Two Spruce Partners

Summary of key points:

• Growth models iIlluminate the path: Having a growth model is critical to every business aiming to grow, bringing clarity to what your goals are and how to get there. Growth models define targets, plans, budgets and resource allocation by month.
• Growth models enable course correction: Your growth model should be the basis of a monthly checkpoint with your leads to ensure you are on track. If you are missing targets, your team should come together to get things back on track (or change course altogether).
• Growth models should be created and used team-wide: Growth models are not just the job of the CFO. Your growth model should incorporate input from and define plans across the sales & marketing org.

One of the first questions someone would ask if you told them you were going on a hike is “where are you going?”. You would answer this by telling the person where you are hiking and a bit about your the trail you are following to get there. You would prepare for the hike by reviewing maps to understand how to get to the destination and back to your car.

If I asked you, “where is your company headed?”, do you have an answer? Do you have a map showing how to get to your destination? Do you know where you can get water? Do you know which forks in the trail you will encounter?

In a company the destination is your goal. The map is a financial model with monthly targets for your key metrics. The model would be able to tell you the cash required to reach your goals, and would highlight when cashflow will be low and if you need to consider alternative funding sources. The model would tell you when you need to hire more team members to scale your growth.

Before you launch into executing your marketing plan, you need to make sure the financial outcome will get you to your destination. Great marketing starts with a financial model.

These models are called many things such as, simply a “financial model” or “financial plan”. Within the Entrepreneurial Operating System (EOS), the financial plan is referred to as the “Scorecard.” In this post, I’ll be referring to this plan as the “growth model” as I think this best describes the type of model I’m recommending you create.

As CEO of SeniorHomes.com, I created a growth model in year 1 that we used and revised every month, quarter and year for the six years we operated the company to reflect the latest insights, tailwinds and headwinds we faced. In every job since (marketing roles), I’ve created similar models to map out how we’d reach our goals. These models have been immensely valuable to my success in growing businesses, products, and profits.

In this post, I’ll share how to create a growth model, how to use a growth model, and the benefits you’ll gain.

What is a growth model?

A growth model is a model that projects your financial statements monthly, over the course of of 3-4 years. The model starts with the marketing channels in which you operate, the funnel projections for conversion rates, sales close rates, and new business and finally produces income and cashflow statements.

Ideally the model includes all marketing & sales channels that are driving your growth, incorporating the key metrics (depending on your specific business) for those channels, such as monthly investment, conversion rates and leads, close rates & sales wins.

A growth model is forward-looking as opposed to historical financial statements. Historical financial statements provide key trends and baseline assumptions to incorporate into your forward looking growth model.

The model should include the team you will need to execute your growth, showing headcount by team and role with salary and compensation numbers built in. It should also include all other costs that you can anticipate, both variable and fixed costs so that the income statement produces is an accurate projection of your profitability over time and the resources you’ll need (cash & people) to fuel your growth.

Finally, the model can incorporate the capitalization of your company, showing equity capital raised, loans, distributions, and loan payments.

Why every company should have a growth model.

Companies without a growth model are flying blind. Here are some of the key advantages of building and maintaining a growth model:

• Provides a clear roadmap to reach your long term targets
• Highlights most important metrics
• Identifies people, resources and cash necessary to achieve desired outcomes
• Identifies timing of capitalization, hiring, key events in growth path
• Aligns your execs, team and board on plans & budgets available
• Provides targets & scorecards for each team on point for driving growth
• Enables you to run scenarios to show best and worst case scenarios as well as outcomes of different decisions

How do you create a growth model?

Creating a growth model takes a significant amount of time, so don’t be discouraged if you can’t build it in a week. Your growth model will be a constant work in progress as you incorporate the important nuances of your business and update key assumptions over time.

Excel is my tool of choice. The model eventually will likely be many rows long with numerous different sheets. I’ve tried building models in Google sheets, but have found Sheets unable to handle the complexity.

In building your model, consult with the key leads in each division of your company to ensure everyone is aligned with the targets & assumptions included. Build the model from the ground up. Leads in each department should either sign off or build the model for their contribution. The model can serve as the basis for your quarterly, bi-annual or annual planning.

Your model should represent the most likely outcome, so should not be overly optimistic or pessimistic. You will be able to play with different scenarios to anticipate worst case and best case outcomes.

How can you use a growth model?

There are a ton of ways to use a growth model.

• Creation of monthly, quarterly & yearly targets & scorecards
• Creation of budgets by department or division
• Project hiring plans by role to ensure you have the resources necessary to meet your targets
• Review progress against targets in board meetings and monthly exec & team meetings
• Project cashflow and run optimistic and pessimistic scenarios to understand if and when you might need outside capital
• Updated over time to reflect latest market learning

When reviewing the model with colleagues, I recommend taking snapshots of the key elements, to simplify things for anyone with whom you share it. People get lost in giant spreadsheets, so be prepared to provide simplified views.

Shouldn’t my CFO be doing the growth modeling? Why would a consultant or CMO/CRO build a growth model?

Yes! Your model should be created and managed by your CFO, but the reality is that many startups and small companies cannot afford a CFO, and rely on bookkeepers and accountants to handle their finances. Accountants and bookkeepers typically only deal with the past and the present. They have busy and important jobs handling payroll, bills, taxes, etc, and typically do not build models or do forecasting.

A top-notch CMO or CRO will require that you have a growth model, so they have assurance that the growth plans they put in place are accruing to the overall goals of the company. Sometimes these growth models won’t connect directly to a full set of financial statements, but should at minimum show the profits generated by channel and product (sometimes called contribution margin) to understand how marketing & sales activity is contributing to the bottom line.

Two Spruce Partners can help you build out a financial growth model to ensure your investment and resource allocation is aligned to help you reach your goal.