisition cost to get that person. Don’t get super mired in the details. Get a sense of it, do the numbers and get an average number.

Then, every quarter go back and review it. If you’re making a lot of changes, review it every month. If you’re selling in a traditional—you got a retail store and you do local radio ads and you do ads in the paper and maybe inserts.

Then your customer acquisition cost for new customers is probably looking at your marketing budget and dividing it by the number of new customers you get because the people that work in your store are probably just a fixed cost that you don’t have to worry about.

Unless of course you do some incentives per sales people on a retail floor and you’ve got some sales people who sell more to new customers and then that is a customer acquisition cost if you got incentives put in place for your retail staff.

It’s not a straightforward answer but at the end of the day it is actually not that hard to figure out. If you have specific questions about customer acquisition cost, you can go ahead and ask them in this webinar and you can always get in touch with us afterwards when we send out the email with the canned webinar. We’ll give you some links and some information about how to get back in touch with us.

We’re going to move on to the next slide here.

Gross margin, how’s my bottom line? Gross margin directly affects your profit and gross margin and forums whether your sales are going to get more expensive.

Basically, this is a really good thing to look at especially for businesses that rely on having to order, manufacture, they have heavy inventory or businesses that may be service businesses, but rely on things like gas.

You’ll see, for instance and all of you will recognize it when I say it, UPS famously started their fuel surcharge when the economy tanked. Gas was actually pretty expensive and they felt like it was an easy way to explain to customers why they were charging more. It was really about gross margins. Gas was more expensive, UPS wanted to get more money out of customers to effect that gross margin. They implemented a gas surcharge.

A lot of other service businesses that have a lot of fleets, trucks out on the road did the same. Gross margin is something that can be very stable for certain types of businesses and can be very unstable for others.

In the construction industry, I just heard from a bunch of people here in Oregon, I sit on the school bond review committee and we and we were looking for a construction cost of new schools that are getting built and the construction cost have gone up almost 30 percent. That’s due entirely to goods that you have to purchase to build buildings have gone up, drywall has gone up 35 percent in price. That is going to effect the ultimate cost and that is a gross margin cost if you’re building a building.

That yard, the materials, those are the materials to build the building. If you as a contractor don’t take that into effect, you’re not going to price your work accordingly and you’re going to lose money.

Gross margin, especially if you’re in one of those industries where you see prices fluctuate for the things you have to purchase to keep your business going, you’re going to want to track gross margin really closely because you may have to do things like a fuel surcharge or some other surcharge. Then you’re going to have to explain to your customer why you raised your prices, just like UPS explained to the customers with that fuel surcharge, just as all of us were paying more money at the pump, we all got it. It was an easy explanation.

And Tom, I’ll leave a little bit of room here for you to jump in as well, because I think you’ve gotten some really gems of information for all our listeners.

Tom Misson: I think on gross margin, I think I would just leave it there. I think the UPS example kind of brings it home very well. It’s an important part of running a business. It’s something that is frequently overlooked particularly in a small business space.

Expenses just tend to creep up on small businesses sometimes and if they’re not watching their gross margin closely, it can quickly become a problem. I’d say that it’s a really important part of running a business and something that have to be watched closely and frequently.

Sabrina Parsons: Great, great, great. So with expenses, budget wisely, all of us hear this right? We’ve got to do it at home. We’ve got to do it in our business. It’s never fun right? Nobody likes budgets, nobody wants to do that, we all just want to be able to spend the money that we want to spend without thinking about it, but we can’t.

You’ve got to really think about what is the cost to operate a business, are they startup or onetime expenses? Are they going to change? Then also to think about that seasonality, sometimes people don’t think about it.

Anywhere you can, I suggest tying expenses to sales. Make your expense a percentage of your sales because then its variable in the right way. So if you’re going to have a marketing line item, tie that marketing line item directly to sales, and if you can, to sales categories. So, how much do you spend marketing dog boarding versus doggie day care? What percentage can you afford to spend based on the gross margin and based on your goals for profitability.

