Unlocking Business Success with Simplified KPIs

In the vast sea of business complexities, the need for a reliable compass cannot be overstated. Enter Key Performance Indicators (KPIs) – the navigational tools that help business owners chart their course and make informed decisions. In this blog post, we’ll explore the art of simplifying KPIs and their pivotal role in guiding your business journey.

Embracing Simplicity in a Complex World

Complexity tends to sneak in as time marches on. And being a business owner is difficult. We often find ourselves facing challenging moments, as a contact of mine did when his sales pitches to a large company ended in rejection. This, however, is normal and part of the journey. Most sales calls receive the dreaded “no,” a harsh reality of the sales world. In the face of adversity, we must not lose heart; instead, we should expect challenges and remain steadfast in our vision.

Our North Star in this tumultuous sea is a clear and unwavering vision. Every business owner must ask themselves: “Where are we heading, and what is our vision?” A clear vision will serve as a guiding light through turbulent waters and should influence the type of information you track and reporting that you do.

Simplicity in Reporting and KPIs

Just as life’s complexities grow with age, so do the complexities in business operations and reporting. If you’ve been in business for a while, you’ve likely seen your processes and reports become increasingly intricate and complicated. It’s just the way it is. With more time, things get more complex.

The key, however, is to keep things simple. The allure of intricate dashboards with tons of data points and graphs is enticing, but often it becomes challenging to see what truly matters. To cut through the noise, it’s essential to maintain a straightforward approach.

Organize and Focus with KPIs

One effective way to streamline your business’s focus is by categorizing KPIs on your weekly Company Scorecard with categories such as marketing, sales, operations, and finance, and assign teams to brainstorm and track three to five key metrics in each category. This approach narrows the focus, ensuring that each KPI contributes to the overall value of your business. And each KPI has a person (or you) accountable for it.

The Power of the Weekly Review

Weekly reviews are the engine that keeps your business on course. This routine check-in allows for the timely identification of issues and the resolution of bottlenecks. It’s the glue that aligns everyone with the same KPIs and growth targets, fostering unity and clarity within the team.

Measuring Progress with KPIs

When it comes to KPIs, consider the following areas: Growth, Fulfillment, and Innovation. To measure your business’s performance, keep an eye on a range of metrics tied to these areas, such as:

  • Growth: Revenue growth, monthly recurring revenue, pipeline, customer acquisition cost, gross margin, net profit margin, monthly active users, activation rate
  • Fulfillment: Order fulfillment time, inventory turnover, on-time delivery rate, total support tickets, average response time, number of clients onboarded, renewal rate, net promoter score
  • Innovation: R&D ratio, new product launches, time to market for new products, milestone achievement, churn.

Additionally, analyze other vital KPIs, including unique visitors, cost per acquisition, return on ad spend, average customer value, new customers, sales, sales leads, qualification calls, close rate, booked revenue, average deal size, and pipeline.

A Deeper Dive into KPIs

If you’re looking to expand your KPI knowledge, consider delving into the following key metrics:

  • Days of inventory on hand is found by dividing the average Inventory by the ratio of cost of goods sold to the number of days in the period. It indicates the average number of days it takes for a company to sell its entire inventory, providing insights into inventory management efficiency.
  • Gross profit margin: Determined by subtracting cost of sales from total sales, then dividing the result by total sales.
  • Working capital ratio: Computed by dividing current assets by current liabilities.
  • Account payable turnover: Found by dividing net credit purchases by the average accounts payable. It measures how many times, on average, a company pays its accounts payable during a specific period, providing insights into the efficiency of the company’s payment process and its relationship with suppliers.
  • Days Sales Outstanding (DSO): found by multiplying the ratio of average accounts receivable to average daily credit sales by the number of days in the period. It represents the average number of days it takes for a company to collect payment after a sale has been made on credit.

KPIs are the lighthouse that guides your business towards success. Keep your compass simple, focus on your vision, and harness the power of weekly reviews to ensure everyone is on the same page. With the right KPIs in your arsenal, you’ll navigate the intricate waters of the business world with confidence and clarity.

