Managing Business Performance
It was the business trouble shooter Michael E. Gerber who championed the idea of creating a business as a system that should standardise, automate, and free you as its founder to grow your business. He said, “The entrepreneur falls in love with the business, not with the product. The technician who is in love with the product, cannot help you grow a successful business.”
This mindset is all about creating a system for business success, one where you as the entrepreneur work “on the business” rather than “in the business” much of the time. In other words, it’s about spending time as the entrepreneur and putting the blocks in place to be successful, rather than being the technician, constantly interested in the innovation you want to bring into the market.
Don’t worry about sounding professional. Sound like you. There are over 1.5 billion websites out there, but your story is what’s going to separate this one from the rest. If you read the words back and don’t hear your own voice in your head, that’s a good sign you still have more work to do.
Be clear, be confident and don’t overthink it. The beauty of your story is that it’s going to continue to evolve and your site can evolve with it. Your goal should be to make it feel right for right now. Later will take care of itself. It always does.
Business Planning
I want to tell you how business planning went from being a dry exercise in guessing the future to becoming an empowering and creative process that can unleash innovation and cultural growth.
Sounds unlikely, doesn’t it?
Like all entrepreneurs, I found my role as CEO of a small growing company very varied. One morning I’d be working on sales, by the afternoon I’d be looking at finance, and the following day I’d have to turn to marketing and human resources. Whilst I pride myself on being versatile and creative, I found as the business expanded in revenue, headcount, and locations, it was becoming more difficult to find time for everything that needed my attention. As we brought in more and more people to the business, the culture of my involvement in decisions across all areas continued. Everyone wanted me to be involved in each decision taken. That was the system I’d created. My response was to find more time. I started getting up earlier each morning and working later into the night. When I was in a busy office, I couldn’t get to my next task or meeting as there’d be a queue of people wanting my time.
This was a situation I’d created for myself. Everyone knew that getting my approval before acting was the way I ran things. In a small start-up, central decision making might be an advantage because you can move faster and get things done. In our growing business this level of oversight was a hinderance as I made quick judgements based on partial understanding and got many things wrong, and I wasn’t building a repeatable system for future growth.
This way of working became a real problem, both for the company and for me. I was stifling innovation and progress for the company. I was also overwhelmed by everything I needed to do and burning out at a fast rate. This brought down my mood and made me erratic and irritable to work with, which in turn caused cultural damage. Our office wasn’t such a great place to work. Growth was slowing and staff began leaving, which was damaging. I ended up taking on more of the work left behind too. The result in the end was predictable: I became unwell and spent more than a month off work. Now my family were worried and unhappy too.
This vicious circle of over-involvement came from a deep desire to make our business succeed and to not let other people down. As far as I was concerned, I’d made promises to family and colleagues that we’d be successful, and I put everything into making this happen.
The warning signs of what was happening to me had did not go unnoticed by friends outside of work. I remember being given some gently offered advice from a good friend who pointed out that maybe I needed some help to become better at my job as a leader and CEO.
Business Insight
Perhaps I needed my own business coach.
Business coaching is all about helping the individual improve in his or her role. I’m happy to say that through my network I was introduced to an excellent one. We have worked together for many years now, and I owe her a great deal for the way she’s helped me develop as a leader and as a person.
It didn’t take her long to see that my biggest problem was overstretch and the overwhelm that went with it. My state was one of exhaustion and the quality of my decision making was very varied.
She said, “Richard, you’ve built a business around yourself. This isn’t sustainable for you and it’s not a recipe for business growth either. Can you imagine building a business that would work just the same, even if you weren’t there?”
That was a real challenge to me. I was deep in the experience of doing more, working harder, grasping more control.
The challenge at my door was that I needed help with what I was focusing on and on the way I did it. My coach asked me to try something I’d not done before. Though I’d heard about great sports people before their victories using visualization techniques, to imagine their future success and the steps to get there , I’ll be honest, I was at that point, pretty cynical. I entered into the exercise without high expectation. I was asked to envision how to declutter my working life and move from discord to coordination in the business. In my mind, I started in a room, our office, with colleagues, and had to describe the clutter, the confusion, and the hard work happening. But then I had to go through a door and in the new room, describe what I saw, when the team was working in an organised, energised, harmonious way.
