Sunday, October 5, 2008

Forecast, Pipeline and Revenue Target

Sometimes the above three items are used interchangeability when talking about sales, but they are three very different items. A company’s revenue target is found in the budget, and is a revenue number that all expenses and profits are based on. The revenue target is not the sales forecast; it is the target on that is agreed by management as an amount that has a high probability of being achieved for the year. The Revenue Target is projected for the year and is then segmented into Quarterly Revenue Targets, and Monthly Revenue Targets. Of course it is important that this number be as accurate as possible, because the organizations spend side of the budget hangs off of this number.


The Pipeline is 100% of the available business that is seen by the sales force. Anything that is in the pipeline is potential; anything that is in the pipeline is vulnerable to competitors, economic factors, and changes to business priorities. Over time an organization understands what size pipeline is necessary to meet the revenue commitment. Time is an important factor when looking at pipeline potential. What is the available pipeline for the next month, for the quarter, the year? Time is an important factor in any pipeline size determination. Many sales managers develop a rule of thumb for evaluating the pipeline. I have heard 2x revenue, 3x revenue, 4x revenue, etc. Over time an organization can develop a multiplier that looks like it predicts current revenue requirements. It is really not possible to do this because of short term changes that can occur in any sales model. It works most of the time, but sales management should really segment the pipeline or sales funnel to see what the potential deal flow is. Another item that factors into pipeline calculations is the sales cycle. Sales has always the clearest view of revenue potential in the current sales cycle, it gets fuzzier in the next sales cycle period, and by the time you reach the third sales cycle period it becomes a guesstimate. Say the average sales cycle is 3 weeks. That means that looking out 3 weeks should be fairly clear to sales management. There is still a good idea of 6 weeks out, after two sales cycles it then becomes an educated guess.

Pipeline management is so important; there must be a clear understanding of what can be added and what can be subtracted to the pipeline. In some organizations sales managers will demand that sales potential be added to the pipeline, to support revenue targets. This is destructive behavior because it does not give a realistic view of what potential there is. Also, sometimes sales reps will take items off to cover mistakes. Both the addition and subtraction of sales potential to the pipeline should be well understood and there should be at least a minimum amount of checks and balances to make sure the pipeline is a valid number. If your pipeline is garbage then the rest of the sales process will be garbage.


A sales forecast is not a presentation of the pipeline, backed with a statement such as “The pipeline is 3x our revenue requirements so we are good for the next month”. A forecast is prepared by sales management with the pipeline being only one element. A forecast is made by sales management taking into consideration all of the variables in the sales process and then informing management of the expected outcome compared to the revenue requirement. The revenue requirement might be 1 million, but that is far from a forecast. The forecast is what sales management feels it can deliver. The forecast number could be 2 million or .5 million, the number is what the number is. I myself do not like to give a single number, but most of the time 2 and if there is a big swing deal that may come in.

An example of a forecast could be that you be report 90% probability for 10 million, 95% probability for 9.76 million and 25% probability for 11.13 million. The 25% probability is tied to a potential big deal coming in. This method of forecasting when used on each individual in the sales team is a great way to normalize a sales department; and this helps sales management have a better view of what is going on.


All three, forecast, pipeline and revenue target are important to a sales department, and the understanding of the sales dynamics in your organization. As you approach the extremes of the bell shaped curve on things such as sales cycle length, you need to really pay attention to the impact on sales performance. The moral of the story is to know why you are doing something, as opposed to doing it because that is what you learned.

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