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.