You want anywhere you can to not have fixed cost to expenses and instead have costs that can go up and up as your sales go up and down. If you’re a summer seasonal business, ramp up your marketing in spring getting ready for summer. Take it through summer but then ramp it down the rest of the  year. Then go up and down as your sales go up and down. At the end of the day the other thing you have to do is just watch the expenses carefully and make those decisions about whether they’re good spends.

Am I spending on things that are vital to my business and growing my business? Don’t just spend the money on a radio ad if you can’t directly tie it to increased business. If you’re not sure, suspend your radio advertising for one month and see what happens. If you do that, make sure that you compare your sales numbers to the same month from the previous year. Don’t get in making decisions that have other factors into them. If you’re looking at January and you suspend radio advertising in January and your sales go down, make sure that it isn’t just that your sales always go down in January because everybody buys your stuff for the holidays in December. Always compare what you did the same month the previous year but understand what’s effective and not effective and don’t spend money if you can’t prove that it’s actually helping grow your sales.

Tom Misson: The only thing that I’d add to what you said is it’s important not only to spend the time to create the budget but it’s important to also actively manage to the budget.

Don’t spend time creating it only to not follow it in later weeks, months, and so forth. It’s important to constantly go back if it’s necessary to update and revise your budget then that’s okay. Don’t pretend that the original budget didn’t exist which sometimes small businesses have a tendency to do.

Sabrina Parsons: Absolutely, that is great advice Tom. I’m so glad you said that. We recommend that if people are going to change their budgets, they do that no more than once a quarter because if you change it every month then it’s like not a budget at all.

Tom is absolutely right. Don’t just do a budget and stick it in a drawer and never look at that again. Look at it, manage to it and understand what’s good and what’s bad about it and if you’re totally off, every quarter take a look. Again, understand why, because there’s probably some missed assumption there and maybe some gut feel and that’s why you were off. The more you do this process, the better you’re going to get at it the more that you’re going to love it. I know that sounds strange but as a business owner and as somebody running a business, I think I’d have an ulcer if I didn’t employ all these tactics.

I absolutely am married to this process, I love it and it’s made looking at numbers so much more pleasurable for me. It means I go to bed every night knowing how much money I have in the bank, what am I spending, what are my sales, how come I’m not reaching my goals. All of that, I just know that, I don’t have to go to bed and wonder and worry and get an ulcer. Tom’s exactly right. You got to manage your budget and you got to stick to it.

The last two slides here is really about some of that. Managing and what are the things that you’re going to check together so that you don’t freak out. For instance, sales and expenses, you’re going to check those frequently and together. Your plan is obviously, you have a goal that you set. If your sales are 80 percent above plan, expect your expenses to also be above plan. Usually expenses are tied to sales. A lot of times somebody will freak out because they’ll look at just the expense line and be like, “My god, what’s going on? I’m only budgeted this much. How come I’m spending so much more?” Well, then look at your sales. Are you selling a whole lot more? Because most times you sell more, you spend more.

Don’t look at one without the other. I’ll tell you a brief little story of many companies who made mistakes from the recession really first hit us and that fall of ’08. Many many companies that came to us for help said things like “My god, thank god I cut up all my marketing expenses because you should see what my sales look like today.” It was really hard not to gasp as they said that because it was like my god, maybe your sales of that low because you cut all your marketing expenses! Their assumption was “No, my sales were just going to be low, so I just cut and cut and cut.”

Understand the relationship between sales and expenses, and check them frequently and check them together. If you’ve done a good job in setting your goals and sales and expenses and your expenses, your goals there are tied to your sales goals. This will start to make more and more sense to you. Tom, any thoughts?

Tom Misson: No, I think you hit everything.

Sabrina Parsons: Great. I’ll go through these last couple of ones pretty quickly here because we’re getting to the top of the hour and then we’ll answer a few questions for you guys.

Cash, how is my money doing? What are the things I see small businesses do all the time and I’m sure Tom in MasterCard sees this too, because MasterCard provides such great small business credit solutions for all of you small business owners. People confuse cash and profits, they’re constantly looking at the profit and they’re forgetting to look at the actual cash and the accounts receivable.