At the end of the visualization, it was obvious that the business needed a new rhythm of working, and for the remainder of the coaching session, we discussed creating management system that would both coordinate and empower. I agreed with my coach that she’d hold me accountable for coming up with such a management system. A system that would mean I was no longer the centre of the business—in fact, a system that would mean the business could run without me. I’d be free to work “on the business” as an entrepreneur driving growth, not in the business as a technician in marketing, sales, product, operations, or finance.
As I began researching what successful businesses did to coordinate at scale, I realized that at the heart of all their stories lay good business planning. Good business planning creates a business architecture, and then empowers people. It creates alignment from the CEO, all the way to every individual contributor, who know what they are doing and why. They even know what’s expected from them in terms of the way they show up, their behaviours, values, and daily decision-making process.
There are plenty of different ways of doing this. The system I wanted would allow me to help chart a course for the business, identify priorities for the different areas of the business with my senior team, and then give them plenty of scope and autonomy to drive those priorities forward whilst maintaining a process of control points across the company to keep everyone accountable.
Through my research, I took a number of inspirations and was able to roll out a very simple process.
The Structure of My Business Plan
I created a CEO-level / companywide plan that synthesised the input of the board, the marketplace, my leadership team’s views, and my own insights.
In the first year this plan was a written document, and later became a web form shared with every colleague.
The plan contained two narratives: a long-term narrative and a 12-month planning narrative.
The long-term narrative was produced so that all departments and staff could read in short form where we were headed and how we’d operate to get there. It consisted of a summary list of the strategic aims of the business over the long run. It stated our ethos, also known as ethics, which was the decision-making framework that all colleagues should use day-to-day to guide them. Other businesses might describe these as values, but I prefer ethics, as collectively they are more closely associated with how to make daily decisions. Having this as a touchstone in annual planning drove culture development. A good ethos can be described in a pithy, memorable short list, such as this: “Customer service, respect for colleagues, motivated by success.”
The short-term narrative in the companywide plan consisted of facilitating and producing with every department a summary set of objectives, which would underpin departmental progress during the following 12 months. The initiatives to deliver these objectives were then revisited quarterly. They included a set of key results, which were our intended outcomes described in a measurable way, and a set of risks which could block achievement of our objectives. The risks were a vital part of this plan, because so often business planning is a set of aspirations that doesn’t properly acknowledge potential blockers, and so when they occur, no-one is prepared, and budgets are wrong, with costs underestimated. All departmental plans were joined by my top level narrative.
Producing this companywide plan was an iterative exercise with my senior team, and I invested time and thought into both learning from others and teaching my own ideas as the work was drafted.
Once happy with all departmental documents, we’d run a business planning launch event with the leadership team to talk through our joined up business plan. This was the first step of several in a cascading process.
In general terms, it goes like this:
1. Create a companywide plan.
2. Launch the companywide plan with senior team. (I found steps one and two empowering because I could shape and influence the plan, then let go of my natural tendency to control decision making, thereby empowering colleagues to take the baton from here.)
3. Each department leader produces a more detailed cascaded plan. That is, they maintain the long-term aims and ethos, take the company wide with 12-month objectives, track key results and risks for their area, then plan out at a second level of detail, with their activity plan.
Departmental, level 2 plans are presented by each leader back to the executive team and colleagues to identify gaps, overlaps, and inconsistencies.
Financial planning is then initiated between the finance team and each departmental owner. What sales result will the plan deliver? What would it cost to deliver this plan? This process will typically take two weeks.
Finance then produces a P&L and cashflow model based on what has been learned. This takes two or three weeks.
The leadership team reconvenes and looks at the draft financial model together, offering feedback. This is a chance to take actions to alter and refine the business plan and the financial model until the planned shape of sales, expenses, and cash are aligned. This is an exercise over two or three days.
The board reviews the business plan and financial model and approves the new year’s budget.
The CEO launches companywide plan on a kick- off call with all staff.
Leaders cascade to level 3, which are the individual contributor objectives, key results, and risks in their teams. These become the performance plan for that member of staff through the year.
In our company, although it seemed like an intensive use of time and no one found it easy to step back from the day job to do this work, the results were impressive, including:
• Alignment from strategy through to business plan.
• Cultural alignment in terms of how to achieve outcomes.
