Optimizing your gross sales and company revenue targets with top-line planning requires a deep understanding of your sales department’s performance. By building a robust sales capacity model, your organization will be better equipped to make decisions that will help you reach your revenue projections.This is why sales capacity modeling is critical to the success of your overall financial planning process.
Getting these two processes right directs your corporate performance management strategy as a whole, as they highlight what the company will need across back, middle, and front office functions to support sales.
What is a Sales Capacity Model?
A sales capacity model is a type of financial model that supports top-line planning by using sales performance to forecast future revenue generation. A sales capacity model should also define the optimal number of sales representatives and the required sales profiles to meet your company goals.
A sales department that is understaffed will not be able to reach the target revenue. However, on the other hand, companies that overhire may incur high costs, or, if they are a startup, may risk burning through their cash runway. That is why it is so critical to take a strategic approach when building your team.
Do you know how long your organization’s investor funding will last? Find out now with our Cash Runway Calculator.
Why is Sales Capacity Planning Important for Startups?
It is especially important for a startup to execute strategic sales capacity planning. Startups must position their product on the market, build their credibility in the industry, all the while focusing on demonstrating rapid growth. To do so, they require significant investment. However, two-thirds of startups fail to make a positive return for their investors.
One of the most cited reasons for failure is poor capital management. With that being said, labor costs can account for up to 70% of a business’s expenses, which is why it is critical that startups develop a strong sales capacity planning model to help them plan resources effectively and allocate funds sensibly.
How to Measure Sales Capacity
Sales capacity measurement must be accurate, and getting your calculations right requires careful consideration. Access to reliable, quality sales data is essential, which traditionally comes from two sources: your human resources information system (HRIS) and customer relationship management system (CRM). However, savvy startups are also incorporating a financial planning and analysis (FP&A) platform to build an infrastructure that supports company-wide data management, interdepartmental collaboration, and strategic finance direction for the organization to follow.
You can calculate your sales capacity which is the maximum amount of revenue your sales team can bring in within a set period of time. To calculate your deals per month, multiply your opportunities times your close ratio. From there, factor in the average deal size and multiply that number by your deals per month to get your monthly sales capacity.
However, there are many more factors to take into consideration when creating a financial plan, for instance: the sales workforce attrition rate, onboarding and ramp-up time, the time/costs associated with training new sales reps, and the level of experience of sales hires. Moreover, how dependent is your company on the performance of your star sales employees? If they were to need time off or worse, leave the company, how would this impact your sales capacity calculations?
Then there are circumstances beyond the sales department, such as economic changes. These may include a downturn in demand for your product, more expensive credit due to higher interest rates, or a more global economic downturn. These are all issues that can significantly impact your sales capacity planning, among other things. As a consequence, it is crucial to also regularly conduct scenario planning to weigh the options and assess potential outcomes.
How to Build a Sales Capacity Model: 3 Steps for Success
With this three-step approach, you will be able to build a high-performing sales capacity model in no time.
- Prepare your data
Data accuracy is a critical component that will influence your sales capacity modeling process and its produced outputs.
Before you can calculate how many sales representatives you will need, you must first ensure that your data is reliable and up-to-date. By sourcing, moving, and managing relevant data, your management team will be able to paint a clearer picture of your team’s operational needs and plan accordingly.
Data should provide insight into your efficiencies and the amount of revenue you have to generate. Other important data points include sales pipeline metrics and average sales cycle length. These types of key data metrics enable you to better understand the labor requirements to manage this workload.
- Identify your inputs and assumptions
The second step focuses on answering essential questions, which includes:
- What are your sales quotas?
- What are your salary obligations?
- What is your average contract value?
- How might different geographies factor into how you build your sales capacity model?
- What is your monthly churn rate?
- How long will it take for new hires to be fully ramped?
- What is the sales conversion rate?
Answering those questions will help you shape a holistic overview of your sales motion, which in turn will facilitate the strategic planning process. This exercise can also sometimes highlight inefficiencies in the sales process that may otherwise prevent them from reaching company target.
- Define the number of sales representatives your company will need
Sales capacity planning is a systematic approach to developing a sales team. It involves identifying the skills needed to sell your product or service, determining the number of salespeople required, and then setting goals for each person. In order to do sales capacity planning correctly, you must first have a clear idea of your target revenue and then reverse-engineer the number of BDRs and AEs your team will need to achieve those company goals. By creating a financial model, your finance team will be able to calculate top-line revenue based on the performance of your sales team.
Streamline your Sales Capacity Model with a Modern FP&A Solution
A modern FP&A platform can accelerate capacity modeling performance by automating much of the data management process, enabling interdepartmental collaboration, and removing the risk of manual error. As a result, you can generate more reliable, precise sales capacity models to drive your organization forward.
Abacum is the collaborative strategic finance FP&A solution that empowers finance teams at the world’s fastest-growing startups to streamline their sales capacity modeling process. With Abacum, you can uncover rich data-driven insights, meet capacity and headcount planning challenges, and drive sales capacity planning performance.