The accounts receivable is cash that is owed to you but is not paid yet. It is owed to you. You need to understand how much money is owed to you and how quickly you can collect it. That will affect your bottom line. You can be absolutely profitable and still go out of business because the bank does not care if you’re profitable if you have no money in the bank.

You could be profitable, because you’re owed a $100,000 in accounts receivable, you’re owed that, but it’s book revenue, it comes out of your pocket if you do not have a cold hard cash in hand.

You need to understand your cash, you’ve probably heard this. Cash is king. Don’t confuse cash on hand with profit or accounts receivable, understand those relationships, know your billing and payment cycles. If you understand those, how do you bill, when do you bill, should you change that? When do you have to pay? Then as you understand that, you can start to understand what sort of credit solutions you might be able to use strategically to help your cash flow.

Again, this is what MasterCard does and this is what Tom does. Tom I’d love for you to jump in if you’ve got a couple of thoughts here.

Tom Misson: Yeah, a couple of things. On the receivable side, there is still today many small businesses that don’t accept cards, and for a long time, many of the reasons that small businesses didn’t accept cards were perhaps there was an underwriting issue where the merchant services provider was not willing to give them the opportunity to accept cards. Perhaps there was a long term commitment there or a buy in commitment or something like that. Again, technology has come and disrupted that quite a bit, the likes of Square and some of the other [inaudible 49:30] providers; they make it really easy to accept cards.

While some of the fees, what they call the discount rates, may be objectionable, when you think about what you get for that: timely payments, good funds, generally higher transaction amounts. If you’re dealing with a customer that you can’t get to pay you or is not going to pay you in 60 days, but a card is going to give you good funds in a matter of 24 to 48 hours, then that’s a pretty good tradeoff and you should consider that. Today a lot of small businesses still do not take advantage of card acceptance.

On the other side, to actually controlling expenses, using cards for things that you would normally write checks for, there’s a lot of benefits to that as well because there’s a lot of controls and there’s a lot of ways that controls can be setup to better manage expenses by employees.

If you have a credit card today and you are not aware of some of the controls that the issuing bank via credit card might offer, you should check it out because I think you’d be surprised at some of the technology that has made its way even into the simple card products.

Sabrina Parsons: Sorry that was me, being over eager here with the mouse. I knew that Tom would have some really good advice because obviously this is the business that they’re in. That would be my advice is go to people like MasterCard, your bank manager, people who are in this industry, but go to them before you run out of money. Don’t wait until it’s too late. Understand your cash flow and set your goals and when it looks like you might be having some issues with your cash but not your profitability, three, six, nine months in the future. That’s when you go and you get the credit you need. Don’t wait until you’re in trouble.

A quick overview on some other goals that you could set besides these financial ones, I’m not going to spend a lot of time here because the financial ones are the most important. If you do those you’ll get addicted to them and you’ll start to figure out other goals to set. It’s what always happens, it’s what happened to me, it’s what happened to small businesses that we work with. Once you start setting goals on the financial side, you start to understand how good that is for your business. You’re tracking to your goals; you start to want as many goals as possible.

At Palo Alto software, we’re a little nutty on goals and data and in fact we even do things, for instance, like the gym membership that we provide for our employees, we have a discounted gym membership with the gym across the street. The more times you go to the gym as an employee, the more Palo Alto software pays for your gym membership, because we want to encourage people to be healthy. We’ve even set goals there; where if an employee goes twice a week to the gym, we pick up 50 percent more of their gym membership. It drops from I think $70 a month to $35 a month. We are kind of nutty on goals and it’s been great for us.

Here’s some other metrics that you can look at. If you run any commerce site, your average cart order, your eCommerce conversion rate, ECR, you’ll see that everywhere. You can Google all of this and get a ton of information. Unique visitors per month to your website—don’t just look at visitors. It’s a false impression. I can go visit your site eight times and I’m still the same one person that you could sell to. Don’t just look at visits, look at unique visitors.

In a restaurant, you need to understand table turns, average revenue per table. Your busiest day, your busiest service. In a service business, number of clients, average revenue per month per client. Sometimes we see this per month per account, per month per user. We call it ARPU here in our business, Average Revenue Per User. AR days, Accounts Receivable days. Service businesses are spending out invoices. Service businesses often also have some tax liability that they need to look at as they collect money then they have to pay taxes on it. Retail shops, average customers per day, average cash register ring. Most popular items, inventory.

