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Now that we are in March, you should have a pretty good view of how your Q1 is likely to end up. If you are a revenue generating company, you’ve probably got a formally approved 2013 plan by now (if not, why not?) Your board is paying attention to your performance against plan, and you and your management team are executing based on the plan you had approved, which likely includes both a revenue plan and an expense plan.
If your sales and revenue are not on or ahead of plan, it’s time to take a hard look at what is going on. Q1 is the easiest quarter to make since you just created the annual plan. If you miss Q1, especially in a recurring revenue, services oriented business, or adtech business, there is almost no way you will make it up over Q2 – Q4. Sure – it’s nice to think something magic, special, and happy will happen, but it almost never does.
Step 1: Put on the brakes right now on discretionary spending, especially headcount. You are probably spending at plan. If sales / revenue / MRR are behind plan, you are just creating a bigger problem for yourself.
Step 2: Do an aggressive root cause analysis of why you missed Q1 so far (January and February). Use the five whys approach and keep digging until you actually understand what is going on. Don’t let your sales organization wave things off. Don’t assume it’s all going to come together on 3/31. Don’t assume the high level metrics you are looking at tell the story. Go deep as a management team. Get everyone on the management team in a room for the day on Saturday 3/9, and figure it out. Yeah, I know some of you are going to SXSW – figure it out. It’s important.
Step 3: Keep playing through on your plan for all of Q1 other than discretionary spending. Be surgical about what is going on. Use this as a wakeup call that you aren’t executing well yet, or at least to the plan you put out there. Do you have confidence you’ll make it up in March? If you do after you think hard about it, then you’ll know in a few weeks. But don’t wait for those weeks to pass to get your mind into the issue.
Step 4: Re-forecast Q1 and the rest of 2013 based on what you expect the actuals for Q1 to be. Again, go deep. You just created an annual plan so the process and the numbers should be fresh. Use it to re-forecast based on the new information you learned in January, February, and Step 2. Get it in shape so that after you know the score for Q1, you can quickly put it in front of the board.
Step 5: Call a board meeting for around April 15. Make this a Q1 review and Q2 – Q4 planning meeting. As part of this, get a new 2013 plan approved that takes into consideration what you learned in Q1.
Don’t panic, but don’t be caught off guard. Assume you won’t make things up and get ahead of them by figuring out what your real trajectory is.
Oh – and if you are beating your Q1 plan, then start thinking about how you can accelerate and grow even faster!
Last night I got an email with a Q3 sales update from a company I’m an investor in for a while. They consistently meet or beat their plan and are an extremely well managed business. Their plan for Q3 was aggressive in my book (and they’ve managed their costs to a lower outcome) had an expectation for what they would come in at based on data from as recently as last week. I knew what they thought the upside case was and didn’t believe it so my brain had locked in on a number slightly below or around plan.
I’ve found that the Q3 number is often the hardest to make when you budget on an annual basis – Q1 is easy since you have a lot of visibility, Q2 is harder, but doesn’t have as much growth built in as Q3, then you have a heavier growth quarter with the summer doldrums (Q3) followed by the insanity that is Q4 in the annual cycle. So I usually view Q3 as “hard to beat; challenging to make.”
This company destroyed their number. They beat plan and came in at the upside case. They ran the table on new business. It was awesome to see. And it blew my mind, in a pleasant way, as this is a humble company that doesn’t overstate where it’s going.
As we enter Q4, I systematically look at the performance of every company I’m involved in for two reasons. First, I want to make sure I understand the real trajectory as they exit the year as Q4 is often an outlier, usually to the upside, as a result of end of year purchasing. I also rarely pay much attention anymore to Q4 plans as they are almost always obsolete and instead focus on the cost / burn dynamic in Q4.
It’s harder to calibrate in cases like this when a company far exceeds their Q3 plan. It’s equally hard in the other direction when a company misses their Q3 plan. And it’s really challenging when there is a big step up for Q4′s plan when you start going into the 2013 planning cycle.
I’m curious how y’all approach this, both entrepreneurs when they are thinking about their own planning as well as investors / board members when they are reacting to the early data from Q3 and thinking about Q4 and 2013.