Value creating Business Plan

By Rob Tearle CFO

Creating a robust financial model and business plan is one of the most critical steps any business can take. While these tools are often developed with investors in mind, their primary purpose is to serve the business itself, acting as a guide to scaling or rescaling, and ensuring the team is focused on where value is truly created. Striking the right balance between bold, ambitious growth projections and a grounded, realistic outlook is essential to crafting a plan that not only inspires but also withstands scrutiny—both internally and externally.

Who Is the Financial Model For?

The financial model is, first and foremost, for the business. It’s your "business manual"—a reference guide for operational decisions and growth strategies. While it’s certainly a crucial tool for presenting to investors, it primarily helps your company navigate its day-to-day challenges and long-term objectives. Value creation is critical as well as given the Exec team some freedom to move forward.

By laying out the key metrics, such as revenue growth, profitability, customer lifetime value (LTV), and recurring revenue, the model gives you a constant point of reference. It helps focus on areas that drive value—whether it's capturing new customers, expanding existing accounts, or improving operational efficiencies.

For investors, the model comes second. It provides a window into how your business runs, but only after you’ve built a credible model that serves your internal needs.

A Business Manual: Focusing on Where Value Is Created

Your financial model isn’t just about numbers; it’s a guide to understanding where and how value is created in your business. It emphasizes the areas that drive long-term growth and profitability, which are critical for the Board to understand. Here are some key areas where value creation typically happens:

• Customer Lifetime Value (LTV): The longer a customer stays with your business, the more valuable they become. If your model shows strong retention rates and a high LTV, it highlights the sustainability of your revenue streams.
• Recurring Revenue: Predictable, recurring revenue (such as subscription models or long-term contracts) is highly valued by both boards and investors because it provides greater stability and reduces reliance on one-time sales. It’s also often tied to higher revenue multiples in valuations.
• Path to Profitability and Positive Operating Cash Flow: Investors and boards are increasingly focused on not just growth but also profitability. Your financial model should highlight the path to becoming profitable and the point at which your business will generate positive operating cash flow. This ensures you’re not just growing for the sake of growth but are also building a financially sustainable business.
• Unique Intellectual Property (IP): If your company has unique technology, proprietary processes, or other forms of IP, this is a key value driver. It differentiates you from competitors and can be a major asset in attracting investors or strategic partners.
• Scalability in a Growth Market: If your business operates in a rapidly expanding market, scalability becomes a key factor. Your financial model should show how you can leverage this market growth, demonstrating that your business is built to scale efficiently.

Forecasting: How Long Should It Be?

An ideal financial forecast spans three years, broken down into a 36-month trend. This should include a comparison of your current year forecast, actuals from the previous year, and your projections for the future.

This 36-month approach offers clarity for both your internal operations and investors, who want to see not just what’s happening today but how your business will evolve over the next few years. By grounding your model in both short-term and long-term horizons, you can ensure it serves as a comprehensive guide for business growth.

Balancing Bold Growth with Realism

While growth projections should be bold and ambitious, they must also be grounded in reality. Investors and boards alike want to see big goals, but they need to be achievable. The key is balancing ambition with feasibility—ensuring that your projections align with your market opportunity and your capacity to execute.

Serviceable Obtainable Market (SOM) and Serviceable Addressable Market (SAM)

When projecting growth, it's important to tie it back to your SOM and SAM:

• SOM refers to the portion of the market you can realistically capture in the near term based on your capabilities and market presence.
• SAM is the broader market opportunity that represents the total addressable market you might target as you grow.

If you're projecting high double-digit or even triple-digit growth, ask: Does the market have the capacity for this expansion? Are we equipped to capture this opportunity effectively?

Evaluating Growth Percentages

When evaluating growth percentages, it’s crucial to align them with your strategic vision:

• High double-digit growth (20%-50%) can be realistic if you’re in a growth market or introducing a new product with significant demand.
• Triple-digit hypergrowth is rare and usually only achievable in early-stage markets or highly disruptive industries.

