I recently came across Ben Horowitz’s article, The Map and the Terrain, which discusses the importance of the interconnection between the financial plan and the business. I love this article, because it highlights the importance of both aspects, the financial plan driving the business and the business driving the financial plan. A good financial plan should navigate the business in achieving milestones while identifying the resources and constraints needed to scale at each growth stage. The unique business nuances should drive the inputs into the financial plan.
For example, when building top line growth targets in the financial plan, here are business questions samples that should be factored into the planning – Are there enough quota carrying sales reps to achieve the required new business to support the revenue growth? If not, how many new reps are needed to fill the gap, and how many months it will take for a new rep to contribute? Are there enough leads and pipeline to generate new business target? How many additional Customer Success reps are required to effectively manage the customer install base? Do you know the threshold of accounts one CS rep can manage, and at which point things will start to break? With all the investments in resources required to achieve the revenue target, how does that affect cash burn and runway?
I have illustrated an info-graphic below to visualize how identifying business levers and metrics should drive key strategies in mapping to a financial plan target.
Below, are some business questions a good financial plan should address.
Are revenue projections segmented by new, upsell/expansion, downsell, and churn.
Does the total sales quota align with new business projections
How much cash burn generates the new business projections
Cost of Goods Sold:
How do net revenue projections impact gross margins
How many CSMs will you need to manage revenue projections
How do you scale CSMs to revenue managed
Are your hosting costs linear to customer revenue
How can you scale customer hosting expenses
Sales & Marketing:
Are there enough leads to achieve revenue target
Have you identified the marketing events to build brand awareness and generate leads
Which marketing channels are the most affective
How many leads will generate X amount of MQLs
What is your MQL to SQL conversion rate
What is your SQL to Win Rate
What is your average win deal size
What is your sales cycle time
What is the new business seasonality between months and quarters
What is your sales rep quota attainment
How many ramped reps do you have
How long does it take for a new sales rep to be fully ramped
How many new reps are needed to achieve sales target
What is your LTV to CAC ratio
What is your sales efficiency ratio with S&M investment
Research & Development
What is total R&D expense to revenue ratio and how is that compared to similar companies at similar stages
What is the percentage of R&D expense on new development versus maintenance development
Are new products or features required to add customer value
General & Administrative
What is total G&A expense to revenue ratio and how is that compared to similar companies at similar stages
What are the investments in business systems to scale
At what growth rate will require new offices
What revenue amount are required for more support