Grow at Your Peril. 4 Most Common Mistakes Companies Make in Their Strategic Planning

It is very exciting when your company has raised a round of capital or has enough operating capital, and finally can spread its wings and fly. Invest in marketing, hire people, tell the world about the amazing product you’ve created and, of course, drive sales.
It is at that time that it is critical to establish a clear link between the company strategy and expected financial outcomes as well as map out how this strategy will impact all areas of your business. Specifically, what would it take to generate your desired level of sales in terms of time, human and operating resources and capital?

In my work with executives and founders, I see 4 most common issues companies face in their strategic planning:

1. Sales strategy not in sync with the resulting financial forecast.
2. Operations disjointed from sales.
3. Working capital not considered.
4. All relevant KPIs not identified and tracked.

All these factors adversely impact the companies’ ability to execute and achieve desired results, often leading to misused capital, liquidity problems and lost time. Let’s explore why.

There are two typical ways in which most CFOs project the number of customers. They either grow the initial number of customers at some arbitrary rate or assume some arbitrary increasing percentage of the total market share.

Both approaches fail to consider the company’s actual sales strategy. Specifically, the sales cycle, the size and nature of the sales funnel, the conversion rate, the marketing budget, mix and the expected number of leads, the size of the salesforce, and the type of the customers converted from various initiatives.

This leads to creating a revenue forecast that is hard to realize because it is not aligned to what the company is actually doing to generate it. Moreover, it can lead to incorrect decisions on whom to hire, how much capital to raise, or what to tell investors or other stakeholders. Unmet expectations destroy trust, focus and create stress.

An easy way to fix this issue is to instead model sales using the company’s go to market strategy and align everyone on the sales process and expectations.

When the company scales, some parts of its infrastructure scale with it and some don’t. It is important to identify and properly account for those scalable pieces. An example could be the sales department, the customer service department, certain positions in Operations and the related operating expenses.

It is a common practice for CFOs to simply hardcode all such expenses without linking them to revenues to clearly establish the connection between these costs and how quickly the business grows. That is a mistake. As the sales assumptions change, the costs required to support those sales must automatically vary as well.

An effective way to address this is to implement logic for how those positions change with the level of sales. This exercise will also give critical insight to the executive team in terms of what resources the company must allocate to support a given level of sales, and allow for proper capital planning and hiring.

When an executive team is only focused on topline growth, it may overlook the cash flow implications of that growth. Such oversight can lead to liquidity issues and, if not managed properly, the company running out of cash completely.

Working capital is to blame. Working capital arises when there is a delay between booking revenue and getting actual cash from customers (Accounts Receivable), having to buy Inventory in advance in order to generate sales, and delaying the payment of certain expenses (Accounts Payable and Accrued Expenses).

When the company grows and, naturally, incurs more expenses to do so, it may not get the extra revenue boost right away because of working capital. Not understanding how much time it takes to get money from the point of converting a customer leads to not having enough cash resources to last up to that point. No one wants to be in the situation when your sales grow, but your cash inexplicably dwindles to zero.

This risk can be addressed by modeling the cash conversion cycle as part of financial planning as well as robust cash flow management. Cash is King, after all.

“What is the cost of customer acquisition?” “How much revenue do you make per customer?” “How much cash do you need for the next 12 months to fund your growth?” “What are your hiring needs and how will they change for different revenue outcomes?” “What is your cash conversion cycle?” “What are your unit economics for various revenue streams”?

All of these questions and more are hard to answer precisely if the financial model is built too high level and does not clearly link the company’s strategy to financial outcomes.

If you don’t have a clear understanding of those factors, you lack critical information to properly evaluate and respond to market feedback, and to effectively plan for the future.

The good news is that a well-built financial model which is correctly implemented in your financial systems, can easily answer any question you may have in terms of what is working, what is not, what to do next, and what capital, operating and human resources are required for that step.

What lessons have you learned from your business? Share below so that we all can become successful together. Want to get more strategic financial advice? Sign up to our free newsletter!