All too often today, when investors back a business plan, they demand instant returns on their money. And while it’s fundamental to capitalism to demand higher and faster returns, this often puts pressure on sales teams to deliver results in a way that offends the decision process of the buyers. And it can put pressure on marketing teams to create activity for its own sake, rather than to generate qualified leads. And so this pressure can actually be the cause of failure.
At the same time, it’s reasonable to question the excessive patience of other capital, especially if it’s waiting out an event like returning to normal after the pandemic. Patience can mask failure and incompetence. And it not only can lead to lower-than-needed, or even negative, returns, it can unnecessarily waste an otherwise viable opportunity.
Given that almost every situation is unique, what’s the right formula for setting expectations with respect to when an ROI (or payback) is going to be achieved?
The Business Plan
Of all the tools available for making investment decisions, the Business Plan is arguably the best, with a long and laudable academic, financial and commercial history. It enables a company to lay out the assumptions regarding the expenditure of funds, and their expected return in the form of sales, ideally at a profit, with timing built into both.
Arguably, even the alternatives – everything from seat-of-the-pants and back-of-the-envelope planning to “trust me” – have some set of assumptions about how much needs to be invested, on what, and when; and then other assumptions about when the cash register might ring.
Excel, of course, has made both methods remarkably easy to implement, at least insofar as representing the assumptions, analysis and conclusions are concerned. So why do so many businesses fail to achieve their goals, and so many investments fail to deliver the ROI they were seeking?
Precision without Accuracy
In our experience, the biggest problem is that, while it’s easy to state your assumptions in a model, and flow them through to a result, the assumptions, particularly about how long things are going to take, but as well as how much they’re going to cost, or even whether they’re going to work, are rarely tested. So you end up with a very precise forecast that is wildly inaccurate.
Some will argue that execution provides the test; but how is that helpful to the investor? But that’s what people mean by “business risk”.
The need to operate under untested assumptions is understandable if you’re running a business and you’re under pressure to deliver an ROI to your investors. But it’s idiotic if you’re the investor. If you have a choice as to where to invest your money, then doing nothing – or, more appropriately, getting a better fix on the assumption set first – is a legitimate option.
In fact, the best investment you can make is in doing the research needed to turn assumptions into facts. It can enable you to avoid throwing good money after bad – which actually has the highest return there is.
We get asked all the time to do the impossible. That is, we’ll be presented with a marketing or sales challenge, and be tasked to turn someone’s hopes and dreams into money, but without the resources needed to insure that it can actually be done. Often, we can figure out where the underlying assumptions are wrong, and we can fix them with a minor tweak. But sometimes it can’t be done for anything close to the available funds.
Some people – particularly employees – of course, are more than happy to take your money, and go to market with whatever story you give them. After all, what’s their incentive – or worse, what right do they have – to push back on your assumptions? It’s easier just to take your money and run.
On the other hand, doing the research necessary to test your assumptions before you pull the trigger is a much better way to insure that you will actually get the ROI you’re seeking.
In other words, it’s “ready, aim, fire,” not “ready, fire, aim.”