Updated: Feb 18
If you’re a company selling products or services directly to a business through a non-binary sales process (with stages) - a good practice is to use a weighted pipeline in your revenue forecast. Instead of using expected revenue (wishful thinking) in your financial plan, multiply the expected revenue of every account with the probability of closing the sale.
Here is an example of how you can create a weighted pipeline:
Account A = $20.000; probability = 10%; weighted opportunity = $2.000
Account B = $18.000; probability = 20%; weighted opportunity = $3.600
Account C = $22.000; probability = 50%; weighted opportunity = $11.000
Account D = $28.000; probability = 50%; weighted opportunity = $14.000
Account E = $30.000; probability = 90%; weighted opportunity = $27.000
Account F = $32.000; probability = 90%; weighted opportunity = $28.800
The formula is simple: Deal value*Probability of closing = Weighted revenue
A summary of the example above is:
REVENUE PLAN = $150.000
WEIGHTED REVENUE = $57.600
Quite a difference huh? Mind you, this is a very shallow and unrealistic example. In real life, there will probably be more opportunities or greater revenue expected.
The probabilities should be connected to a sales stage rather than to a hunch. In this example we can set the stages and probabilities as follows:
10% probability - demo
20% probability - we got the client’s data
50% probability - the client asked for a proposal
90% probability - waiting for the contract signing
The stages, their number, and the weight they carry will depend on the product/service and your sales process or rather your client’s buying process. Start with 3 or 4 stages, and keep refining. From my experience, five stages are usually more than enough. Even though each opportunity is already weighted, I like to have a bit of a buffer so Farseer’s weighted pipeline target for corporate accounts is 120% of the revenue goal. Salespeople are natural and eternal optimists so this is a simple counter-weight method.
Of course, like all models - this is a simplification that makes sense if it brings you closer to the truth compared to not using a model at all. In case you decide to use it, make sure to implement the discipline of regularly updating revenue amounts and percentages/stages. Use the joint weighted pipeline during meetings to motivate and help salespeople achieve their goals.
Here you can find the Google sheets Revenue forecast model covering weighted pipeline, contracted deals, and invoiced deals. You can make a copy and edit it according to your needs. We will keep enriching this sheet with plan of costs, P&L table, cash flow and much more, so stay tuned.
In our company, we do all of our revenue forecasting in Farseer, since these are all important components of our financial plan. Most CRM tools will also have the weighted revenue feature, but discipline is more important. Remember a fool with a tool… :)
Let us know if we can help you set up a revenue forecast and the rest of your financial plan.