• A delivery pact between leaders that they understood and had worked on together.
• Empowered managers with responsibility to deliver the clear summary objectives set out for the next year.
• “Line of sight” objectives from the board level right down to every individual contributor.
• Trackable performance indicators to assess progress on a rolling basis.
• Realism in terms of the risk barriers to success, so that they were planned and budgeted for.
The cadence of my process ensured each reporting component was properly timed.
The annual planning cycle, which started four months before year end, included a three-month timeline to build the plan and a month for revisions and board sign off.
Quarterly reviews of progress against plan happened at a departmental level in a one-day workshop and then at an executive level with all leaders checking in on their departmental progress. This would be used for to setting out the next quarterly initiatives to deliver the annual objectives and key results.
Individual staff member plans were reviewed by their respective managers twice a year.
The Results
The result of introducing business planning was that it was easier for my senior team to be leaders. They had a tighter direction set up front, but much more decentralised decision making and empowerment.
We had a strategic narrative that was coherent and joined up to what we did and how we did it. Everyone knew what good looked like and were held accountable in a systematic way and the continuity it brought allowed us to embed better processes for our customers to engage with.
Our growth went into top gear. The next three years were to be the most successful and expansive time the company had ever seen, and during those years, the momentum carried us through to a very strong exit event and liquidity for all the people who’d committed much to the business. In the end it was letting go of decisions, being less day-to-day controlling that realised the dream for which I’d been so anxious, and which had driven so many of the wrong behaviours and outcomes.
Measuring Performance
“Capital efficiency” is a term used throughout Notes on a Startup because spending money wisely is central to equity and eventual exit returns for founders. Measurement needs to take place throughout any business to get the best performance. As Peter Drucker said, “What gets measured gets managed.”. Central to building this picture was starting every year with a business plan, that assigned ‘key results’ to every initiative we did. Some of the results we were measuring were tactical, such as the daily and weekly assessments at departmental level, which you’ll read about elsewhere in this book—for example, sales metrics. Some of the key results we measured were strategic, headline level “board metrics.”
Whilst many listed companies have a trained accountant as a CEO, I’ve met few start-ups that do. Entrepreneurs often come to start their businesses not through a love of finance and measurement but a love of product or sales. But such entrepreneurs must learn what to track and how to track to equip themselves for working on their businesses; and be able to take growth-oriented decisions for the company based on visibility and control.
As any business grows, it becomes critical to learn from what is happening in near real time, so that measures can be taken to drive improvement and take lessons from the operations today into future plans. Because this work is back-office, never seemingly urgent as managers have their own information, it is a function easily ignored for too long.
Good financial planning and analysis might be done as an automated, real-time activity for mature business. We found as a growing business this work was best done by a strong Excel expert who was able to capture and analyse the workings of your business in this structured way. The person doing this became the main interface between each department and finance. They took the pulse of business performance through active questioning of the data they had, seeking more insight and more data from managers on the trends that they saw. All this information ended up back in their models, usually in spreadsheets or, as the business developed, in automated dashboards. Their objective was to create working measurements of the business that helped executives and managers understand business performance. This information was used on a rolling basis to reforecast the likely performance in the year ongoing.
A portion of their time was also be used on the annual budget, which served as the underpinnings to this rolling review of performance, and against which actual performance and re-forecasts were assessed.
Often the problem that faces executive teams is what to measure. My experience is that keeping the number of measures to a few important ones is best. Doing this makes performance review much more accessible and understandable. If any of these few key results reveal a problem, then that can be a jumping off point to a more detailed assessment of the tactical / departmental data.
Growth of Annual Contract Value (ACV)
ACV is the most important measure in any subscription business. It requires some introduction, because whilst it’s key to growing a recurring revenue business, it is neither an accounting term that all finance professionals understand nor a recognised accounting convention—but it is essential in a SaaS business.
My first experience of buying “as a service” business software under an ACV model happened twenty years ago when I was a CIO tasked with the modernization of antiquated business systems for a relatively small but globally dispersed marketing agency. After my first month of conversations with my internal clients around the world, I concluded that almost every team was one step ahead of me. Cut off as they were from HQ by time and geography, they’d been resourceful in finding newer, simpler, and easier-to-subscribe-to online tools. A good example was WordPress, which they were using to create campaign microsites and landing pages. I knew change was coming, and I began to try and test these new services in my IT estate. This brought me into contact with the then-wild frontier of enterprise SaaS, renegades like Evan Goldberg and Marc Benioff who were building and selling a new and simpler software dream that would within a few short years become the cloud revolution that changed computing forever.
