revenue 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 2 – Forecasting the Knowns

by tomgray | on Jan 01, 2011 | 2 Comments

Forecasting sales, revenue, and cash for the next 13 weeks is the most difficult part of the 13 Week Cash Flow Statement for a small business because it is the least certain. See 13 Week Cash Flow Statement. But this task has some easy parts too. The first step is to forecast known revenue and costs – those for outstanding invoices, work in progress, and new work from proposals already submitted.

First, identify the invoiced amounts you have not received yet. Note how much you expect to receive in each week.

Second, consider your work in progress. How much will you invoice for this work? When will you send the invoice, and how much later will the cash payment be received? Your revenue is booked when the invoice is sent, and this shows up on the “income statement” or “P&L Report”. But for a cash flow statement, the important date (or week) is when the cash comes in. You cannot pay a vendor with booked revenue! You need cash.

This timing difference between invoice and receipt of cash is the most important difference between the income statement and the cash flow statement.

If you expect to pay out additional cash to complete this work in progress, be sure to add that additional expense to your predicted cash outflow for the coming weeks. It is good idea to use separate lines (rows) in your spreadsheet to show the costs for work in progress separate from the costs of new work you have not started yet. In each case, the typical rows would be materials, labor, and subcontractor expenses, any unusual shipping or packaging expenses, and any sales commissions. These are called “variable costs” or “costs of goods sold (COGS).”

Third, consider the future work you know about. You may have already made a bid or proposal, or you intend to. This should be a third set of rows in your spreadsheet. It’s a good idea to use a separate sheet to estimate the revenue, costs, timing, and percent likelihood for each of these jobs; then you can use a summary on your master spreadsheet.

For this future work, you will need to make some realistic estimates. When will the customer decide? Should you assume he will take the price you bid, or will you need to come down a bit? When will you order supplies and when will you have to pay cash for them? When will you complete the job and invoice it, and when will you receive cash from the customer. If there are “progress payments” along the way, how much and when?

The last question may be the hardest: what are your chances for getting each of these jobs? You will multiply each of the revenue and cost figures by this “probability percentage” estimate, making your forecast a more realistic view of the prospects for the business.

The final step is to estimate business as yet unknown. We’ll cover that in the next post. At this point you know the format of the 13 week cash flow statement, you forecasted the revenue and costs for outstanding invoices, work in progress, and likely new work from bids already submitted.

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.