Financial Modeling for Operations: Part 1 – Growth Plan

A crucial driver of your company’s growth is the effectiveness, and efficiency of your customer acquisition.  To optimize revenue as a business manager, you must analyze every step of the funnel and test strategies that optimize success. In this series, I will show you how to optimize your business using four key areas of your financial model in operations.

• Growth Plan
• Revenue Plan
• Expense Budget
• Capitalization Plan

Today, I’ll focus on a high-level overview of our strategy and a deep dive into the growth plan. Forecast > Analyze > Optimize

Optimize your long term financial goals by performing a deep dive analysis every quarter of the year. A quarterly timeline provides pivotal feedback on individual performance of your customer acquisition channels and allow you to rapidly refocus efforts on your most effective platforms. This series will detail these four key areas of your financial model to forecast for each quarter – these become Objectives and Key Results (OKRs) to compare against actuals at the end of the quarter. This allows you to perform a formal analysis of the previous quarter and determine critical opportunities toward success. It’s OK to fall short of your forecast from time to time, but shift your strategy based on the data you collected and set new OKR’s for the next quarter. Share at least a high-level explanation of your quarterly goals with the team to align on company strategy.

Four Key Areas of Your Financial Model

A growth plan articulates a strategy to outline how you plan to acquire customers. This detailed plan contains projections (targets) for each customer acquisition channel you currently utilize, such as direct sales, facebook advertisements, or conferences. Input targets for (1) total number of customers acquired per channel and (2) targets for each step in the growth funnel.

A revenue plan serves a distinct purpose from a growth plan. A growth plan details how to acquire customers. A revenue plan details how to monetize those customers. For example, if you sell a variety of offerings, a  revenue plan will determine which products or services your new customers will buy. This plan also helps you understand churned customers and strategize pricing.

An expense budget, outlines everything that you plan to spending money on for the forecasted period – this is essentially your budget, which includes salaries, benefits, rent, marketing, supplies, and more. This plans a provides a framework to manage your cashflows against established revenue targets to prevent overspending.

A capitalization plan details a strategy to ensure the company doesn’t run out of money. This plan includes target dates and specific cash amounts for raising debt, equity, or a hybrid of the two. 

The Growth Plan

Let’s jump into an example. 

In the below growth plan, we sectioned the model into quarters versus targets for each growth channel. The numbers indicate how many customers we predict to acquire per channel. While strategizing for Q2, our company relies heavily on social media advertising and direct sales to acquire customers, but predicts minimal growth from conferences. As such, we should avoid investing time and resources in prepping for conferences, a hypothetically less effective channel of acquisition. To achieve revenue forecast, we should dedicate resources to execute on our Facebook Ad strategy.

At the end of the quarter, we will compare actual sales against our growth plan and measure results. If we executed effectively on our Facebook Ads and still miss revenue forecast, we may need to rethink our strategy and test a different growth channel for Q3. If Facebook Ads acquire sales at or above target, we should continue to execute toward that success until the comparison data changes and reveals an opportunity.

To optimize revenue, hammer down on specific, short-term targets to climb toward the bigger company vision within a five-year context. This also prepares you for larger growth channels coming down the pipeline.

For example, look ahead into Q3 in our growth plan above. “Influencers” indicate a huge catalyst of future growth. What do we need to do in Q2 to seamlessly initiate influencers as a growth channel in the next quarter? Relentlessly forecast targets, analyze growth, and optimize the strategy to prepare for the immediate timeline to achieve long-term success.

I’ll show you what I mean by digging into a specific example in the photo below: direct sales.

In May, our company expects to acquire four new customers from direct sales. Our sales associate begins by reaching out to 100 people through cold calls and email. Of those initial 100 outreaches, we target 10% will agree to an in-person meeting — that’s 10 people. From those 10 people, we target 80% will follow-up for a demo — that’s 8 people. We target 50% of those 8 people will convert into a paying customer. We achieved 4 customer acquisitions from an initial pool of 100.

In setting each stage individually and tracking target metric each month, we discover where in the process to optimize.  Track the controllable metrics to determine if you need to cast a wider outreach net or follow-up with a different pitch to effectively convert to the first meeting.

These targets essentially translate into OKR’s for each quarter. Observe how this sales associate’s actual conversions measured against the forecast below.

Our company fell short of the outreach target, but still hit goal for potential customers making the first meeting. We also fell short on number of demos and final customer conversion. This indicates critical opportunity for improvement in the last two steps of the sales process, particularly converting from demo to sale. 

What is our strategy to improve? For example, we could consider using new software during the demo meeting, such as our friends, Demoflow – another Techstars company. We could change our demo cadence or invest resources toward a custom a demo for each potential client.

Forecast, analyze, optimize. This process drives you to dive deep into each step of the funnel and create pivotal strategy adjustments to move the needle. Repeat this process for each growth channel to realize long-term, exponential growth.