What CEOs Should Be Doing to Plan for 2011
December 15, 2010
Hoping to have a successful 2011?
If so, there are some things that CEOs and company founders should already be doing to make that happen.
Regardless of whether you’ve bootstrapped the business through organic growth, raised an initial round of venture capital as an early stage company, or will eventually seek additional growth capital because you’ve hit the expansion stage, planning for the future means getting to work today on things that you expect to impact the business a year or two from now.
If your fiscal year coincides with the calendar year, senior management teams should be buried in budgeting and planning for next year. That preparation will determine how you allocate precious resources, capital, and people to take the next big step as a company. As they look to next year, CEOs should use Key Performance Indicators from the previous three quarters to build an economic model for the business. Those KPIs are the financial foundation of the company.
For example, let’s use these fictitious last three quarters of data to set up a sample analysis:
- Your average cost per lead is $25
- You convert 25 percent of your leads to qualified leads at a cost of $100 per qualified lead
- Your average sales rep converts 25 percent of their qualified leads to close
- Your average bookings ASP is $500 per month or $6,000 for 12-month contract value
- Your average rep closes eight deals per month for a 12-month contract value of $48,000
- Your bookings goal for 2011 is $12 million
From those numbers you can determine how much you need to spend in marketing to generate the necessary volume of leads, and how many sales reps you need to have on board to convert those leads to bookings to meet that goal.
So, doing some quick arithmetic, $12 million in bookings means that you need 2,000 deals for the year at an ASP of $6,000 per year (or $500 per month). That equates to 167 deals per month, which means that you should be spending $66,667 on marketing per month and have at least 21 reps who are 100 percent productive from the beginning of the year with no turnover.
It’s important to note that I estimate at least 21 sales reps because companies should always account for a sales learning curve. Based on your experience, you should know how long it takes a newly hired sales rep to hit their monthly quota. From there, you should also factor in turnover. With those two things in mind, you will need to build in some extra capacity in your economic model to lower the risk. After all, nothing ever goes perfectly.
That same preparative approach would apply to a few other business categories as well. The more you’re able to plan for improvements in those categories before the fiscal year begins, the better off you’ll be when it comes to a close. For example, take a look at:
- Finance: The best and easiest examples would be for CEOs and CFOs to examine Days Sales Outstanding for cash flow and what factors might help decrease DSO. Here’s a quick tip sheet from KPI Insight that describes a few ways to decrease those numbers.
- Customer Service: Look at the number of calls required to close out a tier 1 client. Compare it against the number of calls client service reps can handle per month and the average number of calls per customer. Improving that efficiency is key.
- Development: How many developers do you need based on historical development data? Judge the answer to that around stories per development sprint (if you use Agile/Scrum for your development methodology) and you can scale your team appropriately.
In addition to using historical economic drivers for the business, you should also plan for incremental improvement in each area to create more leverage and improve on the processes in each operational area (sales and marketing, finance, customer service, product management, development, and consulting).
If you want to build a great business that consistently beats the competition through operational execution, you should always drive process improvements and cycle time reductions. For example:
- If you can improve the quality of the lead flow, you lower your cost per lead and spend less in marketing.
- If you can make your sales reps 10 percent more productive, you’ll need two less reps to achieve your bookings goal.
That’s the beauty of an economic model. Once you build it, you can look for ways to tune it for improved performance. But none of that can happen if your model isn’t built on historical KPIs. That’s where it all begins. Without that model in place, CEOs are working without a tool that can be the difference between achieving or missing your 2011 goals.
For more on what CEOs and their management teams should be doing, check out a couple of my older blog posts here and here.