What is a sales pipeline? Sounds easy to understand and maybe it is. But after some recent conversations with some sales guys, I thought i should write down an explanation.
Many of you know that I am a very literal person. I am a very direct person too – not much nuance in my communication style and not much making you guess what I mean. Well, a sales pipeline should be the same way. Here goes:
1. VCs and most active startup investors love information. The more info the founders/CEO give, the happier we are (I have written about this a few times). It is kind of like cookies and the Cookie Monster.
2. One of the key pieces of information is a projection model that shows a projected income statement and cash flow statement for the given year (the balance sheet for an early stage startup is less important, but also nice to have). Ideally, this would be delivered in December for following calendar year. It is kind of like a flight plan. Without the projection model the company is flying blind. A detailed income statement with revenue on top and income/loss on the bottom and everything in between (COGS, gross margin, all those SGA expenses below gross margin, etc.).
3. The sales pipeline clearly relates to the revenue projection and for this post I am going to limit it to that – if sales are projected to explode it also typically means that expenses explode too, but the pipeline is, well the pipeline.
4. Sales pipeline = the customer orders that produce the product order backlog (if a physical product company) and then the revenue for each month of the 12 month projection.
5. And I don’t mean customers by some vague code like customers 1, 2, 3 and 4. I mean a literal list of customers by name, unit amount, expected PO date, expected product ship date (last time I checked you cannot have revenue without shipping the product), and expected revenue. A bonus is to show selling price by order so that everyone can understand differences in the way customers are being treated (like volume discounts, incentives, etc.).
6. So, if the projection says $40,800 of revenue for July, $67,000 of revenue for August, $133,400 of revenue for September, then the head of sales (be it the CEO or a separate head of sales) better have a list of projected orders by customer by month to back this up.
7. In other words, the sales pipeline FEEDS the monthly revenue projection (the TOP line) in the projection model.
8. Clearly, the months that are closer in time will have more firm customers and orders. The months further out in time will have less firm customers and orders. But without an actual sales pipeline, the revenue projection is an utter guess. With the sales pipeline it is an educated guess. Educated guesses are always better.
9. The pipeline can be changed during the year and the projection model can and should be updated. It is always nice to keep the original projection model on a separate tab to enable everyone to see the changes and see the slips or unexpected successes.
Hope that makes sense. Have a sales pipeline! It should form a major part of any board meeting package and result in a lot of discussion.