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  • Writer's pictureAriel Menche

The 5-year Budget That Didn’t Make Sense

Recently, one of our clients shared his 5-year budget with us.

“It’s pretty much all set,” he said. “My accountant prepared the skeleton of the model and did a great job.”

His goal was to achieve $5M in annual recurring revenue within 5 years. There was only one problem: he didn’t intend to grow his marketing or sales teams.

“How many deals do you expect your sales team to close per day?” I asked him.

“20,” he said.

“Okay, what does each lead cost you?”

He checked with the CMO, who told him each lead costs $500.

“Something isn’t adding up here,” we told him. “Even if it only cost you $0.05 to acquire each lead, with an impossible 100% conversion rate, your company will not reach its revenue goals,” we said gently.

What Did the Client Do Wrong?

  1. Dreams—no matter how compelling—are not strategy. If you want to achieve 20% market share by Year 4, build a strategy. A dream is not enough.

  2. Thoughtful inputs and drivers are essential for your model. Financial models are only as useful as their inputs. And these inputs should be derived from a company’s strategy.

But unfortunately, many executives like our client fall into these avoidable issues. These pitfalls usually fall into four categories, as outlined by Richard Rumelt, in one of our favorite books, Good Strategy, Bad Strategy :

  1. Word Fluff: Many finance teams use impressive-sounding buzzwords that lack clear meaning. Instead, focus on clarity. Example: “customer-centric intermediation”

  2. Being Unrealistic: Many CFOs set unreasonable expectations and objectives. Instead, we encourage clients to derive strategy from the company’s current status and reasonable growth prospects. Example: “Our salespeople will close 20 major accounts every day.”

  3. Mistaking goals for strategy: Many finance teams view goals as synonymous with strategy. They are not the same. Strategy is your master plan. It’s how you achieve your goals — plans of action designed to achieve your objectives*.* Example: “Grow the business to $5M in annual recurring revenue within 5 years.”

  4. Oversimplification: Falling prey to simplistic thinking can have significant consequences. Overlooking customer feedback or failing to assess market forces will impinge upon your strategy. Instead, consider all factors. Example: “Invest in the product and the product will sell itself.”

So, How Do We Do Strategy at Raftel?

At Raftel Strategy, we perform a comprehensive data intake to scope out the feasibility and details of an engagement prior to starting. After we gather all the necessary information, we begin analysis, ultimately delivering key strategic insights to empower companies to optimize their operational strategies for long-term growth.

According to Richard Rumelt, there are three key components to a good strategy:

  1. Diagnosis: Distilling a complex set of circumstances into a simplified analysis.

  2. Guiding Policy: Determining the approach to tackle the diagnosis and forge ahead.

  3. Guiding Actions: Deciding on the steps to execute the guiding policy.

Consider our client’s situation.

To expand successfully, he should have first assessed his situation with the Diagnosis. What resources were at his disposal? What was the competitive landscape? What were his core competencies and challenges?

The second step, Guiding Policy, involves determining a specific approach: Should we invest heavily in sales and marketing, for instance?

The final step, Guiding Actions, involves outlining the steps to execute on this approach. Whether he decides to hire more salespeople or increase digital ad spend, these actions must follow logically from the Guiding Policy.

Key Takeaway

Crafting an effective business strategy requires three key ingredients: being realistic, a deep understanding of the current landscape, and most importantly, a clear action plan. By avoiding these common pitfalls with a structured approach, executives can navigate the complexities of strategic planning and set their organizations on a path to sustainable success.

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