Contact me for help establishing your KPIs and creating a helpful dashboard!

Budget Time: Use the 80/20 Framework to Keep Costs in Line

80 20 rule

You’ve probably heard of the 80/20 concept (also known as the Pareto Principle), where 20% of whatever you are considering (i.e. workers, technology, inventory) is responsible for 80% of the results (productivity, sales, and profit.) The fourth quarter of the year is budget season and a great time to take a closer look at your overall cost structure within the 80/20 framework. It’s time to ask yourself what you REALLY need to run and continue to grow your business.

When addressing costs – start with the larger impact and more important things.  Dive into the right problems. 

Don’t start with something that will have a minimal impact.  I like to value stream map key processes with stickies and a whiteboard.  Note people and processes around the sales and delivery experience and the customer/vendor touch points like invoicing and getting paid, improving customer delivery, paying vendors, and maximizing cash outlays.

Here are three areas to take a careful look at, with an 80/20 perspective.


So much of business is based on unknown revenue numbers, and people are your biggest expense. An unfortunate reality is that many times, the people who got you to where you are now are not the same people to get you to where you need to go next. They cannot change and develop as the business does. That’s why budget time is also a good time to review your organization chart. You’ll often see that 80% of your results are coming from 20% of your team. Can you identify the 80% that are less productive and think of ways to scale, or invest in increasing their contribution through training, for example? Are there ways to continue growing your revenue while not growing (and perhaps even reducing) your team as you look into next year?


Another cost that can be significant is Infrastructure investments – money you put into the business for tools, applications, equipment, and more. These generally come in what I call stairsteps, not in a linear path. It’s tempting to be attracted, for example, to the bells and whistles of new technology, but it’s quite possible that only 20% of the features would contribute to 80% of your results. Ask yourself if investment into new tech or equipment would overcomplicate the workplace rather than be the solution you need. Will the learning curve create other problems/costs? It’s essential to ensure that these investments will actually elevate productivity and address challenges.

For example, you may decide that a new ERP (Enterprise Resource Planning) system will streamline tasks and management of employees. This can be true! But if the system is overcomplicated, and you have to retain an on-call consultant for a year, is that an effective use of funds in the long run? It could be, but there may also be simpler solutions available using applications you already have. Perhaps some additional training on current applications so users can move from beginner to intermediate or advanced would cost less and work just as well.

Bonus tip: One way to help separate the problem and solution is to identify and address the pain points in one meeting, give time for the assigned team members to research potential solutions, and then have a separate meeting to consider the options they discovered. This allows your team to determine the core problem without having to provide potential fixes right away. A clear understanding of the problem can be extremely helpful in researching solutions.


Face it – all companies are leaking, some worse than others. Another cost to consider is what your vendors are charging. It’s not unusual for companies to be paying for services and products they aren’t using regularly (or don’t need more of right now.) Again, 20% of the services and products you receive could be covering 80% of your needs.

I recommend that you review each vendor invoice and credit card charge for the next 45 days and determine if each item is necessary. When I’m doing this for a client, I ask the obvious question – “What is this for?” Other questions include, “Are the services billed leading to the expected outcome?” “Are you paying for a subscription for an app you only use twice a year?” “Are automatic deliveries keeping your supplies overstocked?” “Are these conference expenses leading to the collaboration, soft skill enhancement, or team bonding or are you essentially providing your employees a paid-for trip/vacation?” (If that’s something you want to budget for, fine, but be intentional about it.)

If you need a more objective eye, there is a group of consultants like my colleague Steve Thompson at Integrity Cost Consulting. He can analyze your vendor spend to look for historical overpayments. His company earns their fee based on the savings they find. I love that! I like to track savings based on hard savings AND process improvements as a critical success factor.

Cost analysis exercises are generally a helpful practice for most companies, even if they can be somewhat painful. Use this 80/20 framework to budget wisely.

Additional tips:

  • Ask yourself not only about getting the best price – but getting the best value. 
  • When cuts are necessary, be sure you cut deep enough the first time.
  • Do cost analysis on a regular basis.