Reflecting on this point in time all these years later, with experience of the old world as well as this one, I see the commercial models on offer in stark contrast. I began in a world of running IT investments, budgeted from cash on the company balance sheet. The retained profits were used to fund one-time builds of business assets that we’d maintain and sweat into the future as they depreciated. Today of course anyone can access a standardized, centralized service online, and where a stream of continuous innovation can be served up not just to one but to all customers authorized to access it.
This transition from buying and setting up to renting and being delivered access to enterprise software capability had made finance teams and auditors alike scratch their heads. There was no asset to write down over time. Indeed, a new set of expenses had entered their profit and loss accounts because companies had to declare the rental of these services to deliver their business plans, just the same as a utility or a fleet of cars for travelling salespeople. Though this may have taken the shine off profitability levels, from a perspective of cash flow, businesses were winning. No longer did they need to set aside the huge cash budgets for once-in-a-decade change. They could take a pay-as-you-go approach to innovation on tap!
Understanding this shift from purchasing innovation with a big one-off payment to long-run subscriptions is essential as you learn how to design your pricing in any “as a service” business. It is a neat performance measure of the growth contribution of a deal, which can be so easily confused when seen through various lenses.
Here are some examples.
The first lens is revenue value.
In the scenario of one-off purchases using capital spend, such as some hardware or a fixed project, the vendor puts the total contract value (TCV) through their books as revenue there and then—job done, targets hopefully achieved.
Renting a service means your commitments as a provider are not done on the day the ink is drying on the deal. In fact, the vendor is committing to a future liability to serve, and accounting rules mean that no matter how cash payments flow in, it would be a misrepresentation of the vendor to suggest that future revenue had been earned. With “as a service” businesses, revenue recognition requires that the vendor only book the revenue to their profit and loss account after each month elapses in the contract and the liability has met with a provision of the contracted service. Revenue value only gives you a point in time perspective. It’s not helpful to measure your growth performance.
You may ask why these rules matter to a start- up? Consider that any one of the following circumstances will mean your accounts get scrutiny by professionals expecting to see these rules applied, raising venture money, selling the business, floatation. There is virtually no escape from this regime if you are ever to expose your company to external financial institutions.
The second lens is total contract value (TCV).
TCV is also problematic as a performance measure of growth in the world of “as a service,” as illustrated by these examples. Think how you would compare the value of two bookings where their contract lengths differ. If I have a one-year deal worth $90,000 and a three-year deal also worth $90,000, they have the same TCV, but the first makes three times more contribution to growth in your current financial year than the second. Or, how you’d compare two bookings if their revenue recognition profiles differ. Let’s say I have a three-year deal worth $300,000, where year one is worth $20,000, year two is worth $20,000, and year three is worth $260,000. I have a second deal, also worth $300,000, but split as $100,000 each year to the company. The second deal delivers a much greater growth contribution in your current financial year.
For these reasons, CFOs of software as a service quickly navigated to measure their performance in terms of annual contract value. It has none of the vagueness or necessary interpretation of the other performance measures. Targeting salespeople with an ACV quota to book that year gives SaaS businesses a clear growth performance measure and business planning tool.
To a new joiner in your sales business who has been used to selling capitalizable assets and one-time deliverables rather than renting an ongoing service as a subscription, it can appear to them that their targets have been paired right back. However, when you consider your customer is making a long-term commitment and planning to spend money with you for many years to come, then the sales process looks just as involved as any much higher, one-off capital spend quota.
For product managers, driving commercial behaviours, incentivizing salespeople to deliver sustained growth on high margin SaaS products is the route to compound growth and should be measured in this way.
ACV is measured in terms of contract sales growth and broken down into:
• New contracts, where a new customer has been signed up within that fiscal year.
• Expansion contracts, where a customer from a prior year has increased their commitment.
• Churn, where a customer has reduced or ceased their use of the service.
