The “Sales Funnel” is a classic technique to understand the time and effort involved in making a sale. It’s a technique to do a “reality test” on your sales forecast, your estimate of revenue timing for the cash flow forecast, and your estimate of the number of salespeople required.
The sales funnel is a ladder of the steps involved in making a sale, from lead generation through the contact, the proposal, negotiation, and closing the sale. Like a funnel, its shape is an upside-down pyramid with the widest layer at the top.
The basic idea is that for each step you have a success rate less than 100% in moving the prospect on to the next step, so by the end of the funnel your sales are only a fraction of the number of leads you started out to qualify and contact.
For a good graphic of the funnel, see http://marketingartfully.com/2011/03/15/small-business-lead-generating-sales-funnel/
- Leads are opportunities (100%)
- Sales calls make contact (10% of above)
- Follow-Up with Proposal (20% of sales calls)
- Conversion overcomes obstacles (75% of proposals)
- Sale contract (67% of conversions)
1. Using the Sales Funnel to Forecast Sales
Start by estimating the “success rate” from step to step. You can fine-tune using experience once you have some! For example,
- 10% of leads are qualified and contacted;
- 20% of those contacts receive a proposal (“follow-up”);
- 50% of the proposals become closed sales.
- The other 50% fall out during the conversion or negotiation step.
Second, estimate how many leads you expect in the time period. Then work the funnel percentages, and decide if the outcome is reasonable. If not, modify the leads or the percentages.
Finally, you estimate average revenue per sale. Now you can make a reasonable sales forecast – not just dollars, but a forecast based on behavior, so it is more realistic.
2. Using the Sales Funnel to Forecast Revenue Timing for Cash Flow
Cash flow is the life of a small business: “Cash is King.” For many businesses, cash is not received until weeks after the sale is closed. In the meantime, you need extra cash, called “working capital,” to buy supplies, pay people, and otherwise run the business. If you lack this cash, your business can go under. So every business must make it a priority to understand its cash flow.
To figure revenue timing, a critical part of cash flow, you need to estimate the duration of the sales process from lead to close, and then the duration of the production/invoice/billing process.
For example, if it takes 2 months to make a sale, one month to produce, and 30 days to receive payment, you can expect cash to arrive 2 months after closing a sale, and 4 months after you start the selling process. See the next article for a sample.
3. Using the Sales Funnel to Estimate Sales Force Size
The third way to use the Sales Funnel is to forecast how much “people time” you need to actually make the sales you are forecasting.
Estimate salesperson time required for each sales funnel activity:
- time spent to qualify the average lead
- time per contact attempt
- number of contact attempts per lead
- time spent in an actual contact (include travel)
- time to create a proposal
- time to negotiate terms
- time to close the sale
- follow-up time by salesperson to ensure customer is satisfied.
Then double this, because the literature shows that salespeople spend about half their time selling and half in administration.
Now you can see how much sales time you need to meet your sales target. Do you personally have that much time available for selling? If not, how many salespeople will be needed and what will they cost, or how can you change your estimates to match targets to resources? This is a crucial test of the realism in your business plan.
See the next article for some examples of using the Sales Funnel for sales and revenue forecasting, revenue timing for cash flow forecasting, and planning the size of your sales force.
Have you tried using the Sales Funnel? Was it helpful? Did you find other techniques to help our readers?
Tom Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or firstname.lastname@example.org. See www.tom-gray.com