cash flow forecast

Sales Funnel

by tomgray | on Feb 20, 2012 | 1 Comments

The “Sales Funnel” is a pyramid or ladder of the steps involved in making a sale, from lead generation through the contact, the proposal, negotiation, and closing the sale. You can use the Sales Funnel for three purposes: sales forecast to meet target revenue; cash flow forecast; sales force size.

For a good graphic of the funnel, see http://marketingartfully.com/2011/03/15/small-business-lead-generating-sales-funnel/

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.

 

Start by making a few estimates. You can fine-tune using experience once you have some!

The first estimate is the “success rate” from step to step. 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. What do you think these percentages should be for your business?

Then 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.

To figure 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 come in 2 months after closing the sales, and 4 months after you start the selling process.

 

See Small business lead generating sales funnel | From leads through a sale

 

 

 

 

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 spent per sales funnel activity, e.g., how much time 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, and 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, 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 is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), and a SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. For information on the scope of Tom’s activities, see www.tom-gray.com. For more on SCORE services, see www.scorefoxvalley.org.


 

 

Using the Sales Funnel

by tomgray | on Feb 20, 2012 | No Comments

In the previous article we defined the Sales Funnel concept as a tool for forecasting sales and revenue, cash flow forecasting, and planning the size of your sales force. See Sales Funnel. This article provides some examples for practice.

Example One: Going up the pyramid to see if market is big enough and number of leads needed

Year 1Year 2
Revenue (Cash) Goal $50,000 $150,000
Average Sale $2,000 $2,000
Sales Needed 25 75
Success Proposal to Sale (50%) 50150
Success Contact to Proposal (20%)250750
Success Lead to Contact (10%) (7500 vs. market size?)25007500

Example 2: Sales/Cash cycle for first 25 sales

Sales Cycle:
3 mo. To sell, 1 mo. to perform, 1 mo. to pay 		Mo 1-6789101112
Sales 0248111315
Revenue Booked After Job Completed/Invoiced (avg. sale is $2000)04K8K16K22K26K
Cash Received 1 month after invoice; 2 months post-sale 04K8K16K22K
Total Cash 50K

Note: you need enough start-up cash to support your business expenses until cash begins to come in.

Example 3: Salesperson Time Required in Year 2 of Example 1

TaskTime for Each # to DoTotal Hours
Attempt to Contact Lead 5 minutes 750037,500 mins / 60 = 625
Make Contact 1 hour750 (10% of leads)750
Write Proposal 2 hours 150 (20% of contacts)300
Negotiate 4 hours 100 (67% of proposals)400
Close Sale 4 hours 75 (50% of proposals)300
Total Time 2375
Your time @ 20hrs/wk 1000
Shortage = 1375

Example 3 shows that your sales forecast is unrealistic unless you add one or two salespeople, or you spend more than 20 hours per week selling. If you don’t, your cash flow will be less than half your forecast, and you will run out of cash before the business can turn a profit. “Don’t be this guy!”

The Sales Funnel is a simple tool for forecasting revenue, cash flow, and the size of your sales force by analyzing each of the sales steps for your business. For a good graphic of the funnel, see http://marketingartfully.com.

Questions? Call or email Tom Gray.

Tom Gray is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), and a SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. For information on the scope of Tom’s activities, see www.tom-gray.com. For more on SCORE services, see www.scorefoxvalley.org.

 

 

13 Week Cash Flow, Part 3 – Forecasting Unknowns

by tomgray | on Jan 01, 2011 | 1 Comments

You already know how a 13 week cash flow statement is developed (see 13 Week Cash Flow Statement), and you have forecasted known revenue and costs (see 13 Week Cash Flow, Part 2 – Forecasting the Knowns).

To make a realistic cash flow forecast, you must next estimate how much unknown revenue and cost will happen in the next 13 weeks, even new business unknown as yet! Nobody can know for sure, but nobody has a better foundation for making this estimate than you. Consider trends, seasonal patterns, probability percentages for new work, and timing for each cash event.

The most obvious technique is to assume trends for the last few weeks will continue for the rest of the 13 week period. You may believe the trends will change, for reasons such as a new sales approach, or a new marketing campaign, or lower prices from a new process that reduces cost. But the bank will doubt your belief and will assume that past trends continue.

Since you want the bank to believe your forecast, resist the urge to assume improvement. The only reason to assume a change in the trends of the last few weeks is a seasonal pattern demonstrated in your results from the same weeks for the last two years. If you do not have that data, do not put it in your base forecast.

However, you have the option of making more than one forecast. You can do a most likely case, best case, and worst case. The most likely case is based on current trends continuing. The best case is where you can show the results of more optimistic assumptions from better marketing or undocumented seasonal trends that you expect. The worst case would assume a lower “probability percentage” in capturing new business, or higher costs. But the bank is in the risk management business, so you should not expect it to base a loan decision on your best case. In fact, it may decide that your worst case is actually the most likely one!

Now that you have decided what trend basis to use, how do you actually forecast? The problem is the variety of products or jobs that you offer. So make your forecast by product type. Define the types of products you may sell in the next few weeks. Using a separate worksheet, estimate the revenue and the variable costs (material, labor, subcontractors, shipping/packaging, and commissions) for one sale of each type, and the timing of each cash event—when you pay and when you are paid. Then create formulas for each product type to show the cash effect each week. For example, if the sale is in week six, and the work completes in week eight, the variable costs may be paid for in week eleven, and the cash for the work may be received in week thirteen. Finally, estimate how many (unit) sales you expect for each type, in each week.

On the master spreadsheet, enter the estimated unit sales per product type per week, and enter your formulas for cash in and out for each week for that product type.

In the next post we will address job shop complexity, and how to double-check your work and draw conclusions. Up to this point you have learned how a 13 week cash flow statement is built, how to forecast the knowns, and how to estimate future revenue and costs for jobs as yet unknown.

Tom Gray is a management consultant focused on small business, a Certified Turnaround Professional (CTP), and a SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com.