Blue Elevator Blog

To Move Forward Think Backward

We’ve all heard the saying, “one step forward, two steps back.”  But that isn’t what this article is all about. 🙂

This is about, God willing, planning for growth.

Projections

Projections are fun.  Anyone with decent Excel spreadsheet capabilities can build good models.  Having worked in the Fortune 500 world for quite a bit of time, I can recall a few distinctions:

• There were people who worked in Financial Reporting.  These were/are, typically, the CPAs and accounting types who were adept at reporting “actual” financial results.
• There were people who worked in Financial Planning.  These were/are, typically, the MBAs who were adept at modeling and producing “projected” financial results.

The interesting thing was that these functions were independent of each other, save for the fact that the projections usually started with the prior year actuals.

Projections Are Fun

As some of you may know, as a CPA (inactive), I had come through the financial reporting ranks.  In fact, the profession has a lot to say of being associated with “forward looking” financial data (e.g., projections).  Namely, to avoid it.

So, as someone, who was somewhat constrained to the mundane reality of looking out of the back of the bus, I must admit the prospect of spending the day creating “forward looking” projections seemed appealing, liberating, fun, etc.  In the company where I worked, the Financial Planning department was even in a different (nicer) building than the Financial Reporting department.

OK.  Yeah, I wanted to work in that department.  The grass did seem greener. 🙂

Back to the Future – Literally and Figuratively

In reality, you need both.  You need to do projections.  As the saying goes, “The best predictor of the future is the past.”  And, “If you don’t do anything different, then you’ll keep getting what you have been getting.”  So, it is important to plan for the future.

So, let me submit the following:

• It is good to do projections.  You need to plan ahead.
• It is good to have a great handle on the actuals.  You need to keep and close the books monthly.  And thanks to Quickbooks, no one is without excuse.
• And, you HAVE to bridge the gap to compare where you are – with where you hope to be.

But that aside, let’s focus on the exercise of projections.

To Move Forward You Have to Think Backward

This is where things take a bit of a turn.  When doing your modeling and projections, it’s all about your assumptions.  And, it’s the ability to move backward that helps you vet the feasibility of your assumptions.

If you would like to see a 50% increase in sales next year, anyone can model that in an Excel spreadsheet.  Anyone.

• Projections are only as good as the assumptions.
• Assumptions are only as good as the execution of the underlying metrics.

This is a good article to read as we consider our next steps: Identify the Key Drivers …

It’s Easy to Move Forward

Let me explain using a simple example.  In this example, let’s assume the current year revenue is expected to be $6 million.  The average deal size is about $5,000.  This means that the company is expected to have booked or recorded 1,200 transactions.  This equates to an average of 100 deals per month.

Next year, the company wants a 50% increase.  Assuming no change in pricing, this means the average deal size will still be $5,000.  But, the company will need to record 1,800 transactions, or 150 deals per month (e.g., $9 million = $5,000 x 1,800).  That’s an extra 50 closed deals per month.

Thinking Backward

This is where the proverbial rubber meets the road.  All too often, projections leave us feeling warm and fuzzy.  In fact, in some organizations, projections have been the basis for incremental spending or investment decisions.  From new things to new hires, we need resources to help us deal with the growth, right?  It’s fun to buy and spend!

Here is a trustworthy saying:

“Suppose one of you wants to build a tower. Won’t you first sit down and estimate the cost to see if you have enough money to complete it? For if you lay the foundation and are not able to finish it, everyone who sees it will ridicule you, saying, ‘This person began to build and wasn’t able to finish.’” – Luke 14:28-30

So, the projection is only the beginning (easy).  You must now think backward (difficult).

Illustration

Literally, I encourage you to get out your smartphone calculator and work through this exercise with me:

• If we need to close 50 more deals per month, what will those be the result of?
• Let’s say, on average, the company gets a closed deal 25% of the time – and the 25% is the result of “appointments.”  This means we will need to create at least 200 additional appointments (e.g., 50 deals = 200 appointments x 25%).
• Let’s say, on average, “appointments” are the by-products of phone “conversations.”  And, roughly, 20% of the “conversations” agree to an “appointment.”  This means we need to have roughly 1,000 additional “conversations” (e.g., 200 appointments = 1,000 conversations x 20%).
• Let’s say “conversations” are the results of people who enter a name, e-mail, and phone number on a website landing page (e.g., “submissions”).  And, roughly 50% of the “submissions” result in a “conversation.”  This means we need to get 2,000 additional landing page “submissions” (e.g., 1,000 conversations = 2,000 landing page submissions x 50%).

Now, where and how are you going to go about getting 2,000 additional landing page “submissions?”  That, my friends, is thinking backward.  Much time will need to be invested to determine the best way to go about getting these additional 2,000 “submissions.”

• Is this realistic?
• How will the company generate the additional 2,000 “submissions”?
• What will be the cost of acquiring these additional “submissions” (e.g., cost per submission)?
• How will these be funded?
• What measurements will we need to have in place to feel certain we can accomplish the enhanced activity?
• Etc.

You see?

“Your ability to move forward is based upon your ability to think backward.”

Summary

Anyone can prepare a projection.  The real work is in thinking backward.  And, all too often, in most organizations, the projection is an exercise in and of itself that stands alone.  Very few organizations take the time to think backward.  The projection is only the beginning.  It’s the literal and proverbial tip of the ice berg.  The real substance is what is underneath it all.

At Blue Elevator™, we love helping our clients move forward.  Or, is it helping them think backward?  Contact us!