Need some objective input? I can help. Contact me!

Three Ways to Grow Your Business

Grow Your Business

When it comes to ways to grow your business, it may not be that you lack time but that you need to do some prioritizing. It’s important to constantly evaluate your growth and progress. With the year already well underway, it’s time to take a closer look at how your business is doing. Is it multiplying? Are revenues increasing? If not, here are three ways to grow your business.

Let’s dive into each of these and see how you can measure and improve your progress, using a fictional example of a mid-size coffee roaster, employing 40 people, and supplying over 50 coffee shops with custom-roasted blends.

Add More Customers

This is the most obvious way to grow your business. The more customers you have, the more potential sales you can make. Look at your metrics for new customer acquisition. How many new customers have you gained since this year began? If you aren’t seeing the numbers you’d like to see, do you need to adjust your marketing strategy or invest in new acquisition channels?

Example: ABCoffee expands their strategic social media campaign to target not just their base city and suburbs, but counties 100-200 miles away. Their sales reps do “coffee shop tours” of shops in this expanded area, sharing photos their marketing specialist then posts to encourage people to visit the shops, and leaving a packet of information and sample roasts to the owners of the shops, so they will consider carrying ABCoffee.

Increase How Much You Sell to Each Customer

Another way to grow your business is to increase the amount that each customer spends with you. Look at your average order size. Has it increased compared to previous years? Consider offering bundle deals, or upsell items during the checkout process. I’m sure you’ve seen stores that have multiple low-price items in the checkout area or have been asked online if you want to add “these regular items” to your cart. Always try to add another line item to an invoice and offer premium/higher-priced products to encourage customers to spend more.

Example: ABCoffee offers specials that allow regular customers to add free bags to orders over a certain size. They occasionally slip in samples of new roast, hoping to whet the customer’s appetite to carry more varieties. They host “cuppings” for coffee shop owners to do tastings of their coffee blends, and offer special pricing for orders placed at these events.

Increase the Number of Times a Customer Buys from You

You can also grow your business by increasing customer loyalty and encouraging repeat purchases. To measure this, look at your purchase frequency metrics. Have customers been buying from you more frequently this year? If not, consider implementing a loyalty program or offering discounts to encourage repeat purchases. Make it a desirable thing to be a regular customer.

Example: ABCoffee implements a wholesale customer subscription program that provides a 10% discount to customers that sign up for their automatic monthly delivery service, thereby increasing the frequency of orders (with the bonus of providing reliable and predictable orders to their fulfillment center, increasing efficiency.

By evaluating your metrics for each of these areas of potential growth, you can identify where your business is thriving and where there’s room for improvement. (There’s always room for improvement.) Maybe you’ve been focusing on customer acquisition when your efforts would be better applied to increasing customer spend or loyalty.

Remember, there’s no one-size-fits-all approach to growing a business. Find out what works for your specific business and customer base. By concentrating on these three key areas and monitoring your metrics, you can make data-driven decisions to drive growth and achieve your business goals.

Avoid Waste, Improve Profit


Today’s business environment is competitive. Companies are constantly looking for ways to improve efficiency, reduce costs, and increase profitability. One way to achieve these goals is to implement lean accounting practices, which help businesses identify and eliminate waste in their processes.

According to a study by the Lean Enterprise Institute, a nonprofit organization focused on promoting lean thinking and continuous improvement, a staggering 85% of all effort in business is wasted. 85%! This means that only 15% of a company’s efforts actually contribute to value creation. This waste can take many forms – wasted time, wasted resources, and wasted effort. In my CFO Services practice, I work with many business owners and SMB companies trying to get to the next level with revenue and profitability, and I agree with this finding – there is so much waste, particularly in two areas: employee time, and reworking.

Employee Time
One of the first questions I ask in my initial business assessment process is to review the employee census and ask

“What do each of these individuals actually do?”

“What is their value to the customer? The development and creation of the product? The efficiency of the operation?

One of the largest areas of waste is time. Employees spend a lot of time on activities that don’t add value to the business. These include attending unnecessary meetings, responding to irrelevant emails, not automating processes, or engaging in non-work-related activities during work hours.

