Forecasting your company's expected financial performance not only gives you a clear direction in which to assess your performance, but this also explains expectations you may want to meet within a certain timeframe. We all know how budgeting can help us - even if the only experience you have had with it has been on a personal level, it's nice to know you can walk into a store and have the money needed to purchase the items you need.
Budgeting is extremely important in a business - especially if your cash flow ebbs and tides throughout the year. Your customers won't, and being able to forecast expenses and budget accordingly can ensure that you don't lose customers due to not having product. The important thing to do is to sit down, figure out an annual goal - or even a five year goal - and then decide what steps you need to take to reach those goals. Discover what financial moves need to made every week, every month and potentially every year in order to reach the (temporary) chronological end goals you have set forth. A few good questions to ask could be:
- What is the capacity for sales in the designated time frame, and what expenses will be in that timeframe?
- How much are you wanting to sell in that period, vs how much you can realistically expect to sell?
- What about cash, how much cash flow will you have before and after expenses?
- If you are raising investment how much runway does this provide you?
- Does your business have a cycle where different times mean different business? This can include times of day for a short-term projection; or seasons for an annual projection.
- Are there any new trends in the surrounding area that you and your staff need to be aware of? Can it potentially impact your business, and how?
- Ensuring the staff you have on teams you designate for departments can greatly influence your ability to meet or miss your financial projection goals. Making sure management at the company is "on board" is important.
- Finally - are the financial projections realistic and accurate?
Get your terminology right
Many people ask us for help understanding what all the metrics for technology businesses mean when forecasting and budgeting, why they’re useful and how they’re calculated. Particularly useful metrics are as follows:
Monthly Recurring Revenue (MRR)
One of the most important metric a subscription business should track. MRR is a measure of your normalized monthly recurring revenue. With a monthly subscription the MRR is simply the price paid each month for the subscription. If customers are paying for more than one month up front (e.g. 12 months) you simply divide the amount paid for the subscription by the number of months in the subscription period.
Annualized Run Rate (ARR)
This is 12 months of MRR.
The rate at which your customers are canceling their services. For younger startups, renewal rate can be a more meaningful metric to gauge the attrition of annual plans.
Customer Lifetime Value (LTV)
An estimate of the average total value of a customer, over their lifetime (from signup to churn)
Customer Acquisition Cost (CAC)
An estimate of the cost to acquire a customer. Calculating CAC usually only makes sense once you have reached some level of scale
For more information on how to concoct a financial projection that not only describes expected annual financial performance, but improves it, contact us.