Things to consider when setting revenue-based goals

by Michael Eckstein | Jan 1, 2022

Basic revenue and profit targets are some of the most common business goals. They’re straightforward, unpretentious, and easy to make. They don’t need any fancy software to track or assess progress. And, you can keep them as simple as a sticky note on your screen, a reminder in your project management software, or a note on your 2022 vision board. (Or, you can get as complicated as annual budgets, forecasts, and variances.) On the surface, they appear to be good, attainable goals that check all the boxes and satisfy frameworks like the SMART criteria, OKRs, or whatever other framework you use. They seem like a good starting point for strategic planning.

But, when you dig a little deeper, you’ll find that many revenue goals don’t make good strategic goals. They’re just numbers plucked out of thin air that only technically satisfy goal-setting frameworks in the mildest way (while entirely missing the point). These weak revenue targets are very difficult to accurately plan for and reach because there was never any reasonable basis for them. It’s very difficult to come in after the fact to add reason where there originally was none, and create a workable plan. Instead, start with a reasonable basis, check for anything that may hold you back, and build your way up to the revenue target.

Start with the plan and build up to the revenue target:

Revenue goals frequently start as an incredibly rough number (eg, “I want to make an extra: $50,000, 15%, 10 more clients, etc”) then we back into how that can be accomplished (eg, “That’s just 2 more retainer clients. Easy”). Instead, start with how you’ll grow revenue. You don’t need the exact play-by-play and action items yet. But, will you be increasing the number of customers, increasing average transaction size, increasing the frequency of transactions per customer, or raising your prices? Then, once you have a growth plan, use a revenue target as a simplified way to explain that plan (eg, “I plan to get 2 additional projects a month at $1,250/project which is $30,000”). Your revenue goal should just be the capstone on your plan.

Do the math on lead flow, close rates, and capacity :

After creating a rough plan, make sure it’s feasible. For plans that rely on more customers or transactions, that means reviewing your lead flow, close rates, and capacity/utilization. You’re checking for two things. First, you need to make sure there’s enough leads coming in and you’re closing enough of them to maintain your current business AND reach your new revenue goal. Check last year’s CRM data to see how many good leads came in and how many became clients. Then, you need to make sure your team can actually manage the work and there’s no operational bottlenecks that’d get in your way. Check your project management software to see how much work is already on your employees’ and key decision-makers’ plates. If neither of those two points checks out, your revenue goal is setting yourself up for failure and disappointment. Your time would be better spent on other goals that improve your business (eg, more marketing, improving your sales process, or better ops) thennn attacking a revenue goal in the future.

(Note on capacity/utilization: You can’t expect employees to work at 100% utilization for an extended period of time. If your goal relies on that, you have a problem.)

Consider the ramp-up period :

All new goals require some changes or improvements in your business. Otherwise, they wouldn’t be goals, but business as usual. (You don’t need goals to reach the status quo. You’re already there.) And, those changes take time to implement. So, you won’t make progress towards a revenue goal and see new top-line revenue right out of the gate. The first few months will be spent getting things in place, like hiring a marketing agency to increase lead flow, improving your sales process to increase close rates, bringing on more employees to increase capacity, or planning your next pricing increase. For example, a plan like “I plan to get 2 additional projects a month at $1,250/project which is $30,000” would look more like “I plan to get 2 additional projects a month at $1,250/project, but first I need time to hire a new employee for additional capacity, which means I’ll make $25,000.”

(Note: This ‘improvements then revenue’ issue can also create cash flow problems. Make sure you have the cash coming in and savings to fund any new expenses until revenue catches up.)

Increase revenue by looking internally :

Many revenue goals rely on new clients or more work. But, that’s not the only way to increase revenue. You can also increase revenue by increasing transaction size or increasing your pricing. Take a look at your current client list and look for opportunities to upsell an addon, suggest an additional service, or reassess pricing during contract renewal. These opportunities may not be as glamorous as a huge client list, but they’re often easier than attracting and selling new clients.

More revenue doesn’t solve everything :

More revenue isn’t a magic bullet. It can’t solve every problem in your business or help you reach every other goal. For example, more revenue won’t fix culture problems and won’t necessarily lead to you working fewer days a week. Take a hard look at your business, your desired outcomes for it, and ask yourself if additional income helps fix these problems or reach your other goals. If it won’t, scrap the revenue target and focus on more pressing issues or goals that’ll more meaningfully move the needle.

Action Item:

Remake your revenue goals. Start with a basic plan then do the math on lead flow, close rates, and capacity to make sure it’s attainable.

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