Here are my favorite metrics to check when I finish creating a five year plan. These metrics are also great to check for annual budgets or even monthly forecasts.
- Revenue Growth Year over Year Percentage – Revenue is the key to any business and understanding how it changes year over year gives you insight into growth. The average growth rate for companies with over $1M in annual revenue is between 40% and 50%. Only a third of companies have growth rates over 100%, so if your model is showing a really high growth rate to get a hockey stick forecast you may want to double check your assumptions to make sure they are believable. One of my favorite Peter Adams quotes is “It is possible but not probable” when talking about extreme growth. Show something that is in line with what investors are expecting.
- Sales and Marketing as a Percentage of Revenue – This is the first assumption to check that the revenue growth rate makes sense. As you spend more in sales and marketing your growth rate should go up. If your revenue is skyrocketing and your marketing spend is flat then you have underestimated the costs needed to help drive that growth. An average Sales and Marketing % is 10 – 35% of Revenue but can vary based on stage of company.
- Gross Margin Percentage = (Revenue minus Cost of Goods Sold) divided by Revenue. This is a good metric to check to make sure your model is accurately scaling your COGS with your revenue. Typically the Gross Margin % should stay pretty constant unless there are major initiatives to drive efficiencies or reduce costs.
- Cash – How low does cash get? How often is the company raising money? How much cash is on the books at the end of 5 years? In my mind you shouldn’t be raising more often than every 1.5 years, cash should only get as low as a few months of runway, and you should not have a ton of excess cash showing in the bank – any excess cash should be invested in the business for more growth or more than likely some of your assumptions are off somewhere.
- Customers – This goes along with number 1 on Revenue Growth but the most important part of a financial model is how the business is getting customers. This is the hardest thing for a business to do so there better be more thought than the customers are going to grow by 5% every month. What are the assumptions for how the company will spend sales and marketing money, what is the cost to acquire and lifetime value and conversion rates for each channel? This will help the company figure out when to pivot if needed (ie when they expected to get 100 customers through word of mouth and get 0 then they should try something else).
If you want a free check of your financial model then schedule a call here.