The Sales Pipeline
A good sales department will always be optimistic in their sales projections. Most sales departments believe that 100% of contacts have the potential to turn into actual sales.
It is their nature to be optimistic about every contact.
However, from an executive standpoint, management needs to be able to calculate with some precision exactly how much revenue is expected.
Too much optimism will leave a business with under-utilized employees or too much inventory.
Too little preparedness and the business may miss out on revenue opportunities.
The sales pipeline report calculates a reasonable range management can use to plan for future work. Planning for new work or possible retraction is necessary for all businesses.
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Pipeline reports are valuable tools. However, they are most useful for organizations that sell their products on contract or purchase orders.
This can range from SAAS companies that sell on subscription to manufacturers that sell on purchase orders.
If a company sells a product or service, outside of retail, then the report is an important tool.
In this post, I’ll explain why the sales pipeline report is important, explain how to calculate the report, and provide several suggestions if you’re new to the concept.
What is a sales pipeline, and why does it matter?
A sales pipeline report is a quantitative way to calculate future sales. The report is derived from the concept that future sales are being worked by the sales staff and are in a ‘pipeline’ for future delivery.
The report allows everyone from the sales department, marketing, and management to understand the realizable future income produced from sales in process.
Not all potential sales noted on a pipeline report are going to materialize, so calculating future sales is imperative.
How to calculate the sales pipeline report.
The report is a one to two page document showing all the future customers, future orders, and possible finalization. While some reports include a narrative form, most use a short note for each future customer.
Stages of a Sales Pipeline.
There are two main stages:
- Future customers who have never done business with the company.
- Current customers who are looking at services or products they haven’t purchased before.
Future customers who are new to the company.
These customers are always going to be the hardest to obtain. If they are unfamiliar with the company then they don’t know the services, products, warranties, or customer support offered.
They will often be hesitate to use an organization they know little about or don’t yet trust. Statistically, the realization or conversion rate on these sales is extremely low.
The conversion rate, depending on industry, can range from one to ten percent.
For every 100 sales calls, the company may get a realization of one to ten new customers.
Current customers who are looking at services or products they haven’t purchased before.
These customers will be more likely to purchase new products or services from the company. The realization or conversion rate on these types of sales is much better and ranges from 20% – 50%.
When setting up the sales pipeline report, the sales department needs to separate these customers into specific columns, buckets, or categories.
This is an imperative step, as it will be used in the overall calculation of future revenue.
Sales Pipeline Template
Now that we have a general idea as to the stages and conversion factors, let’s see the sales pipeline in practice.
For our template, we’ll assume the sales department has the following in the pipeline:
- $850,000 in new customer sales with a realization of 10%.
- $500,000 of existing customer sales with a realization of 50%.
The total projected realizable revenue would be $335,000 ($250,000 + $85,000). See the calculation below.
Now, we need to know the following:
- What is the revenue necessary to meet forecasted projections?
- What is the capacity?
These two items are important to bring into the calculation. Management needs to be able to understand that even with new sales will the company meet forecast goals.
Does the business have the capacity to meet these new sales goals?
Here is the calculation updated with these specific questions:
In this expanded example, we have first broken out the current revenue under contract and how much revenue the company will need to meet the forecasted revenue. The total revenue not under contract for the next three months is $341,000 ($37,000 + $92,000 + $212,000). The revenue not under contract represents the current capacity.
Next, in the example, we take the total projected realizable revenue and compare to capacity. In this example we can see that the company has another $6,000 in capacity ($341,000 capacity – $335,000 projected).
Even though the sales department might indicate there is $1,350,000 ($850,000 + $500,000) of sales in the pipeline, the projected realization is $335,000.
This difference is important for management to understand so they can pivot to the forecasted revenue.
The Third Stage
There are two main stages in a report calculation: current customers and new customers.
There is a third area that doesn’t come into the pipeline report. Yet, it is important to track.
Stay in second place.
For customers who decided to go to a competitor, the sales department will still try to maintain top of mind awareness. If the sales department put resources in winning their business, it makes sense that the company values obtaining them as a future customer.
The effort the sales department shouldn’t go to waste. Instead, they stay in contact with the potential customer.
Helpful hints, emails, updates on company projects, etc. are all part of this step.
If the competitor fails to deliver, your sales department will be next in line to deliver.
Tips and Reminders.
- Don’t go past three months on your report. The farther out you get, the harder the data is to calculate with any precision.
- Calculate the capacity. There are many complex formulas that can be utilized to determine capacity. New businesses are encouraged to stick with a simple formula of forecasted sales minus contracted sales.
- Split the future sales into two main categories: current customers and new customers. Maintain statistics on actual realizations.
- Compare projected realizations to capacity. Is there still excess capacity? Does the company need to hire more staff?
- Track the sales losses in a third category. Stay in second place with potential customers who went a different route.
Keeping a precise pulse on future sales will afford a company the time to pivot so they can meet forecasted revenue goals
Steven D Hovland is a Certified Public Accountant and a Certified Forensic Accountant. He has 20+ years of experience in CFO, accounting, and forensic investigations. He is the founder of Hovland Forensic and Financial, a virtual CFO service company as well as forensic litigation services.
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