The Power of Predicting the Future
Think about the power of being able to predict your financial results three, six, or even twelve months in advance. You could make decisions about adding people and equipment. You could make investments with much greater confidence and grow revenue. You might even have fewer sleepless nights.
This post is about gaining that power in your business.
When I look at a business, I must understand the financial mechanics of the business. The “mechanics” are the underlying parts of the business that produce the revenue, expenses, and changes in cash flow. I look for how costs behave over time. I review the ways that cash, receivables, inventory, and payables change throughout the year and as you grow revenue. Through my financial advisor lense, I’m looking to know if the business is predictable or susceptible to surprises. What are the key drivers of revenue?
Measuring Your Financial Mechanics
After identifying the mechanics, I can determine how to measure the mechanics which then enables me to predict future results.
Here’s a parallel in economics. Frequently, you hear news reports about the “leading economic indicators.” Economists developed these measures to predict the economy’s performance in the future. If the leading economic indicators are growing, that growth means that the economy will likely grow. If they are declining, it indicates that the economy is likely to enter a recession.
In the same way, your business has leading indicators of revenue, expenses and cash flow. Understanding and developing reports for these indicators helps you predict the future. And if you can predict the future, you can make decisions and changes sooner to influence the future — a great competitive advantage in business.
Now let’s look at measuring revenue mechanics – how you grow revenue.
The Revenue Generating Mechanism
In most businesses other than brick and mortar retailers, new customers do not just magically appear. There is a process of getting to know you and becoming customers. Think of it as a manufacturing assembly line where different steps are performed as the non-customer is transformed into a customer.
In classic sales lingo, the process is called a pipeline or a sales funnel. The new customer starts as a potential or target customer (a company in your target market). Once you have made contact and qualified the potential customer, you have a lead. Using the landscape industry as an example, the next step is preparing a proposal. Finally, there is the follow-up process of getting a decision from the customer – hopefully, a win.
Recognizing and documenting this process is the first step to predicting future revenue.
Measurements for the Revenue Generating Mechanism
You will want to measure the time it takes for the customer decision process so that you can predict the timing of future revenue based on current sales actions. You will also measure the percentage of potential customer contacts that become proposal opportunities. Next, you will measure the percentage of proposals that become new customers. Finally, you will want to measure the average annual revenue for new customers.
As you discover the percentages of potential customer contacts (an action) that become proposals (an action) and proposals that become new customer wins, you and your team can see the impact of increasing the number of actions. Then you and your team can begin working on strategies and tactics to increase each percentage and measure the improvement over time.
Your Revenue Generating Mechanism
Here’s how to identify the sales funnel for your business:
– Start with the end, acquiring a new customer, and work backward answering the question, “What did the business do prior to the customer win?”
– Keep working backward sequentially, focusing on actions and desired results, until you get to your entire target market. (It is beyond the scope of this post, but every business needs to have a specific target market and a profile of the ideal customer.)
-If you have an internet lead generation strategy or an internet-based business, then you can use existing tools such as Google Analytics to help you track and measure the steps in the process.
Sales Funnel Reports
The most obvious report to predict the future and grow revenue is the sales funnel (or pipeline) report, including the historical win / loss percentages. Fortunately, there are many low-cost, cloud-based software solutions to help you monitor the actions required for your sales funnel and measure your percentages. These solutions will also help you hold key people accountable.
The name for this software is Customer Relationship Management (CRM). Salesforce is the big name, but it is overkill for many businesses with less than $20 million in revenue. For service businesses, I like Insightly. Some workflow management software solutions for specific industries include CRM functionality. One example for the landscape industry is BOSS LM.
If you know how many new customers you want each month, then you can calculate how many proposals that your team needs to do, how many leads they need to find, and how many actions they need to take to generate and qualify those leads. It is an oversimplification to say it is “just math,” but the math certainly helps calibrate and coordinate the sales work in your business.
Knowing each activity or step in the process enables you to track and report on the quantity of those activities. These measures become your leading indicators of future revenue and will help you forecast revenue.
As you become more confident in forecasting revenue, you will be able to make investment decisions with greater confidence. It will feel much less lonely at the top!
To increase the accuracy of your revenue forecast, you will need one additional report. I will review that financial report in the next post.
I am curious: How do you manage your sales funnel? Please comment below.
Remember: To Grow You Need to Know