Q4 is the time for companies to establish and align on cross-functional objectives for the following year. During this time, most Finance teams are hyper-focused on budget planning, and need to consider information living outside their accounting and ERP systems. Doing so strengthens the alignment between Finance and revenue-generating teams and can result in a budget and an operating plan that meet growth expectations.
1. ARR / MRR Growth
During annual planning, a company should examine the trendline of ARR/MRR in recent years; doing so will help inform growth expectations and goals for the various revenue teams. Setting a meaningful stretch goal for ARR or MRR is important given that the market values companies on their recurring revenue. Plus, with a good sense of ARR growth expectations, Finance can have a better understanding of target valuation for next year.
2. Customer Acquisition Cost and CAC Payback
CAC informs a business of how much it is spending on sales and marketing in order to acquire one new customer. CAC benchmarks will vary greatly depending on the ASP, but CAC payback gives you a sense of efficiency; nevertheless, Finance teams will want to monitor these efficiency metrics closely especially in today’s environment.
During annual planning, Finance and go to market teams should take a look at their 2022 CAC together and make sure their 2023 CAC payback goal is aligned with next year’s go to market objectives. For example, if you are planning to launch a new product in a new market, you may expect your CAC to increase and payback to lengthen. However, if your 2023 go to market goal is the same as 2022, you may challenge your GTM teams to achieve a lower CAC and shorten CAC Payback.
3. Gross and Net Revenue Retention
Customer retention is the most important factor when growing a business. While new business is important, customer retention has a much bigger impact on a company’s valuation. In fact, according to a Harvard Business Review article, increasing customer retention by 10% has the potential to double or triple your valuation in five years. As a result, it is very important to Finance and Customer Success teams to align on customer retention efforts and objectives during annual planning.
4. Pipeline Coverage
Pipeline Coverage is the leading indicator for sales bookings. As a result, it should come as no surprise that during annual planning, finance and sales leadership should partner to identify pipeline coverage requirements. Note, pipeline coverage should be based on recent conversion rates, not win rates. With a clear expectation of pipeline coverage requirements for the upcoming year, Finance can then partner with sales and marketing to allocate go to market budget accordingly.
5. Magic Number
Finally, in today’s environment, we would like to add Magic Number. Magic Number is a sales efficiency metric that compares dollars spent against dollars earned. It is critical to ensuring the company is efficiently allocating budget towards revenue generating efforts. Typically, finance teams are going to want to see a magic number greater than 1x. During annual planning this year, finance teams should look closely at their 2022 magic number: if the company is spending more money than the company is bringing in, they should adjust the budget accordingly.
