"God, grant me the serenity to accept the things I cannot change, the courage to change the things I can, and the wisdom to know the difference."
Most of us are familiar with the serenity prayer. I've always found the prayer calming in how it simplifies but ultimately unsatisfying since it trivializes the hard questions.
Talking to experienced business leaders can be similarly frustrating because they gloss over the details that are needed to solve the problems. In fact, some of our own articles like Guarding Against Down Quarters could be criticized for committing the same sin.
That's why this article provides a step-by-step process for growing your tech services company by discerning what is in your power to change and what is not, in terms of your sales pipeline.
The Interplay Between Targets & Forecasts
We defined the difference between Targets and Forecasts in our article The Triad Of Strategic Finance. The key is understanding that targets represent the desired state whereas forecasts represent the current trajectory. The difference between targets and forecasts is essentially the difference between hope and expectation.
Effective execution is about turning the desired state into reality. But the only way to do that is by fully acknowledging your current state because that is the foundation for your future. The peskiest element of your current state, though, is your current trajectory because it perpetuates the status quo into the future.
When we started planning, we struggled to reconcile these two concepts. Looking at targets based on our current growth rate meant we would not have a foundation for our aspirations. Forecasts provide a foundation based on reality. But forecasts propagate the current status quo so they do not provide a path to improvement.
We have distilled our learnings in reconciling these two future states into the following step-by-step process:
Step 1: Understand The World After The Change
The first step in instituting a change is visualizing the world after the change. Your aspirations should translate into a desired state - your targets. You should build out your revenue targets for at least a year in advance.
Break your annual revenue target down into quarterly revenue targets. From your quarterly revenue targets, you can directly derive your bookings target. Your bookings target can be calculated from the equation:
Quarter revenue target = Backlog contribution to the quarter's revenue + (bookings target for the quarter x percentage of in-quarter bookings billed in the same quarter)
There is a slight simplification here, and as you mature in your forecasting you will add more details to improve your accuracy. But this equation will give you a bookings target for each forecast.
Step 2: Know What Can & Can’t Change
The immediate future is not in your power to change. Take revenue as an example: while revenue is the ultimate number that you look at in your tech services business, you cannot control it.
What’s in your control are bookings. So, while revenue is the ultimate goal, all of your planning should be centered around bookings. You hit the bookings goal, and your spreadsheet will tell you the revenue for the quarter.
Even in bookings, you need to accept what is in your ability to change and what isn't. The first question is the length of your typical sales cycle. Closing a deal faster than your typical sales cycle is again a hail mary.
A typical sales cycle that we have seen from an established company with an average deal size greater than USD 200k is one quarter. This means that if you don't have enough deals in the pipeline at the beginning of the quarter, then you will not be able to hit the quarter's bookings target.
Beyond that, it depends on your lead engine. At this point, you can start to do activities that will create more leads - putting things within the territory of your control. The exact numbers depend on the company itself. For example, a company getting USD 20k contracts signed within a week on Upwork will have a very different equation.
A good rule of thumb for a company that has reached a level of scale is that you can't control revenue for two quarters and bookings for one quarter.
Step 3: Forecast Bookings To Get Current State
Leverage your sales pipeline information and sales cycle time to establish your expected bookings from the data. The simplest formula for doing this is your weighted pipeline. That means the sum of the expected size of each deal will be multiplied by the probability of winning that deal.
As the quarter moves forward, you should recognize that the time to complete a deal is decreasing so you should restrict the deals you consider to only the ones at the later stages of the pipeline.
While forecasting, another useful number to consider is the ratio between the weighted pipeline and the unweighted pipeline. If the number decreases to less than three, it indicates that while your current quarter pipeline may be healthy with many deals about to close, there are very few deals in the early stages of the pipeline. And you will likely run into problems in the next quarter because you have emptied out your pipeline.
Step 4: Serenity And Courage
At this point, you have a good understanding of what you can achieve in the coming few quarters. Readjust your targets to make them more grounded.
You also know that your forecast identifies the gaps in your current state that prevent you from meeting your desired future state, but you can take action to correct some of those gaps. You can launch campaigns today to start collecting leads that you can close next quarter.
You don't need to shrink all your targets to match the forecast. Rather, you need to identify the gap between the forecast and the target and identify the actions you plan to take to bridge that gap.
As you're making these plans you need to be realistic about the current capacity of your team to handle the increased load. The goal is to end up with targets that are ambitious but achievable.
Step 5: Iterate
This is not a one-time thing. This is a continuous process of establishing targets, forecasting, creating initiatives to bridge the gap, and reconciling your hopes and expectations. You will have to do this repeatedly, and it will constitute a primary responsibility of the CEO. It will be the lifeblood of your company, dictating the allocation of the time and money of the organization. As you repeat, you will mature.
Wrapping Up
The interplay between setting targets and creating forecasts is a profound exercise in balancing ambition with pragmatism and vision with adaptability. Going through this exercise will allow you to reconcile your ambitions with reality to create a path to success.
Ultimately, this will allow you to hit the financial bullseye consistently. It will bring you comfort in the knowledge that you are headed in the right direction and have done everything in your power to understand the risks and mitigate them. And that comfort is the serenity you strive for to be the confident leader your company needs you to be.
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