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.

Pipeline

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.

Forecast

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.

Conclusion

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.

Revenue...

When setting revenue goals for the year a company should always prepare a top-down and a bottoms-up look at the revenue projections; and then work to gain alignment. When preparing the bottoms-up revenue number one should look at the revenue per sales individual and then make a list of what factors may accelerate or decelerate that number. Sales training, product training, more marketing spend, new product introductions, shape of the economy, ability to compete, changes in pricing, big changes in partners, new competition—one can go on forever on items that have an impact on a salesperson’s performance. The final determination that needs to be made from looking at all of these factors is to decide if your sales reps are going to sell more, the same or less than last year.

If you determine they are going to sell more, and history gives some supporting evidence of that, then what is the multiplier. Is it 110%? If you have 20 sales reps, and they averaged 1 million each last year, and the revenue forecast for next year is 40 million, the odds are that you will not hit your number.

What are you going to change? Are you going to double your sales force? That may work, but many times when you are growing your sales team the law of diminishing returns kicks in. When you get to this point it is really important to understand your sales force and how they compete. It is also important to understand why you win deals, and of course why you lose deals. I find that most of the time, it is easier to achieve a boost in sales by looking at why you lose deals (if you have the ability to change the circumstances).

I have seen so many sales managers when put on the spot by management, over an underperforming sales team, do not understand the dynamics themselves. If the sales manager does not understand the internal dynamics then any solution that they come up with is just an educated guess.

So the short answer is. The way to plan on how to size your sales force to produce the anticipated revenue number is to understand your sales force and what are the key leverage points you need to work with to meet your company’s sales objective.

The most important background piece on this is to make sure the rest of the management team understands and agrees to the commitment that THEY need to make to take the company from point A to point B. A sales team can fail because of lack of commitment from the entire management team. It all comes down to a sales team needs a plan, the larger the team the more details and resources need to be spelled out. A good sales team needs lots of support, leadership and management to function at its very best.

Building a Sales Environment

I find that to build a sales culture it is important to establish some basic parameters going in to the situation.

1. It starts with the senior sales manager; the sales manager needs to be engaged in the overall sales process, top to bottom and at every point of contact with the prospect.
2. Establish clearly that you are looking for challenges to resolve, not people to blame.
3. Empower everyone to make decisions that support the customer.
4. Clearly define tasks for every position on the sales team, establish “Rules of Engagement” that clearly identify responsibility for handoffs, and the “Sales Bill of Materials” for that handoff to occur.
5. Establish that policy and coaching will come from the appropriate supervisor; there will be no word of mouth coaching.
6. Train department (sales and product skills) so everyone knows and speaks the same language.
7. Have compensation plans that are straight forward and provide an opportunity for success. Respect the intelligence of your sales people and if their plan is capped tell them in plain speak how the plan functions. No phrases such as, “We are interested in your success as a salesperson, so we are capping the plan at 130%.”
8. Talk up the success of individuals and teams on the sales force, catch people doing the right thing and then spread the word.
9. Never criticize anyone in a group, if criticism is needed as part of coaching then do it face-to-face.
10. Recognize that sales people fail for three reasons: you as a manager have not provided them with the tools, training, support and coaching to be a success, the company has not provided them with the tools for success or they are not well suited to the requirements for the job. Look for solutions to people challenges before they become people problems.
11. Support your sales team when they need to be supported.
12. Have a laser focus on what your customer requirements are and how what you sell addresses those requirements.
13. Never mistake activity for progress.

Setting Sales Goals

Setting sales goals is a core activity of sales departments. The establishment of the goal for annual, quarter, and month is probably the single most critical decision that shapes and drives a sales department. Every company needs and deserves a purpose built sales team that has the capability to deliver on the sales goals of the organization. When the sales goal is overlaid with the company’s offerings, the resources available, level of marketing support, route to market, market potential and competitors; a sales strategy can be formulated that dictates the sales tactics (sales plan). A sales plan simply outlines how the sales and marketing resources that are available are going to be allocated to achieve the goal.

Just setting a goal, without examining impact to the sales and marketing department is not a reasonable approach. A good everyday example of a goal without a reasonable plan would be someone who wants to loose 15 pounds in 90 days. That is a stretch goal and depending on the weight and health of the individual that may or may not be a good goal. Let’s assume that it is a good goal. A very bad plan to achieve this would be for the individual not eat until they had lost the 15 pounds. Not a very practical plan. The plan that sits behind a goal has to be reasonable to implement. The plan must have the resources available to permit proper execution.

If a developed sales plan calls for a 40% increase in marketing spend and 6 new hires to sales, but there is only budget for 20% increase in marketing spend and 2 new sales hires, then the success of the goal comes into question. The goal and the plan are tightly integrated because of their nature. The plan must be reasonable in scope, and look at potential contingencies.

As an example, consider a mythical company that the previous year achieved 50 million in sales; this represented an increase of 12% over the year before. Then let’s assume that management’s goal is to grow an additional 12% in the new year, this would put the new revenue target at 56 million. The question then becomes, what is the sales and marketing plan that has a high probability of achieving that goal, all other things in the market being equal (competition, disruptive technologies, major market shifts, degree of market penetration, maturity of market, significant new products, major changes in your go-to-market partners, etc). All things being equal, your sales force should become more efficient year over year. So the assumption becomes that to achieve a 12% increase in annual sales the sales budget would need to increase less than 12% (this is dependent of the relative size of the organization and market conditions).

When the goal is established, an assessment is made of the previous year’s success balanced against budget expenditures, a draft plan is built that accommodates the expected growth for the coming year, and the plan’s implementation cost is then forecasted. If goal, plan and budget are signed off on then the next step is implementation and measurement.

The goal and the plan must align. This seems so obvious, but I have often seen examples with little or no alignment between the two. Most often this happens when the sales plan is not adapted to fit the company’s product offering, the potential market and the internal resources available. Critical for success is a company’s alignment with the market, and the internal alignment of the sales and marketing team.

Points for consideration:

• Goals need to be clearly defined
• Company’s sales and marketing plans need to align to goal
• Plan has to be resourced to the right level
• At the very least middle management needs to buy into both the goal and the plan to achieve the goal. This is critical for success.
• The entire sales and marketing team should believe that the goal is obtainable, and see a way forward to achieve the goal.
• Everyone in sales and marketing must understand their role and their contribution to the company goal; if this is not clear then they become disassociated from the process of meeting the goal.
• Senior management must be completely supportive of the goal, the plan and the allocation of resources to support that plan.
  

One last comment on this subject is that many times in an organization there is imperfect plan alignment and even internal plan conflict can exist. It is hard enough to develop customers and grow sales, but when there are core conflicts inside an organization it becomes doubly hard. There is never an environment of 100% peace, love and harmony; the complexity of an organization is too great to achieve that, and a small level of dissonance is not a bad thing. However, there should never exist a condition that takes the focus off of the plan and execution of the plan.