Measuring performance by looking at the P&L is like driving by looking in the rearview mirror. Here's a better way to predict performance.
Arguably the most important element in building a business is setting clear goals and targets. Successful companies set stretch goals and build a solid business model and strategic path to reach those goals, which usually are results-oriented: revenue, growth, and profit. Some companies may even set a valuation target.
But, as important as these goals are in driving the direction and prioritization of the company, they can become problematic when operating in a rapid growth environment. Each of these results is an inherently backward-looking measure. The P&L statement shows results for the past year, quarter, or month but says little about the future. Using the P&L as an indicator of success is like driving by looking in the rearview mirror. Growing companies are dynamic, and the leadership team needs forward looking or real time data to make critical course corrections and set the business on the right track to achieving its goals.
This is especially true if your business has a lengthy sales cycle. In our business, our sales cycle can be as long as 18 to 24 months in some cases. We meet a potential client or investor, engage in initial discussions, convince them that we're relevant, then wait until they feel the timing is right to make an investment in their business. As a result, our P&L results largely reflect decisions we made over the past two years. So we needed to come up with a series of metrics that we could use to predict our P&L over the next two years, so we could invest (or divest) appropriately in growth opportunities.
Here are the measures we use as leading indicators of the health of our business:
1. Number of Quality, Active Relationships
We measure how many potential clients we are engaged in conversations with within the last three months that are likely to hire or partner with us to build a business.
2. Number and Quality of Active Discussions
We count a client as an active discussion when we are talking to them about a specific way we could build or transform a business for them.
3. Number of Active Proposals
We count the number of outstanding proposals that have not been accepted but are still relevant to our client.
4. Number and Value of Starter Projects or Initial Investor Agreements
We typically engage our clients in a 6-to-12-week starter project to explore the prospect of building or transforming a business, prior to agreeing to a long-term partnership.
5. Number of Active Long-term Partnerships
We know these partnerships have long-term potential, but we need to invest in them to retain and grow our business with them.
By tracking these five metrics weekly, we gain insight into where our business is headed over the next 18-24 months. When they change in one direction or another, we can correct our course to ensure we stay on a consistent growth path.
KARL STARK AND BILL STEWART are managing directors and co-founders of Avondale, a strategic advisory firm focused on growing companies. Avondale, based in Chicago, is a high-growth company itself and is a two-time Inc. 500 honoree. @karlstark