This not only decreases productivity but also can dramatically increase labor costs. To implement lean accounting principles in this situation:

  • Evaluate your meetings and determine who should attend them. Can some attend only once per month? Or stay for only a portion of the meeting?
  • Encourage employees to unsubscribe ruthlessly to emails they don’t need. Consider using fewer “all staff” distribution lists in favor of tighter lists that apply to specific projects.
  • Train employees to welcome automation, not fear it. Be open to their input about what tasks could be handled better with improved technology, or eliminated altogether.
  • Build a culture where people aren’t afraid to occasionally connect casually or do something “non-work-related” during work hours as a way to strengthen team bonds. But also have a culture that expects dedication and excellence. This isn’t accomplished as well by policing as it is by providing ways for people to feel human while at work, and celebrating wins to which everyone contributes.


Another area of waste is reworking. This is when products, services, or backroom processes are not performed correctly the first time, resulting in the need to apply additional work, resources, and time to fixing the problem. This increases costs and often decreases customer satisfaction.

Fixing issues like this is like fixing a leak in a utility closet. Cleaning up the water is not enough to solve the problem. Identify the root cause of the leak (i.e. faulty faucet) and turn off the water. Don’t address only the symptoms. Find the underlying cause and work on it, first.

For example, is the process unclear? Are steps being skipped? Standardize the procedures, and write them down. Follow the example of “pre-flight checklists” that are used in various industries. Using checklists will help your staff build muscle memory for the process, but also keep them accountable, and help get them back on track if distracted. This also helps in training new people, and teaching your current employees how to identify and prevent quality issues themselves and with their coworkers.

Lean accounting is an approach that focuses on providing accurate and timely financial information that is relevant to the decision-making process. It emphasizes the importance of waste reduction and continuous improvement, which helps businesses increase efficiency, reduce costs, and improve profitability. It should be a critical component of any business strategy, especially for small and medium-sized businesses struggling with cash flow and profitability. Put it into practice in all your business operations, and see how the bottom line, and your culture, can improve.

Contact me to help you implement lean accounting practices into your business.

What’s the Score? Track Your Key Performance Indicators

key performance indicators

What are your business’s Key Performance Indicators (KPIs)? Are you even keeping score of your business’s performance? When it comes to business results, leaders often have a target in mind (i.e. make more money this year than last year.) You probably have some specific hopes and goals, and are trying to move your results toward those targets, hopefully by following a plan. But without measuring performance results, you won’t have the information you need to hit the bullseye.

As a guiding North Star, there are three components that need to be top of mind when measuring business success: revenue, margin, and profitability. While these financial results are guided by your purpose, values, and service differentiators, these elements are the number one tangible success indicators of your business. If you track your progress with components of the top three, you can manage your business effectively.

Remember these top three measures are lagging indicators. It’s important to look at leading indicators for your specific business – what factors are driving the sales. These include things like tracking new customers, website traffic statistics, customer acquisition costs, customer retention or churn, sales pipeline statistics, and production results. These will give you a better idea of what’s going on “under the hood.”

I suggest using a weekly scorecard to keep track of your Key Performance Indicators (KPIs.) Keep your scorecard simple and choose a few key items to track. Here are some leading indicators you may want to consider choosing from:

  1. Revenue Growth Rate – consistent growth in revenue indicates a healthy business and is a good indicator of future financial performance.
  2. Customer Acquisition Cost (CAC) – if your CAC is too high, it may indicate a problem with the business model, marketing strategy, or product-market fit and can be a leading indicator of the sustainability of the business.
  3. Customer Retention Rate – a high customer retention rate indicates that the business is doing well in meeting customer needs, which can lead to more predictable revenue and a better bottom line.
  4. Net Promoter Score (NPS) – NPS measures customer loyalty and can be a good indicator of future revenue growth. A higher NPS indicates a higher likelihood of customer retention and referrals, which can lead to increased revenue.
  5. Employee Turnover Rate – a high employee turnover rate can be an indicator of poor management, low employee morale, or lack of opportunities for career advancement. High turnover rates can be costly for a business because recruiting and training new employees can be expensive. This can also indicate that a separate, but important, effort should be made in regard to improving the culture and people side of your work.
  6. Sales Pipeline – a healthy pipeline indicates that the business is generating enough interest from potential customers and that there is a strong chance of closing deals.
  7. Cash Flow – monitoring cash flow can help business owners anticipate potential cash shortfalls and take steps to mitigate them before they become a problem, making it essential for the sustainability of any business.
  8. Website Traffic and Social Media Engagement – an increase in website traffic and social media engagement can be an indication of growing brand awareness, which can lead to increased revenue and market share.

