What’s in your pipeline? A process for better revenue prediction and planning

Cash flow ups and downs are the bane of every small business. Better forecasting will help you cope.

By Michelle van Schouwen

For small companies whose revenues rely on significant, short-to-medium-term contracts, and for whom clients and projects come and go, cash flow and annual revenues can be uneven and their prediction a challenge. However, this is a critically important challenge to master. Construction firms, public relations and ad agencies, management consulting, and other contract-dependent companies often live or die depending on their ability to weather revenue variations.

A simple but very useful “lead grading” tactic for such businesses supports better predictions and planning, and is a boon for owners who like to sleep through the night.

Step 1: Assess the percentage likelihood of each outstanding new proposal in your pipeline being signed in the next 30 or 60 days and “grade” the lead. (A predicted 60% chance of a $10,000/month contract being signed thus becomes $6,000/month.) Where a contract’s net value is decreased by significant or unique expenses, this can be figured into your math as well. Then, add to the list all committed projects for which you will be billing in the same 30- or 60-day period. Total up all the certain and potential contracts in this pipeline using the adjusted numbers. The example below details the expected monthly income for all contracts that may potentially be signed in the immediate future plus all committed projects, and predicts a subsequent month’s revenue as follows:

$10,000 x 60% =   $6,000

$4,000 x 40% =     $1,600

$5,000 x 30% =     $1,500

$22,000 x 100% = $22,000

Total = $31,100

Step 2: Using the total of predicted and committed revenues as calculated above, “grade” the anticipated total revenue based on a predetermined standard for your company’s cash flow needs. For example, $50,000 in monthly revenues may be an “A” (“outstanding result”) for your company, $40,000-49,000 a “B” (“good result”), etc.

As each month passes, compare your predictions with actual cash flow and update the letter grade for that month.

Step 3: Put the data to work. Closely tracking predicted and actual revenues over a number of months is very instructive. It’s easier to make decisions about staffing, plan for any expansion or see in advance that a more aggressive sales or marketing effort and/or cost cutting may be required. For example, you might want to create your own guidelines for measures to take if revenues fall to a “C” grade or lower for two months or more.

[amazon_link asins=’0470142510′ template=’ProductAd’ store=’succeedingin-20′ marketplace=’US’ link_id=’f0063f98-3358-11e8-ade4-6bbb3b101a4a’]For a company with multiple salespeople, this lead and potential revenue tracking can also be used as part of your system to assess who produces results over time, and who has, for example, too many false starts and too few deal closes. The process can also be used to help determine which types of proposals, prospects and services are bearing fruit over time.

Once your short-term revenue for each month is laid out for analysis, you can devise tactics to increase sales, build your working capital for lean times, cut costs, or enhance future contracts with new services or billing plans.

During my three-plus decades owning a strategic marketing company and experiencing every economic condition from boom to bust, I learned that any tool that helped predict the company’s cash-flow and revenue-generation future was valuable. This was true when times were good and money was flowing, and more so when every dollar counted.

Seeing your pipeline laid out as in Steps 1 and 2, then planning based on accurately predicted revenues as in Step 3 helps create long-term success in dealing with and even mitigating revenue ups and downs.

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Michelle van Schouwen enjoys an “Act 2” career as principal of Q5 Analytics, providing advocacy and communications for climate change mitigation and adaptation. See Q5analytics.org. For the past 32 years, Michelle has been president of van Schouwen Associates, LLC (vSA), a B2B marketing company. In 2017, van Schouwen Associates was acquired by Six-Point Creative Works, Inc. of Springfield, MA. Michelle supports the Six-Point team in an advisory capacity.

 

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