One of the first things we help our expansion stage CEOs with is building their financial and operational dashboards. What we typically find in start-up companies is a lot of management decisions being made with “gut feel” and a practical sense of the business…what we also find is financial planning and management being largely based on cash-in, cash-out accounting.
By raising expansion capital, CEOs need to turn their attention to the economic model with which to grow their companies. I have written quite a bit about capital efficient growth here (What is a Profitable Distribution Model) and here (The Ideal Path to Expansion Stage Growth.)
OpenView Labs developed for our portfolio a high level dashboard that covers the basic financials and operating metrics of our companies. The intent of this dashboard is to be a high level summary of the key operational metrics. It is also intended to be a subset of a more complete quarterly operational review package.
Here’s a run down of the dashboard, with some of the key questions I ask myself as I review the data. Note that the numbers represented in these charts are totally fictitious, to protect the innocent.
The very basic starting point, but one that initially requires a lot of scrutiny. The key questions are:
1. What is the definition of a booking? If you sell monthly subscriptions, is it the value of the first month? If you sell occasional three year contracts with annual invoicing, do you book the three years or just the first? Whatever you decide, my recommendation is to stay within a year of booking value (i.e. book a month value, or a year value… but don’t book multi-year deals.)
2. Why did we miss our budget target, and did we also miss our forecast target? Accuracy of budgeting and forecasting is an absolute fundamental need in a software company. Under-achievement of the forecast and an over-achievement are both a forecast miss. A miss against the budget target is an indication of poor understanding of the dynamics behind the distribution model (e.g. how do marketing dollars and resources translate to future bookings? What is the productivity of a sales rep, including ramping up new reps? What is the seasonality in the business?). A miss against forecasted bookings is a sales pipeline management issue.
3. Should we revise our forecast for the next quarter?
Depending on the type of licensing, revenue adds another dimension to the operational perspective that you don’t get from bookings.
1. Are we set up with the proper revenue recognition from a GAAP perspective? What are the steps we need to take to ensure that we are?
2. Where are the gaps with budgeted revenue coming from? Are we seeing a change in the balance between license revenue and services? Are we seeing a shift in how our sales contracts are being executed?
Renewal and Upsell
Expansion stage companies tend to neglect renewal and upsells by being exceptionally focused on new customer acquisition. More often, the opportunity to retain and sell more to customers is a huge untapped source of lower cost revenue. For more on the topic, read “Sell More to your Existing Customers.”
1. What is the current renewal rate (without upsells) and why is it not 100%? What is the profile of the customers that have churned, and how do we classify them? What were the reasons they churned? Should we have a “lost customer” calling program to get these answers?
2. Are we selling to the right profile of customers? What is the profile of customers that don’t churn? How do we find more of them?
3. Is our product meeting our customers’ expectations? Do we need to offer an on-boarding service to ensure that new customers are being trained to best use our products?
4. What is our upsell rate to current customers, and how can we increase it? Do we have an active account management process? Do we have sales reps that are dedicated to upselling existing customers?
This is probably one of the most important charts when it comes to the economics of scaling an expansion stage company. The chart depicts the profitability of the distribution model by looking at the ratio of gross profits against the sales and marketing costs in a given quarter. For more on this, I refer you again to What is a Profitable Distribution Model.
1. What is our priority when it comes to the profitability of our distribution model? What is our growth strategy vis-à-vis our available capital? What do we need to dial-in operationally in order to get economics?
2. What is the impact of each of the the distribution variables (gross margin, bookings, sales and marketing cost)? How is each trending, with what impact to the ratio of top to bottom lines?
3. What should be our priority for the next quarter going forward? What kind of sales and marketing support do you need to explore?
Ready for Part II of this series? Here you go http://bit.ly/agSmg8
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