Businesses track progress displayed in a table known as a waterfall, showing the monthly or quarterly changes in these figures across the financial year so that it’s easy to see how the business is performing in a land-and-expand sales strategy and churn avoidance. It is helpful to look at year-on-year (YoY) comparisons in ACV to get relative progress against historical performance. Indeed, this YoY compare is something I’d promote as an anchor for all your KPIs.
Pricing strategy must be cognisant of another important consideration in measuring ACV. ACV growth is a clean measure of shareholder value creation because it signposts predictable future cashflows. Cashflow is predictable when the contract is an annual one, where the service commitment from the customer to the supplier is continuous and unbreakable over that time. As a committed service, there is no suspension, termination, or performance related hold back or claw back. On balance, trading down somewhat on total price to trade up on contract length is a sensible strategy.
Pricing should incentivize annual rather than monthly commitments. Another term used to describe ACV is committed monthly recurring revenue (CMRR) or MRR, throughout the year. However, the focus here on monthly has origins in pay as you go subscriptions that may be cancelled from one month to the next. Monthly rather than annually committed contracts create much less certainty over future cashflows and therefore do not translate as having the same high shareholder value. So monthly recurring contracts should be avoided and priced less favourably accordingly.
Where there are implementation dependencies, these must be contracted under a separate services contract so that the deliverables don’t present a future barrier to recognizing the revenue. When the service is provisioned for the customer, whilst it may require set up and configuration, it must be operationally available for all the contracted users to be activated, if required. In theory these users could use their SaaS license from day one. Provided this is the case, then the availability threshold has been passed and the revenue can be recognized from day one, contributing to revenue growth. This commitment must be a consideration through the selling and contracting process, and adherence to this structure is a control point in all successful as-a-service businesses where there is set up work.
Gross Retention Rates / ACV Churn
For several reasons, churn—the loss of contracted ACV—is as critical as sales. Churn can be customer cessations or reduction in paid commitments. The term “gross retention” refers to the inverse figure—the proportion of your existing contracts you maintain over the period, expressed as a per centage.
Firstly, if customers choose not to extend, while it may be the result of company downsizing or efficiency drives, it’s more than likely because the customer sees insufficient value in the service; and the more it happens, the more of a case there is to revisit the service offering.
Secondly, the impact on growth that churn has can be profound. If in a given year your business opens its books with $10 million under contract and a churn rate of 15 per cent, then before accounting for any new sales the business will be down to $8.5 million by the year end. In the following year that same cohort of contracts will end at $6.3 million, and the next year just $4.7 million. That’s more than half the value gone in just three years.
By comparison, if your business has a churn rate of 5 per cent, meaning a gross retention rate of 95 per cent, then without new sales $10 million in Y1 becomes $9.5 million in Y2 and then $9 million in Y3. This remarkable difference in just a 10 per cent lower retention rate shows the compounding impact of churn and the ever-deepening “hole” that needs to be filled by new business.
Concentrating on keeping your hard-won customers happy and working with your software is the most important thing you can do to maintain high growth rates.
Customer Acquisition Cost (CAC)
A further key indicator in SaaS is customer acquisition cost. Having established that ACV carries a lot of “jam tomorrow,” with value and payment deferred to future years in a way it is not under one-time capital contracts, the performance of sales and marketing to deliver efficient growth could not be more important. Without good performance in these areas, cashflow in a SaaS business is not sustainable.
Using a simple fraction calculation, the marketing and sales expenses for a quarter are divided by the gross profit on new and extension contracts delivered to your business over the same time. This gives an index called the payback period—how many times more were your costs to deliver the profits of the sales growth during that time and therefore how many years of those profits are needed to payback. Businesses often look at this figure as a rolling average over a year.
It tells us if the calculated number is less than one, then your business is generating more contribution to the business than it cost to sign up that business, over that time. Whilst payback in months, not years, is in theory achievable, particularly by selling products with simple purchasing decisions, my own experience is that a healthy payback period takes between one and two years.
At the other end of the spectrum, if the payback period is indexed at three or above, then it’s taking three times or more the necessary marketing and sales costs in that period to equal the contracted gross profits, creating a big drain on cash.
