Revenue Stress Test
Maximizing your revenue potential
In 2019 I had a chat with Kees Koolen, the former CEO of booking.com. We spoke about growing companies at an extremely high speed. Kees is now an investor, and he said something exciting when we talked about his criteria for investing in a company:
“Before I invest in a company, I want to see an exact rolling forward profit & loss statement for the next five years that shows how they’re going to at least 10X that company. At Booking, I updated this sheet every night based on the actual numbers of that day, so I knew what I had to do and where my plan was off. If they don’t have this in place, I don’t invest in them.”
Let’s deconstruct this quote and make it applicable to your situation.
A profit- and loss statement (P&L) is an accounting statement that shows how much a company made in profits at the end of the year. Profit = revenue – expenses.
Rolling forward means that after every period that passed, you add that timeframe to your forecast. So a monthly rolling forecast from 09-2020 to 09-2025 will become 10-2020 tot 10-2025 when it’s October 2020.
So what Kees is challenging his potential investment companies to do is show how strong their understanding is about the relationship between their revenue, expenses, and profit.
But also, how they are going to create systems to drive revenue growth. And how much growth their systems would be able to handle.
Systems are a key component in managing extreme revenue growth.
Victor Cheng about this in his book Extreme Revenue Growth: “The key to managing rapid growth is to standardize your operations and design internal procedures that are scalable. Scalable operational procedures can handle significant increases in volume without re-design.”**
But every system will eventually break when you increase the input. That’s where your bottleneck is. So if you want to grow more it’s important that you focus proactively on removing those bottlenecks.
We call this, stress testing your revenue.
- how much revenue can your organization handle before it breaks?
- where is currently your biggest bottleneck?
- how can we increase the throughput of your organization?
Let’s explain how this works in a business situation:
A company wants to grow its revenue from 2 million to 4 million within one year.
After a stress test of 5 minutes we can already conclude that this revenue goal is not achievable.
They can only handle a revenue of 3.2M within their organizational setup. Why?
In this case, customer success seems to be the bottleneck.
With every new client that comes in, a customer success manager has to spend four hours to onboard the client. They have two customer success managers who have in total 2,400 hours available yearly to onboard new clients.
So what this team can onboard is: available hours / hours onboarding per client = 2.400 / 4 = 600 clients.
So only 600 new clients can be onboarded.
If a new client brings in €2,000 in that first year, the team can onboard this amount of revenue:
= onboard availability x revenue per client = 600 x €2,000 = €1.2 million.
If we put this into numbers:
Revenue Goal: €4 million
Current revenue: €2 million
Onboard capacity: €1.2 million
Gap: €0.8 million
We can do all the marketing and sales to get €4 million in business, but it won’t work.
Customer success would break at 3.2 million.
What can they do? How can they solve this gap?
There are a few potential solutions:
- Reduce the time spend per customer
- Process re-design
- Automate specific steps with, for example, video tutorials
- Hire more customer success managers
- Outsource customer success management to outside organizations that can quickly scale-up
Victor Cheng stretches this even further. He has developed the ten times test, consisting of the following thinking exercise:
What if they would go from €2 million to €20 million in 1 year, what would break?
This question really triggers you to think about scalability and how you proactively manage those bottlenecks away.
One of the greatest writers about this topic is Eliyahu M. Goldratt, who created the Theory of constraints. His approach is as follows.
Theory of constraints (TOC) by Eliyahu M. Goldratt
1. Identify the system’s constraints.
2. Decide how to exploit the system’s constraints.
3. Subordinate everything else to the above decision.
4. Elevate the system’s constraints.
5. If a constraint has been broken in the previous steps, go back to step one, but do not allow inertia to cause a system constraint.
With his approach, you continuously increase the throughput of a system. In other words;
You continuously test and increase what the system can handle or produce.
Read more about his approach in his book.
You will see that there are also a lot of constraints in what a marketing and sales department can produce.
You can use this way of thinking in that context to connect inputs with outputs and remove constraints.
So I try to challenge the marketing and sales team what the bottlenecks are to increase their output. What is breaking, and is it a good business case to proactively fix this bottleneck?
24h stress test
Sometimes people say that taking a step back, redesigning processes, and automation takes too much time and resources.
My advice on this would always be to start with the thing that’s closest to the money:
- What is currently blocking you from making more revenue?
- Come up with five ideas that you could implement within 24 hours.
- Execute one of them.
The power is in the question:
What can you implement within 24 hours?
Don’t leave the room before you have five ideas and one that you will implement.
You’ll be surprised at what’s possible within your organization.
Why is this lever?
A 5 minute thinking exercise can unlock millions of extra revenue. It’s all about being proactive.
How can you start with this now?
Download the Growth Lever Cheat Sheet and I will help you implement this lever today!