All of these are up there. I think they look pretty obvious to people and I put them up here because of the business that Palo Alto software’s in because I run this business, I ask small businesses that these type of questions wherever I go. I go in to a coffee shop and I realize it’s the owner serving me and I’m asking him these questions. I go to the bike shop to look at buying some a new bike for my son and asking the questions and what shocks me and it shouldn’t shock me anymore but it does, every time, is most of the time the owner can’t answer all these questions.

When I ask hey, how many customers do you have per day, or how many customers do you need a month? What’s the average they need to purchase for you to be profitable, and when a business owner doesn’t know that, it shocks me. But they don’t. So here’s just some other metrics. They’re not by any means all metrics for all businesses. It’s just to get your mind flowing and understanding all the different metrics you can be tracking up and setting goals to. Tom, do you have any other metrics you think I’ve missed or things that you think people should be looking at?

Tom Misson: No, I think that you’ve hit the major ones here.

Sabrina Parsons: Great. Here’s a summary and we’re at the very end and we only have about four minutes. While you guys look at this slide, I’m also going to have Peter jump in here and see, we don’t have time for a ton of questions, but some of the other questions we’ll try to answer when we send out that email with this recorded webinar. It will take us a few days to produce the webinar and get the email ready to go with the content in there, but you will all receive a link to the canned webinar. Peter do we have some questions to answer?

Peter Thorsson: Yeah, I think we can fold a couple of this into one actually. Sounds like one business is looking to add inventory that they need funding for and then another one is moving to a different space and they’re both sort of asking a similar thing about how do they—which option is best to supply some of that funding. How do they approach that idea and kind of I guess fold it into some of the metrics that you were just talking about. Should they use personal investment or credit or loans, that kind of thing?

I guess let’s address all the questions, all three of these actually. What if we say, if there’s some basic guidelines to getting started to looking at funding or how to acquire a capital expense cost.

Sabrina Parsons: I’ll have Tom jump in first. Again I love that we’ve got someone from MasterCard who obviously specializes in helping small businesses get credit. Tom, some thoughts on that question?

Tom Misson: I would first start with kind of the general rule of thumb and that general rule of thumb is that—of course there are exceptions, this is just the general rule of thumb—that one should really only borrow to increase sales or to decrease costs.

In this particular case it sounds like there is a need for inventory. How can inventory be funded? Generally inventory tends to be kind of a short term financing need and the way to do that, you can—I’m in the cards business so that may be an option providing that a revolved rate is reasonable.

There is a cash receivable financing. There’s factoring, there’s seasonal lines of credit, contract lines of credit, the vendor credit lines. There’s a whole bunch of different options out there.

Generally, the thing is, short term financing tends to be less expensive in the long term financing. I think most folks know that. I guess the key is that there’s just a lot of options out there today and they’re even being more and more options that are being introduced.

There are some nonbank financing options that could be considered if the traditional banking type of financing is difficult because the business itself is not established long enough to meet some of the traditional underwriting criteria or whatever. Those are my initial thoughts Sabrina.

Sabrina Parsons: Great. I think you’ve covered most of it, I think you’re right on the money there. We’re really right at the top of the hour, Peter do you think we’ll just answer the rest of the questions in an email that goes out?

Peter Thorsson: I think what we’ll do as Sabrina mentioned, we’ll send the email out with the post and this will probably be posted on Bplans.com if everything works out as we hope. In that post we can also address some open questions if there are any. Let’s go ahead and wrap it up at the end of the hour here.

Sabrina Parsons: Great, Tom, thanks so much. I really appreciate all your contributions. I think we were really lucky to get you and your expertise on small business and credit and running and managing businesses. Really appreciate everyone who has attended and listened to what we have to say.

Tom Misson: Thank you Sabrina. I appreciated the opportunity to talk with you and the group today. I hope everybody has a good afternoon.

Sabrina Parsons: Great, thank you.

AvatarSabrina Parsons

Sabrina has served as CEO of Palo Alto Software since 2007.