Entrepreneurs on Annual Revenue Goals

Entrepreneurs are an optimistic bunch. When talking about revenue goals for the year, the most common approach is to pick numbers that feel reasonable and idealistic while also fitting into a spreadsheet narrative. Of course, it’s extremely difficult to estimate revenue without a repeatable customer acquisition process in place for a year. Why? For the most accurate revenue forecasting, a bottom-up financial model is superior to educated guessing.

Here are a few thoughts on annual revenue goals:

• Consider number of sales people, length of sales rep ramp up time, ratio of sales reps that work out to ones that don’t work out, number of leads required per sales rep, and more (hence the need to have operating history with reliable data for each category)
• Analyze key metrics like cost of customer acquisition, gross margin, lifetime value of the customer, annual renewal rate, annual up-sell rate, and more to make sure that the numbers in the plan are inline or below industry averages (they should be worse than industry averages because economies of scale haven’t kicked in yet)
• Without operating history from a repeatable customer acquisition process, take whatever data that’s available and conservatively extrapolate it out into a plan (this is where optimism combines with rose colored glasses)
• Pardot’s revenues, previously published for magazine and newspaper awards, were as follows:
  Year 1 – ~$3,000
  Year 2 – ~$400,000
  Year 3 – ~$1,200,000
  Year 4 – ~$3,200,000
  Pardot isn’t the norm and that was the revenue growth with an amazing team, product, and market.

Naturally, entrepreneurs are going to be optimistic thinking through annual revenue goals, but it’s important to use data and make them realistic. Growing revenue is always much more difficult than it appears on a spreadsheet.

What else? What are some other thoughts on entrepreneurs and annual revenue goals?