CAC payback is an imprecise yardstick. Likely, the marketing expense incurred over that period is going to be delivering early-stage pipeline rather than closed business, which is why you have to apply a rolling average. But it’s also a useful illustration of how long it takes to recoup your sales and marketing costs. Therefore, it’s instructive on how much cash needs to be pumped in to deliver your plan. If you have a CAC payback of two, then it’s going to cost you $10 million to acquire $5 million of new subscription contracts generating cash inflows over the next year. If that figure is three, then the same $5 million will cost you $15 million to acquire and this information will be most relevant as we look at the next section on Customer Lifetime Value.
Venture capital firms look at this payback period to indicate how capital intensive a business is to grow. You should be thinking the same way. If your CAC payback is over two years, you really need to think hard about whether your product and go- to- market are correct. Before spending more, you should consider making adjustments, because your plan isn’t sustainable without raising a lot more money (which may not be available in this situation) or without having a significant cash contribution being generated through alternative revenue streams such as professional services or retained contracts from prior years (with no new customer acquisition costs) that you think is best spent funding this model.
If we take 18 months payback as a solid performance in the industry, in order to hit target, your SaaS business needs to start with 1.5 times your budgeted ACV sales for the first year sales and marketing costs. I think this puts in the spotlight the importance of maximizing your deal sizes by selling add-on services around your core ACV products. Without a realistic understanding of what it will cost you to scale your SaaS business, it’s very easy to become unstuck as you start delivering your business plan.
Customer Lifetime Value
As the name says, customer lifetime value is an averaging measure used to describe the value contributed to your business over the lifetime you retain your customers. This is done by looking at the gross margin contribution from the average customer ACV booked in a given year, multiplied by the number of orders in that year, multiplied by the average number of years that a customer remains a customer. This gives you a figure based on the size of the business you sign up and the likely time customers stay. Where this figure is high it shows that there is intrinsic high shareholder value.
This lifetime value figure is often used to create a ratio between the lifetime value of the customer and the customer acquisition cost, because it indicates the profitability of sales made.
Net Retention
Maximizing customer lifetime value is achieved not only from high gross retention rates as illustrated through 95 per cent retention example, but also from high net retention. Net retention is an expression of your customer contracts at the beginning of the year, minus the reductions in committed customer spend, plus the expansion contracts signed in that year. In other words, after churn and upsell, how has the annual contract value changed over the year as a percentage? 110 per cent net retention is an acceptable industry benchmark, showing that a sufficiently high proportion of customers continue using the service and enough of them get plenty of value from your business and buy more, expanding their commitment to you.
Days Sales Outstanding
Days sales outstanding (DSO) is a measure of the average number of days it takes for a sale to convert to cash. In other words, how long it takes for customers to pay.
Focusing on converting sales into cash is as important as converting opportunities into sales in the first place. It is vital to paying the bills and staying in business.
In a high- growth company, if for a proportion of deals customers pay their invoices late, yet the company has paid its expenses and made growth investments in expectation of receiving all the cash, then the company becomes financially stretched. If some sales never end up being paid, then the company itself may be at risk.
Above all other growth metrics in your business, you should care about how quickly your sales get converted into cash. This is measured through DSO, which is calculated as:
Accounts receivable (monies owed) at month end, divided by your monthly revenue multiplied by twelve (to annualize it), multiplied by 365 days = DSO.
For example:
(($120,000 AR at month end / ($110,000 monthly revenue x 12)) x 365 = 33.18 days.
This figure should be compared to the contracted payment term to understand if collections are being performed faster, in line with, or slower than the contracted period.
Final Thoughts
In this note, I share my journey from being an overextended CEO involved in every decision to adopting a structured business planning approach that empowered my team and fostered sustainable growth.
Key Takeaways:
Transition from Technician to Entrepreneur: Shift focus from working in the business to working on the business, emphasizing system creation over individual tasks.
Implement Structured Business Planning: Develop a clear business plan to align team efforts, delegate responsibilities, and reduce dependency on the founder for every decision.
Empower Your Team: Encourage autonomy and decision-making within your team to foster innovation and prevent bottlenecks caused by centralized control.
Recognize the Signs of Burnout: Be aware of overextension and its impact on personal health and company culture; take proactive steps to address it.
Seek External Support: Consider engaging a business coach or mentor to gain perspective, improve leadership skills, and navigate growth challenges effectively.
By embracing structured planning and empowering your team, you can transition from an overburdened founder to a strategic leader, enabling your business to thrive sustainably.
Sources