I like to track metrics manually versus a fancy automated dashboard. It lets me know where the number is coming from and to me, it seems to mean more if I manually enter it into the scorecard.

Keeping track of your business’ performance is crucial for its success. Use a weekly scorecard and focus on a few key performance indicators to manage your business effectively. It will help you predict future financial performance and take steps to improve it.

I provide a variation of a Weekly Scorecard here. Contact me if I can help you customize it for your needs.

Fourth and Final – Finish Strong and Be Ready

fourth quarter

The fourth quarter has started – the final quarter of the year.  In this fourth-and-final quarter, there are four things you should do in your business to stay strong and successful.

Get Your Team Energized to Finish the Year Strong and Be Ready for 2022

With most of my clients, I am focusing on helping them have a solid Q3 close and a strong finish to 2021.  In the quarterly review meetings, we are looking at the numbers and ensuring that everyone understands the business’s vision and long-term strategy.  I find that, generally, everyone is 70% aligned. We use the opportunity to increase that percentage by having an in-depth discussion of the historical quarter’s results, and then looking at the rest of the year and going into 2022 to align the teams’ vision and long-term strategies. Knowing where you stand can give you motivation and energy for what needs to happen next.

Ensure a Solid Q3 Close

If you’ve established effective processes and routines, your accounting staff should be keeping up with the necessary tasks to ensure you have accurate numbers and information for future decisions. If not, focus on getting these procedures polished (checklists are a great help to this) and getting your staff on board with doing them well EVERY month.

Get Your Short-term Targets in Focus

What are you hoping to see happen in your business during the fourth quarter? Write these goals down, narrowing them to be realistic, measurable, and fitting for your team.

Start the Budget Process

2022 will be here soon so you’ll need to have your budget in place to ensure an effective transition. It may be a simple matter of copying and tweaking this year’s budget. Or, you may have to revamp if, for example, some areas of income didn’t match your expectations. Get input from your staff. Consider cost-cutting measures or redirection of funds to more effective endeavors such as product development or marketing for next year.

Bonus Task

I find it interesting the statistic that 98% of business owners don’t know how much their business is worth.  Their business is their most valuable asset, yet most have no idea of its value until they decide it’s time to sell. I know several owners currently looking to transition out and “retire,” but the offers they are receiving are substantially less than they anticipated.   

In addition, not knowing the current value of your business makes it harder to intentionally increase it over time with well-informed decisions.

I suggest all business owners do a business valuation every few years. If you haven’t done this, let’s arrange to do one now. Our valuation process is inexpensive and efficient and you’ll be pleasantly surprised at how the information helps you as you head into 2022.

Gear-up For Q2

Well, happy spring!  I hope you had a successful first quarter.

Now that Q1 is over – how did you make out with your first quarter goals?  For me, the year-end CPA audits are done, my “big rock” goals were completed, and my teams are ready to jump into the second quarter.  It feels good to finish strong, and I hope you did too.

If you didn’t finish as strong as you hoped, I urge you to get your first-quarter financial results wrapped up early and do a solid comparison to your projections.  Take another look at your 1-year plan to ensure that you are on target.

Also, set up a meeting with your banker to ensure they are up-to-date with your financials.  A strong relationship with your bank can be so important in good and bad times.  Banks don’t like surprises and will appreciate you being proactive. Review your year-end financials, first-quarter numbers, and forecast for the future so they can have a clear view and be confident that you know what you’re doing.

