I attend many board meetings and have done so through multiple market cycles. Regardless of your business model, I think ultimately four numbers are the most important. I call them The Big Four.
The numbers may reflect whatever is most relevant for your companies: they could be pageviews, active number of users, or revenues. But, to me, here are the four numbers that really distill how your business is doing and how you’re managing it:
- Plan
- Commit
- Forecast
- Actual
Let’s say you’re at the point where you can have some revenues. Here is how the Big Four work.
PLAN
Plan is pretty straight-forward: what is the number you’re planning to achieve that year, quarter, and month?
COMMIT
This also is pretty clear: this is the “rock bottom number” that you think you will achieve. It is the low bar. It tells the Board, essentially, what you’re guaranteeing. It does require judgment to come up with this one.
FORECAST
This number requires much judgment. This is where you think you will end up. There might be a range, but it ideally is pretty narrow.
ACTUAL
At the end of the month or quarter, this is what happened. Again, straight-forward.
Here are some scenarios:
YOU’RE DOING WELL
This happens when Actual is greater than Plan all the time. You’re beating your numbers. It’s also likely the case that Commit is larger than Plan, and Forecast is larger than Commit. You’ve either done a good job of sandbagging the plan, which is legit, IMO, or your business is really starting to hum along.
So, here is what each quarter looks like:
Actual > Forecast > Commit > Plan
YOU’RE STILL FIGURING IT OUT
You are behind. Actual is less than Plan each quarter. But, you’re getting a handle on the market. You always hit your Commit numbers, and more than likely, you only sometimes hit your Forecast number.
Actual < Plan. But, hopefully, Forecast > Commit
SOMETHING ISN’T RIGHT
You’re behind your Plan. Moreover, you never hit the Commit numbers. In fact, Actual, in the end, is less than your Commit or Forecast. This scenario, if it happens over and over, is a tough one:
Actual < Forecast < Commit < Plan
Now, there can be quite a few reasons why this exists. The market is new. Your product is revolutionary and is very early. Or, you don’t have the DNA on the team to adequately read the market.
One option is this: don’t offer a Forecast or Commit numbers. You may not know enough yet about your market to do so.
But, eventually, you have to. If you never, ever can come up with a Forecast or a Commit, then is there really a market for your product?
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I think it’s very important to be very honest about where your market is and whether you have the right team in place.
The Big Four numbers are very revealing.