Now that you’ve analyzed your team and found the right person to handle strategic planning for your business (if not, check the previous article), what’s next?
Let's speak about money.
I believe financial targets should be driven by the business owner’s personal life goals, happiness, and fulfillment.
A happy owner = successful and growing company.
After all, we want to build an ethical business with steady growth, not at the expense of our health and life, but to elevate their quality.
Here’s my favorite homework assignment, something I give to all my clients. It’s not just about setting random numbers; it’s a way to define clear financial goals that align with your lifestyle ambitions. This method will help you calculate your company's target revenue for the next year and five years.
This methodology will be helpful if you’re starting a business from scratch or if you already have a profitable business. I would say that if your annual income is up to 10 million, you can calculate your target revenue this way.
How Does Financial Planning Typically Work?
Financial planning sounds like this in many companies: “We made 2 million last year, so let’s aim for 3 million next year.” The numbers often come up randomly or are based on industry benchmarks, like aiming for 20% growth each year because “that’s what the book says.”
And yes, understanding benchmarks and statistics is valuable. But…
I’m absolutely convinced that its owner's growth ultimately limits a business's growth.
So, let’s try a different approach. Instead of looking at past performance or external benchmarks, we’ll focus on the future — your future.
A New Approach to Financial Planning: Looking Forward with GPT
For this exercise, you’ll work with my favorite assistant, GPT, to calculate how much money you’ll need for your ideal lifestyle in the future. Here’s how to get started:
- Ask GPT something like: “Please help me calculate how much money I need for my target lifestyle in 20 years. Ask me questions about all aspects of life and potential expenses.”
- Imagine Your Life in 20 Years: Think about your age, your family, and the lifestyle you’d like to have in 2044. Ask yourself:
- How old will you and your family members be?
- What will your lifestyle look like?
- What level of health, quality of living, and leisure will you want?
- Where will you live, and with whom? What will you own?
- How often will you travel, and in what style?
3. Detail Every Expense with GPT: Write all these answers out and ask GPT to estimate the financial requirements. This final amount will be SUM1, or your 20-Year Goal.
Moving Closer: Your 5-Year Plan
Now, repeat the exercise but look five years ahead. Ask yourself what lifestyle you want by the end of 2029. Remember, it’s not just words; we need numbers to support this lifestyle. We’ll call this SUM2, or your 5-Year Goal.
To calculate the revenue your business will need to reach this amount, let’s walk through an example:
- Suppose SUM2 = €1,200,000.
- To ensure this amount after taxes, consider that you’ll pay a 20% dividend tax.
- This means you’ll need €1,500,000 pre-tax to be left with €1,200,000 after taxes.
Now, assuming your business has a 20% net profit margin, the required revenue is calculated as follows:
- Revenue = €1,500,000 / 0.20 = €7,500,000
Now you have two targets for your 5-year plan: your Revenue and Net Profit goals for 2029. This approach aligns your business goals with your desired lifestyle, giving you clear, realistic numbers.
[Please ask our amazing assistant, GPT, to handle all the calculations.]
Final Task: Your 1-Year Plan for 2025
Think honestly about your current lifestyle and the income needed to support an enhanced version. Add the amount you want to invest from your personal funds. Let’s assume SUM3 = €380,000 for your ideal lifestyle next year.
1. Calculate the Pre-Tax Amount
To retain €380,000 after a 20% dividend tax, calculate the pre-tax profit needed:
- €380,000 / (1 - 0.20) = €475,000
2. Add Business Reserve
Next, add the amount you'd like to keep as a reserve for your business, accounting for monthly expenses if you don’t already have a safety cushion. Assuming monthly expenses are €150,000 and you want a 2-month reserve:
- €150,000 x 2 = €300,000
Adding this reserve to the pre-tax profit:
- €475,000 + €300,000 = €775,000
3. Calculate Required Revenue
Assuming a 20% net profit margin, calculate the revenue needed to achieve €775,000 in pre-tax profit:
- Revenue = €775,000 / 0.20 = €3,875,000
Summary:
To support your desired lifestyle in 2025, your target revenue should be €3,875,000, with a pre-tax net profit goal of €775,000.
Example Summary:
- 20-Year Plan (2044): Target €3,000,000 post-tax income.
- 5-Year Plan (2029): Target €1,200,000 post-tax income, or €1,500,000 pre-tax. Business revenue goal: €7,500,000.
- 1-Year Plan (2025): Target €380,000 post-tax income, needing €3,875,000 in revenue.
This structured financial roadmap clarifies your goals based on actual needs and aspirations.
Feel free to share your SUM1 and your long-term vision in the comments if you'd like, and support by liking and sharing if this was helpful!