How to forecast bookings in a fast growth SaaS company

One of the hardest things to do in an early stage software company is get alignment on bookings target for the year. Currently MMC has 13 investments in SaaS companies so we have just been through an intense period of bookings budget setting! In this post I will explain how to sense check your bookings budget and produce high level leading indicators to monitor as the year progresses.

For the purpose of this post I am assuming an enterprise SaaS company with a lead time that averages out at 6 months (i.e. smaller deals close in weeks, the larger deals can take longer than a year). The numbers in the charts below are made up by me for the sake of an example!

The booking budget you set for the next 12 months is largely dictated by the current situation in your business. Most of the work achieving that budget is tactics and execution not strategy or long term planning.

There are 4 key questions you need to answer:

1. do you have enough well qualified pipeline right now to hit your Q1 budget and most of your Q2 budget?
2. what value of pipeline do you need to add to Q2, Q3 and Q4 and do you have the required marketing resource to achieve this?
3. do you have enough performant sales people to hit your first 2 quarters?
4. are you in the process of hiring enough sales people to hit you last 2 quarters?

This article is focused on trying to answer the first two questions by:

1. analysing the historical performance of your pipeline
2. mapping your existing pipeline.

1. Analysing the historical performance of your pipeline

The most important metric is the historical behaviour of the opportunities you originally forecast to close in a quarter (for Q1 this would be deals in your pipeline on the 1st January forecast to close in Q1):

1. What % of the value of those deals actually closed in the quarter (“Closed Won in Q %”)
2. What % of the value those deals ended up rolling into the next quarter (“Rolls to Next Q %”)
3. What % of the value of those deals is lost in the quarter (“Lost %”)

These ratios will move around a lot quarter to quarter but will trend to a surprisingly consistent level over time so it is important to measure them from the start.

Often companies assume that conversion is the only variable that matters in a pipeline but the accuracy of forecasting the time of close is at least as important. If you can systematically increase your Closed Won in Q %, you will significantly improve the efficiency of your business over time.

1 / (Closed won in Q %) gives you the pipeline coverage you need at the start of the quarter to hit your bookings budget for that quarter (ie 28% “Closed won in Q %” means you need $3.6 of pipeline for every $1 you want to close). From that you can start to build your pipeline development targets and analyse your existing pipeline.

2. Mapping your existing pipeline

With a six month average lead time:

1. Q1 bookings will almost all come from well qualified opportunities in your pipeline. Your bookings target for this quarter is set by the size of your current pipe.
2. Q2 bookings will come from a fairly even mix of opportunities in your pipeline now and opportunities added in Q1.
3. Q3 bookings will come from a fairly even mix of opportunities in your pipeline now and opportunities added between now and Q3.
4. Q4 bookings will almost all be from new leads generated in the first half of the year

Before you start mapping your existing pipeline you need a good level of confidence in the quality of data, so do a detailed deal review with your sales team. Focus as much on the forecast close date as on the deal values and the level of qualification.

Now map your current pipeline in a bar chart like the below.

From the above chart you can start to get a feel for how much pipe you need to add before the start of each quarter in order to give yourself the required coverage based on your average “Closed Won in Q %”. But you don’t have real clarity on this until you add in the pipe that will likely roll from the quarter you are in (50% in the 1st chart of this post). Using the chart and table below will give you that as an estimate:

For example, in Q2 you set yourself a bookings target of £550k. You are working on an estimated “Closed won in Q %” of 28% which means you need to start Q2 with £1,960k of deals (ie £550k divided by 28% — your “required pipeline coverage” for the quarter).

The current pipeline of deals forecast to close in Q2 is £800k so you are £1,160k short.

You are starting Q1 with £1,500k of deals in your pipeline, of which you estimate 50% (£750k) will roll into Q2. So by the time you get to the start of Q2 you will likely have £1.55m of pipe due to close in that quarter. But you need £1.96m. So your marketing team need to add c.£410k of deals that are closable in Q2 during Q1 in order to give you the necessary coverage at the start of Q2.

Now you your marketing team has a very clear objective for Q1 that is clearly aligned with your sales teams targets for the year.

Final comment: accurately forecasting bookings in fast growth software businesses is borderline impossible, but the harder you try to get there, the better you will be at running your business. Oh, and because it is so hard you need a way of cash flow forecasting that allows for it which I have tried to explain it in this post from last year: Cashflow forecasting for fast growth SaaS Companies

Some side notes:

• in the pipeline above I am referring to unfactored pipeline. I think properly weighting a pipeline in an early stage company is hard to the point of not worth doing. Having clear pipeline stages is very important though for managing the sales process. Using unfactored pipe for the analysis above does make it very crude but that is fine
• a lot of companies will have much shorter lead times than 6 months. If you do then this analysis still holds but you might want to look at months not quarters
• setting your CRM up well early is very important so you have good understanding of how opportunities behave. In our experience data compliance in a CRM is a pretty solid leading indicator for the success of a company in the short to medium term (as boring as it might be..)
• When someone says “don’t worry we haven’t lost the deal it has just rolled to the next quarter” remember your sales team is finite. Time they are spending on a deal that should have closed last quarter is lost to a deal that you wanted to close this quarter. You may not actually have lost the deal but the effect on your bookings achievement for the year is pretty similar.
• A really hard dynamic of an early stage enterprise software company is the lumpy nature of the deals in your pipe. For example if you have a bookings target of £400k ACV in a quarter and have a single deal due to close in that quarter of £1.2m you have 3x coverage but in reality the result is pretty binary. Sadly there is no simple way of solving for this. It will even out over time and the key is to be disciplined measuring information on the way potential deals behave as they move through your pipeline. Forecasting the close timing is important because that is critical to managing your business from month to month.