Regardless of how aggressive your growth projections are, they need to be tied back to data. Look at your customer base, market conditions, and your ability to deliver. Investors will want to see that you have a credible plan to achieve these numbers.

Aligning with Strategic Vision: The 3 Horizons Model

The McKinsey 3 Horizons model can be a useful framework for aligning your growth projections with your strategic vision:

• Horizon 1 focuses on leveraging your existing products in your current markets (SOM). This is about executing on your targets and hitting your numbers—not just in revenue, but in profitability and other key metrics.
• Horizon 2 is where you drive innovation and look for new revenue streams—whether through new products, new geographies, or new customer segments.
• Horizon 3 represents your long-term goals, where you aim to achieve exponential growth by exploring unprecedented opportunities or strategic shifts.

This structure helps align your bold growth targets with a logical progression. It demonstrates that your growth is not just aspirational but part of a well-thought-out plan that unfolds over time.

Sales Team Capacity and Churn: Can You Deliver?

A critical part of your financial model is evaluating whether your sales team has the capacity to meet your growth targets. If you’re projecting significant growth, ask yourself:

• Does the current sales team have the bandwidth to deliver?
• How realistic are your churn assumptions? Are you overestimating customer retention?

Often, new sales hires take 6–9 months to start delivering results. If your growth plan relies on expanding your sales team, make sure your financial model accounts for the time it takes for them to ramp up.

Go-to-Market Plan: Marketing and Sales Alignment

Bold growth projections need to be supported by a solid go-to-market strategy. That means aligning your marketing and sales efforts so that your sales team has a steady pipeline of high-quality leads.

• Marketing Investment: Does your marketing budget reflect your growth ambitions? Is your marketing strategy capable of generating the demand you need to hit your targets?
• Sales and Marketing Collaboration: High growth requires a seamless relationship between sales and marketing. Your marketing team should be delivering leads that your sales team can convert into revenue.

Leveraging AI for Efficiency and Scalability

In today’s business environment, AI can significantly enhance your company’s efficiency and scalability. Incorporating AI into your business model can not only improve operations but also support the bold growth projections in your plan.

• Efficiency Gains: AI can streamline many aspects of your business—from automating repetitive tasks to improving decision-making—freeing up resources that can be reinvested in growth.
• Scalability: AI can help scale processes, from customer segmentation to lead generation, making it easier to expand your business quickly without significant cost increases.

Focusing on the Path to Profitability and Cash Flow

A growing focus for boards and investors is not just revenue growth but the path to profitability. Your financial model should clearly lay out how your business will reach positive operating cash flow and profitability. This path is critical for showing that your business is sustainable in the long term, not just reliant on continued investment.

Crafting a Narrative for Investors: Where Value Is Created

When presenting your financial model to investors, the narrative must focus on where value is created. Highlight key areas such as:

• Revenue Multiples: Investors often value companies based on revenue multiples, particularly when there’s a high level of recurring revenue and long customer lifetimes.
• Customer Lifetime Value: A high LTV, coupled with low churn rates, shows that your customer base is both valuable and sustainable.
• Profitability and Cash Flow: Investors want to see a clear path to profitability and positive operating cash flow. Growth without profitability is unsustainable in the long run.
• Scalability and Unique IP: If you have unique IP or operate in a growth market, highlight your business’s potential to scale rapidly. These factors often drive higher valuations.

My thoughts

A well-constructed financial model and business plan should be both a bold vision of your future and a realistic guide for today. Focus on where value is created—whether it’s recurring revenue, unique IP, or a path to profitability—while ensuring your growth projections are grounded in reality. Align your plan with your strategic vision, ensure your team has the capacity to deliver, and present a compelling, data-driven story to investors. In doing so, you’ll not only build a business that can scale but one that creates lasting value.

However even with the best well thought out Business Plan where you as either CEO or CFO going to the Board meeting anticipating approval and being able to get cracking you still may hit hurdles. The effort and time to get this done may not have given you time to get the Chair on board prior to the Board meeting. Maybe the investors have not seen the growth in their other portfolio companies and want more from your business to meet their Power Law demands. Make sure there is enough time to bring together alignment across all the stakeholders.