Identifying the metrics

What are the 3-5 metrics that matter the most to the health of your business? At LinkedIn, we used the "Core 4", which included two engagement metrics in addition to revenue, and profitability. Every employee knew the Core 4 (we reviewed performance regularly at Company All Hands) and were evaluated against our performance on these metrics.

At a minimum, for most startups we recommend including revenue and a measure of profitability, whether cash flow, runway, or cash on hand. You can also consider "true north" metrics that serve as leading indicators, e.g., daily/weekly active users, retention, churn, new customers, bookings, net promoter score (NPS), customer acquisition cost (CAC), and lifetime value (LTV). 

It's tempting to add more metrics, but we recommend no more than 3-5. For each of these key metrics, you'll want to develop rigor in your forecasting — which takes time! Of course you can and should track additional metrics, but without the need for rigorous forecasting we discuss below.  

Setting the targets

Once you’ve identified the right metrics, it’s time to set targets. Our framework delineates between three different types of targets, each with a different likelihood of exceeding.

Plan (60/40; some refer to this as "Budget"): This number is set in stone at the beginning of the planning period, shared with the board/investors, and it's how you'll measure the health of the business. The Plan should be "60/40" — i.e., you are 60% likely to beat, 40% likely to miss — in other words, it allows for a bit of conservatism to ensure the team is set up for success. A common mistake founders make is being overly optimistic, sometimes in order to justify a higher valuation. This is a big mistake. You may get the valuation you wanted, but now you've raised expectations to a potentially unreasonable level, which could lead to investor disappointment and worse, mistrust.

Stretch (30/70): The stretch target is more aggressive than Plan, designed to be 30% likely to beat, and 70% likely to miss. This may be an internal target you use to rally the team (don't hold them accountable to it given the lower likelihood), or it may represent the upside case given a recent investment, potential big new customer, or key partnership. Do not use Stretch targets for profitability calculations because it will set you up for a bottom-line miss.

BHAG (10/90): The BHAG stands for big hairy audacious goal, and should be set with a 10% likelihood of beating, and 90% likelihood of missing. In other words, this is an exercise in the art of the possible. It’s about asking yourself, what do we need to believe to hit an aggressive target? By asking and answering that question, you can identify constraints, and then put together a plan to unlock those gating items. It’s important to note the BHAG is not a linear extrapolation. It's meant to inspire and get you to dream big, about what's possible. It's not a realistic Plan, so just like Stretch, don't flow through the BHAG to bottom-line projections.

These three types of targets do not change through the year. They are set once at the beginning of the fiscal year and locked in. What does change through the year are the Forecasts and Actuals.

Forecast (50/50; some may refer to this as "Outlook" or “Closest to the Pin”): The Forecast is the most accurate prediction of future performance based on recent data. It’s exactly 50% likely to beat and 50% likely to miss. Once the fiscal year has started and you’ve gathered some data on the first few weeks or months of the year, then it makes sense to develop the forecast. Given what you now know, and what you are seeing in the pipeline, what is your most accurate sense of where the metric will be? At the beginning of the year, the Forecast should be pretty close to the Plan, because you don't have a lot of new data to adjust it on. Later in the year, as you have a quarter or two under your belt, and a better grasp on product-market fit, customer acquisition, churn, etc, you should have much better acuity in predicting where you'll land.

Comparing Forecast to Plan is a quick way to understand the extent to which the business is trending better or worse than you anticipated from the beginning of the year. Use the Forecast internally to ensure you and the team are making the best decisions possible based on the latest data. We recommend founders share the Forecast for upcoming quarters as a way to manage investor expectations, and avoid unwanted surprises on the downside. 

Actuals: This one is pretty straightforward - it’s the actual performance during a given time period. Compare Actuals to Forecast to understand how well you're able to predict performance within a specific timeframe. By developing a Forecast and comparing it to actuals, your ability to understand, predict, and pattern-match the business will improve. Compare Actuals to Plan to understand how your business is tracking relative to the original targets. This is the simplest way for investors to understand relative to your stated targets, how is the business currently faring?

Assessing performance

Tracking progress:Once you have an annual Plan, you can break it down into quarterly, monthly, and weekly targets. The pro forma modeling should be at least monthly to account for seasonality and projected growth.

1. Update your annual Forecast on a quarterly basis, at least.

2. Update your quarterly Forecast on a monthly basis.

3. Update your next-month Forecast based on where the current month is landing.

Compare both Forecasts and Plan to actuals at the right cadence. Most companies should be looking at actual data on a daily or weekly basis, and reporting to investors on a monthly (ideal) or quarterly basis.

Stoplight colors: We use stoplight colors to make it easy for folks to scan dashboards and quickly differentiate signal from noise.

1. Green = Forecast on track to meet or exceed Plan (Or Actuals met or exceed Plan)

2. Yellow = Forecast projected to miss Plan by 0-5% (Or Actuals missed Plan by 0-5%)

3. Red = Forecast projected to miss Plan by 5%+ (Or Actuals missed Plan by 5%+)

When a metric is green, share what drove the outperformance, and how to build on the strength going forward. Celebrate the wins! 

Whenever a metric is yellow or red, include a 1-2 liner proactively explaining why, key learnings, next steps, and ETA to get it back on track. Note: Yellow or red isn’t always a bad thing. It could represent a good insight that helps you respond and take a better course of action.

Forecasting presentation

Forecasting may seem daunting at first. How can you predict where you’ll be in a year, let alone a quarter or month? The key is to get started, because your forecasting skills will improve over time as you learn about the business and key drivers. In the early days, don’t spend hours and hours planning — it’s not worth it. More important is to be resilient as you launch, learn from customers, and iterate.