Updated: Dec 6, 2021
Forecasting your startups revenue will be one of the most important area of your startup's budget. It will allow you to create the blueprint for your startups success, giving you key insight into where you can invest more in order to scale your startup.
Despite the fact that each startup's revenue build has its own intricacies and no two will ever be the same, forecasting revenue based off sales reps is the most common way that I see Saas founders forecast out their startup's revenue.
Now, when I say sales reps, I could be talking about SDRs (sales development representative) BDRs (business development representative), Account Executives - it doesn't really matter what you call them if they're tied to a quota.
This is different from someone like an account manager whose job is really to nurture and potentially expand on the existing customers rather than close new ones.
Here are a few key things that you would want to consider while using this method.
Whenever you bring on a sales rep, it’s going to take some time to ramp them up. You can't just assign them a quota and assume that they're going to be able to hit it from day one.
When they join your organization, they need to first learn about what you do, and get onboarded to all your platforms. Then, there's a sales cycle. They're going to reach out to a lot of prospects, and they are going to be booking meetings and nurturing leads. It's going to take at least 30, 60, 90 days or sometimes even up to eight months to close a deal.
So, the first thing you would want to include with your forecast is a ramp period.
In this example, this is saying that a sales rep, when he joins is only going to be able to hit 25% of his quota in month one. For your startup, this number may be higher or lower, depending on how mature your sales development playbook is, and how well tested your sales process is.
Another important thing to include is the sales rep’s quota. I like to start on an annual basis and ask questions like "how many customers does this sales rep need to bring?"
I sometimes see founders use quota based off actual MRR or just total bookings instead of a quota based off customers, which is fine too.
After getting this annual sales quota number, you would want to include a utilization, IE - how effective will each sales rep be at hitting their quota? Another word for this is attainment. 80% is the most common that I see.
Now let's go over an example. Assume that in the first month, we bring on 10 new sales reps for illustrative purposes.
Because each sales rep goes through a ramp period, initially we have the cumulative equivalent of only two and a half completely ramped up sales reps, in spite of hiring 10 reps.
So two and a half sales reps, times 24, customers divided by 12 gets us to five new customers in this period.
Eventually, when all our sales reps get fully ramped up, by about month five, we're getting two new customers per sales rep or 20 new customers.
In this example, once we know how many new customers we'll get bring on, we can attach a bookings value to it.
Once we know how many new customers we're going to bring in, we can attach a bookings value to it, and then we could understand if this sales rep is a profitable investment, or are we losing money and need to restructure.
In this example, the overall bookings that we get to can be summed up on an annual basis at a hundred thousand dollars.
If this sales rep is being paid less than a hundred thousand, between their wages, salary, health benefits, their payroll processing fees, commissions, and any other incidentals, then this would be a good investment. However, if the sales rep is being paid $120,000 a year, then every new sales rep that you hire under these assumptions is losing you money.
Once we have all this information, we could start forecasting a ton of additional info.
This just shows the bookings amount. Is this an annual booking? If so, now we need to prepare what our revenue is going to be based off a 12th of that each month.
Additionally, oftentimes when customers purchase, they're going to be purchasing again, if not, you most likely don't have a good business. Forecasting for renewals based off a renewal rate or one minus your churn rate is another key factor in building a revenue build based off of sales reps.
Josh Aharonoff CEO and Outsourced CFO
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