As the second quarter kicks off, it is a great time to evaluate your team. How did they perform over the quarter? Are the right people on the bus and in the right seats?  I’m currently going through an exercise with one of my clients to evaluate the finance team.  We are reviewing the org chart based only on accountabilities, not names.  We will be making some adjustments. We are starting with what needs to be done, then ensuring we have the right people in the right spots.

As I look back, Verbeck Associates and my clients had some huge goals for Q1 that seemed unreachable at the time … and yet … we nailed them.  We held each other accountable, reviewing the ‘Weekly Big 3’ weekly, and if someone is behind, we help them with resources and reprioritize priorities so we hit the targets.  That process was the key to our reaching those ambitious Q1 goals.

Let’s check on your progress:

Compare your Q1 financial results to your Q1 budget and to Q1 last year. Look at sales and gross margin by segment, overhead and payroll expenses, and cash flow. How did the quarter stack up compared to your plan and to last year?

If you’re behind on your goals – be honest – face it head-on and up your discipline. Don’t use the excuse you didn’t have enough time. There’s never enough time. You need to make time and keep your focus on the important things.

Now, set up your next 90 days. Set your “big rock” goals in place and get to it!


The Art of the Close


Controllers and CFOs know that having a quick and accurate financial close is essential to manage your company effectively. Accurate and timely financial statements allow leadership teams to get a view of the organization’s financial picture and allows managers to make changes to improve performance.

We all can become relaxed in our company processes, but the financial close must be attacked with discipline and rigor. It’s early in the year so now is a great time to evaluate your close and improve your close process now so you have the best information as early as possible to make the best decisions. Test your close process this month-end.

I use a closing checklist with all of my clients. See an example here. The checklist lists the closing tasks, who is responsible and the expected completion time-frame. It is a simple process and keeps everyone on the same timeline. Using a closing checklist will improve your accuracy, completeness, and efficiency. You will have better information, sooner.

Once the general ledger is closed and the checklist is complete, a basic (or sometimes not so basic) reporting package can be produced, distributed, discussed, and reviewed.

I know many business owners who don’t look at their monthly financial statements very closely or they don’t fully understand what they are looking at. Some business owners don’t even look at their financial results at all. I believe it’s important to look at your monthly report-card (earlier vs. later) and to fully understand what they are telling you or trending toward. This holds teams accountable, which improves performance and allows you to make changes and improvements earlier to avoid any bumps and improve financial performance.

The other day I met with a very experienced and talented business owner who was surprised by his company’s recent situation – his company was profitable most months, but he was having trouble making his payroll. He didn’t understand the balance sheet very well. His accounts receivable and inventory were using all his cash. After a quick review of his financials and a brief lesson on asset velocity, the balance sheet, and cash flow, he saw his problem. He is developing ideas and solutions to improve this and breathe easier.

Are you experiencing similar challenges? I can help. Contact me!

The Second Half – continued

In my last post, I discussed the 2nd Half Year Business Plan (2HYBP) as an opportunity to reassess and re-plan the second half of your company’s performance for the year.  Hopefully, you were able to get your June financials closed tightly, analyzed the business trends and re-forecasted next two quarters.

I have all my June reporting packages completed, but I’ve had some challenges getting all the 2HYBP’s done – one of my clients is having trouble nailing down the sales plans.  And since the sales plan is the basis for the overall financial plan, we’re a little behind.

Maybe it’s paralysis analysis, but we are just finishing a deep dive into the sale forecast, slicing sales by product, by segment, by customer, by region, and by sales rep.  The sales forecast now is a driver and a scorecard.  The team is engaged and totally committed.  Sometimes it pays to be patient.  The rest of the 2HYBP is being developed around the sales plan.  The organizational chart got slightly reconfigured, and we added some additional expense provisions for a segment’s revenue growth and production efficiency.

We also developed goals around the cash flow drivers—primarily days sales outstanding (DSO) and inventory turnover.  This is a large global company and the impacts on small improvements are massive.  Plus, they have much too much inventory (calculated at 272 days).  We have developed plans to smooth imports and improve purchasing operations and feel we can easily drop on-hand inventory by 90 days.  Based on their sales volume, this improvement will add $17 million to cash!

