Most of us leave the numbers to the CFO or someone that is effective with numbers to tell us what to do. This isn’t practical for small to medium sized businesses as they most likely wear multiple hats. I talked about forecasting a in an earlier blog and promised to get to the process to determine how to right size your organization based on revenue projections.
First let’s look at what it is you need to accomplish from a revenue perspective (first year 10 million, next year 15 million):
You need to accomplish roughly 15 million dollars in actual closed business to hit your numbers, and move into the next year while hitting your target; then it is time to right size your organization. The first task is to accurately value how much business can be closed by a salesperson and how much time it takes to get a salesperson to be fully functional.
Let’s say for simplicity that the average rep takes 3 months to get up to speed, meaning they will start closing business by then, and that you already have a few reps in place. The last piece of the puzzle would be what the reps can do, so for this exercise we will say the traditional quota is 2 million dollars. On the surface it would dictate that you need 15/2 or 8 reps since you can’t hire half a person. The only problem with that logic is that you aren’t factoring in the time it takes for people to ramp up, which we stated was 3 months.
The actual formula might look something more like this if you decide to boil the ocean and hire them all at once:
What this simply states is that you actually need to carry 9 reps to hit your revenue goal, adding 5 new reps , starting day 1. This of course changes if you intend on ramping up your team over the year, rather than all at once. These are pretty simple math equations to determine how to size an organization. The truth of the matter is that people spend a ton of money and time modeling out quota and trying to derive the best possible number.
I have personally watched people spend time arguing endlessly about the authenticity of the numbers and how they can be projected. What it usually comes down to is that you have to do market and internal analysis to feel comfortable with the ratios you put forward and experience helps a lot. The reality is that you do need to set something in stone, otherwise you never have anything to march toward. It not only provides a more accurate way to set your projections, but it will also give you a north, something that every organization needs.
- Posted by Doug Erb
- On May 20, 2014