Almost all investment literature warns you that past performance is no guarantee of future results. That disclaimer usually prompts, for me, a juxtaposition with Einstein’s definition of insanity: “doing the same thing over and over again and expecting different results.” So, which is it?
I have no idea, but I consider both of these concepts as I review portfolio revenue projections each coming year. We just completed that cycle for our portfolio and I’ve got a suggestion for every entrepreneur projecting year-to-year — plan your cash in the new year as if your past performance IS a guarantee of future results. Therefore, if you completely crushed your projections last year, get aggressive this year. However, if you’re like most optimistic entrepreneurs, and you didn’t hit all your numbers; incorporate that history lesson into your new year.
Project as you might normally do, including your usual expectations of growth. Refine it with your CFO and others. Then, apply a discount based upon your prior year performance. If you only achieved 60% of your revenue plan; apply that same discount going forward. If you were able to run more efficiently last year, only spending 90% of plan; apply that same discount (to the positive) going forward. Don’t change your sales teams goals based on these discounts, but manage your cash (and project fundraising) as if past performance will hold true going forward. If you perform even better against your projections next year, great — you’ll have more runway to create value.
Two caveats to this advice are:
1) You should get better over time at projecting, so there is an argument for incorporating that expected improvement so you don’t unnecessarily sit on cash. In theory that’s true, but you’d be surprised how often the world throws new hurdles at you each year — so last year’s lessons aren’t as applicable to next year.
2) Significant changes in how the company operates, it’s business model, or it’s team; can make a big difference in hitting projections. Again, you could try to factor in improvements from key changes. My advice is not to assume those changes bring only upside — they often bring new lessons as well.
I’ll end by saying I’m a pretty optimistic guy by nature, so it’s tough to advocate such a cautioned view. However, I’ve seen this story too many times — it’s much better to deliver upside surprises to yourself, your board and your investors, than the alternative.
I hoped to incorporate some piece of Fred’s recent “Different Results from Doing the Same Thing
” post; but the topics were just too different. That said, I’d still recommend reading his post. It dishes some knowledge on bridge financings and the auto industry predicament, all in one insightful post.