The devils, or fire-breathing dragons, are always in the details. They can singe your fingers, hair, or toes depending on how gallantly one jumps into the details.
Welcome to the Lakelet Strategy FinOps Dance Series, where we bring you specific issues and discuss in moderate detail how the operational grease, or lack thereof, affects the finance team, and some things that can be done to improve operations.
For the first article of the series, let’s start where all businesses start: Sales. From a finance department’s view, the exact details of how sales are booked, how the contract is valued and over what length of time, and other similar questions, may not be immediately relevant. Accounting will only be aware once a contract is signed and needs to be invoiced. There’s one question that brings this to the forefront: “What’s the value of our sales pipeline today?” This is often followed up with, “How much of it are we expecting to close in the next 30—or 60, 90—days?” Pulling the information to answer this question reliably and consistently means that you have confidence in the sales process and the data. How do we get there?
Sales teams often track this in some kind of CRM tool—be it a spreadsheet or a CRM tool serving as a workflow tool as well as a documentation tool. While debates over the “right” tool are the most prevalent, the harder discussion is about updating the processes to make sure the appropriate data is captured in a timely fashion. No sales tool will fit your organization’s sales process immediately; you likely need to customize the software while also updating your processes with the sales team.
As it relates to communicating sales information to finance, there are a few things to make sure are standardized.
Value of the Contract
Work with the sales team to understand what the expected value of the contract is. If you’re a product business, the actual price of the sale may not be ambiguous, but the expected volume of purchase may be. This further grows in complexity based on whether your customers are purchasing in bulk, if they’re purchasing over time, or if there are expected discounts that need to be considered.
If you’re a SaaS company, this is critical to standardize. If contracts are annual, perhaps you book the full first year’s expected revenue and use that as the value of the lead. If you typically sell multi-year contracts, be careful before defaulting to the full 2-3 year value. What are your cancellation clauses and associated early termination fees? Are there refunds expected for prepaid contracts? Typically, erring on the side of a conservative value is recommended.
One last item here to focus on is any service/support or maintenance contract bundles that get sold with a product or service. First, is the service contract optional? Is it bundled in at the front end and therefore mandatory for the initial contract term?
Stage of the Prospect
It’s standard practice to walk a prospect through the sales funnel based on certain milestones achieved, such as “appointment set,” or “pricing presented.” Each of these funnel stages typically have a likelihood percentage assigned which is supposed to indicate the likelihood of close. That percentage is often applied to the stated contract value to yield a weighted average sales value. So for example, a sales rep may have met with a prospect twice and moved them to the appropriate stage in the CRM. That stage may indicate a 25% likelihood of close, because it’s only the second meeting. If that customer is worth $10,000, then this translates to a pipeline value of $2,500.
The key here is to make sure that the sales team places the prospect in the appropriate stage, not necessarily based on the stage name, but on the likelihood of close. There are some customers who love to talk, so you may be meeting with the prospect for a 5th or 6th time, but you know by now that this prospect is just wasting your time. The likelihood of closing this customer is 0 (or close to it), regardless of what stage they’re in.
Tracking the Value of Partners Separately
Partner relationships ideally present exponential value primarily because they’re the gateway to a larger network of prospects. When a partner relationship is established, one has to be careful that (a) prospects aren’t double-counted and (b) that the pipeline value of the partner isn’t mixed in with direct sales. In some instances, sales reps may be working with what appears to be a single prospect, but they end up becoming a channel partner. In this situation, it’s important to track and report these partners separately because this will skew the value of the sales pipeline.
A parting note is to mention that CRM tools are often the first place finance and sales look when evaluating sales commission or variable compensation—as a sanity check that the appropriate reps get compensated for closing the right number and value of deals. Setting up the right playbook for how to document sales activity will save several hours each month of swimming in data to confirm and validate the numbers.
This is not a comprehensive list of all the items to consider, but no doubt there’s more. Having your finance team member sit with the sales team to understand the nuances of how the data is recorded will raise the caliber of the financial reporting presented to stakeholders.
As always, if you need help working through some of this, send Lakelet Strategy a note; we’re always glad to help.