When you first started your business, you were likely focused on just getting as many clients as possible. In the beginning stages, you are just trying to establish yourself and grow a consistent client base. However, as your business expands, you might become aware of a sweet spot: a specific number of clients necessary to cover costs while also putting away enough money to reach business goals. In fact, a frequent question we get from clients is “What is my ideal pipeline size?” This becomes especially important when you’re trying to forecast revenue, since pipeline is one of the most controllable inputs into future cash flow.
The reality is that the ideal pipeline size for your business will depend on your business goals. While that seems abstract, it becomes much clearer when you understand how much work your team can actually take on based on its production capacity. From there, we can build a formula that gives you a very specific, concrete answer.
Calculating Your Ideal Pipeline Size
To begin calculating your ideal pipeline size, you first need to know your average sales cycle. The average sales cycle is the time it takes a deal to enter your sales funnel to the point at which work begins. If you haven’t begun tracking this metric, it’s an important first step in making plans for business growth. You will need to use a dedicated resource to find your average sales cycle. Many of our clients use HubSpot or Pipe Drive, but there are many other CRM systems that can track this metric.
Next, you will need to calculate average contract length. This is the number of days that your client contracts last. The average contract length metric is important because it will tell you how quickly you can turn revenue out for a specific period of time.
After you’ve calculated your average contract length, you will need to determine the close percentage. There’s two pieces of information required to calculate the close percentage: number of closed qualified opportunities and the number of qualified opportunities. Once you have these numbers, you will take that first number and divide by the second (# of closed qualified opportunities/# of qualified opportunities).
The final step is to calculate your actual ideal pipeline size using the other metrics you just collected. Take revenue capacity x (average sales cycle/days remaining in the period) x (average contract length/days in the period). Then, divide this new number by number of qualified opportunities.
This is your current ideal pipeline size. However, you might be wondering how you would go about calculating pipeline size based on a future revenue goal. To do this, all you will need to do is put this revenue goal in the revenue capacity slot of the formula. You will also adjust the days in period for the time in which you would like to make that goal revenue.
Planning Your Business Goals
Making a plan to grow your business involves settings KPIs to measure progress. While an ideal pipeline size might be one KPI to keep your eyes on and adjust where necessary (by changing marketing strategies, sales strategies, etc.), there are other metrics and strategies to use. Scenario planning with a solid dynamic forecast is one of the most effective ways to translate your pipeline into actionable growth targets, while tracking the right metrics helps you stay on course as conditions change.
If you need help translating your pipeline into realistic growth targets and aligning it with your team’s capacity, connect with a Virtual CFO advisor to build a plan that supports sustainable growth.