The cash flow driver principle works the same way for smaller companies too.  Consider a $2,000,000 company with $250,000 in accounts receivable.  Bringing DSO to 35 days adds $58,000 of cash to the balance sheet.  Small improvements in accounts receivable and inventory turns are important to continually work to improve cash flow.

The 2HYBP goals should focus on 5 things from the financial side: sales, gross margin, employee efficiency, expenses, and cash flow.  How are yours doing?



Predicting the Future without a Crystal Ball

crystal ball

As a business owner, you need to be able to predict the future.

Verbeck Associates has been doing a lot of business modeling lately.  It must be the time of the year and the type of clients I’m working with now.  I am currently working with two turnaround companies and four startups – both require financial modeling for forecasting results and developing successful strategies to deal with tight cash flow.

We use business modeling to:

  • Develop internal goals and targets – and provide a budget and scorecard.
  • Determine feasibility and what-if scenarios to test growth and survival strategies.
  • Pitch new financing or new equity capital to show cash investment needs.
  • Evaluate capital investments and strategies.
  • Produce forward-looking financial statements for your bank and existing lenders.

Keep in mind: projections are wrong by definition. They are future-state, and no one has a crystal ball.

We can certainly get in the weeds with modeling – I run that risk all the time. That’s why I aim to keep it simple.  The more complex, the more confusing and subject to error. My models are generally simple 24-month forward-looking financial statements. Here’s how to take a simpler approach to reduce the number of inputs and reduce potential errors.

Take a higher 30,000-foot view first thinking more strategically in both the short-term and down the road.  For example, “Based on this revenue, we require this headcount and should be able to deliver x net income and cash flow.”  What would happen if we do this or if we do that?  This then develops into a more granular approach with a 24-month working model.

It’s interesting to observe the thought process of many business owners.  Most understand the income statement, but many have trouble with the balance sheet and the statement of cash flow.  All business models start with the income statement so it is important that we understand the revenue model, the go-to-market and sales plan. But that’s not enough. Owners need to understand product costing, product mix, margins by segment, customer acquisition costs, etc.

When I review all this with owners, I start with historical financials numbers for the last 24 months: revenue, margins, headcount, operating expense growth, accounts receivable and inventory turnover, accounts payable days, debt repayment schedules.  For startups, historical information is non-existent which can make this more challenging! We work with whatever information we have, and/or consider the following elements and questions:

Plan: The essence of a model starts with the sales plan.  What are the expected monthly sales by customer and by segment for this coming 12+ months?  Consider the basic business model of:

Leads x conversion = customers x number of transaction x average selling price = revenue.  See more discussion in an earlier article


Develop a realistic sales plan by customer and by product segment.  Understand units sold per month and sales potential growth.

Develop a detailed personnel plan (see template).  People are generally your largest cost and your biggest asset.

Based on the sales plan, understand the timing of raw material purchases.   This obviously depends on your business.  For one of my current clients who purchase a product from China, significant lead times must be considered.

Document all assumptions.  What is true and what you predict will happen.  Prepare a summary of significant assumptions document to attached to final projection printout.  The document walks through the income statement sections discussing the thought process with units shipped, sales growth, cost of sales, gross margin by product segment, selling costs, customer acquisition, personnel costs, operating expenses, interest, and depreciation – each line of the income statement.  Do the same with the balance sheet – documenting the turnover and asset velocity assumptions, cash and debt needs. (The forecast model and assumptions support the 13-Week Cash Flow process if your company is tight on cash.  More on that later.)

It’s essential that the assumptions are reasonable, supportable, and documented. And updated.

I like to go through this plan/process in three ways, producing a conservative, moderate and aggressive model.  This helps a business owner make wise decisions, and the more historical data that surfaces as time goes on, the more accurate the modeling can become. But you have to start somewhere — because you probably don’t have a crystal ball (at least not one that works.)

Image by Alexas_Fotos on Pixabay