Go bottoms up to plan for what you want and increase the likelihood you get it.
The challenge
Ask most leaders what their goal is for the next year and you will get a revenue number. Anchoring is a super powerful effect. Setting revenue goals as our target creates strong subconscious desires. Communicating that revenue goal to team members and investors anchors that goal in their minds and further commits us to the goal. How we judge our success and value becomes a function of hitting that goal.
We all the know the problems that result. When marketing efficiency declines, the reflex is to spend more in order to hit the revenue goal. When it comes time to order inventory, the inventory goal decides the amounts. Channels are added or expanded in service of the revenue goal. People and tools and capabilities are added swelling OpEx because that’s what we believe we need to hit our goal.
The irony is that revenue is a proxy metric and often just a vanity metric. Saying you have a $100 million per year business sounds cool. But what if you lost $10 million and have 30 days of cash in the bank?
As a client and I were getting to know each other, I noticed that many of our conversations were focusing around revenue. What revenue should we go for next year? How much can we grow topline? What should be our target ROAS? What can we do to increase revenue? Talking about the importance of focusing on profits and cash wasn’t going to work. We needed something tangible we could play with and test.
The Solution
I built a plan and planning framework that started with our profit goals and then worked from there. It took a couple sessions to reorient the client’s thinking, but instead of focusing on sales and marketing spend, we were focused on profits and cash generation. You could see the client starting to look at their business in a whole new way and that enabled us to make some big and impactful changes to the company’s strategy.
The results
Three big results flowed from this planning process.
- The client has a better strategy for how to drive and grow their business which is focused on generating cash and profit, not sales.
- The core metrics that must be hit to achieve the profit goals were made clearer, thus increasing our operational focus.
- Most importantly, this focus on cash generation led to a new long term strategy for the founders. Instead of a vague goal of growing to X sales with Y EBITDA in Z years and then hoping for a sale, the strategy has shifted to one of building robust and durable cash generation in order to maximize cash distributions to founders over time. In doing this, we will build a fantastic business that will garner premium multiples when the time comes to sell, if the founders even want to sell.