Small Business

Two Issues to Sort Out Before You Expand


Getting a handle on revenue projection and sales force compensation will help you see where you're going

To manage the expansion of your business, you need to know how to project future revenue as well as structure sales force compensation. While these tasks can be delegated, I strongly recommend you take the time to understand the mechanics behind each. Whether your goal is to boost the confidence of financiers or to simply communicate your ambitions and policies to your team, your business will benefit.

Let's start with revenue projections. I'll answer a question I've been asked repeatedly over the past few months, then tackle another later in this column.

I need to know what a decent five-year revenue ramp should be for my business plan. How do I make it attractive to financiers?

Financiers like to see a decent revenue ramp, plus a controlled cost structure. Sloppy cost control will botch profitability pronto. Also, there are key inflection points that are expected in the growth of a business if it is to be considered compelling.

Let's use this example. Company X is a product company, expecting approximately 70% revenue from products and 30% revenue from services. I'd expect cash-flow breakeven at the end of Year Two and profitability at the end of Year Three. By then, initial development costs should be covered by sales. And the company should know the estimated lifetime value of a customer, have repeat purchases, and have solid expense data, too. That's because in Year Two it'll have its internal systems and processes in place and run more efficiently.

A Smooth, Upward Path

Here's a revenue ramp example if Company X is seeking equity financing:

Year One: $500,000 to $1 million (shows X can go from zero to somewhere)

Year Two: $1 million to $2 million (double previous year's revenue)

Year Three: $3 million-plus to $6 million-plus (triple to quadruple previous year's revenue—Year Three is when the staff, systems, products are solidly in place and a customer base with repeat sales is firmly established. This is when X is ready to blow the doors off!)

Year Four: $9 million-plus to $18 million-plus (triple or more previous year's revenue)

Year Five: $27 million-plus to $54 million-plus (triple or more previous year's revenue)

Remember, equity investors want to see rapid growth. They're investing for a glorious exit, and generally want startups to get to $50 million-plus in revenue in five years or so, depending on the type of business.

A Gentler Incline

If you're seeking a loan, I'd dial down the revenue projections above, as the goal here is to show a stable, growing company that will have the ability to repay its loan on time. In this case, again using all the assumptions above, I'd lay out the revenue projections like this:

Year One: $500,000 to $1 million

Year Two: $1 million to $2 million (double previous year's revenue)

Year Three: $2 million to $4 million (double previous year's revenue)

Year Four: $6 million to $12 million (triple previous year's revenue)

Year Five: $18 million-plus to $36 million-plus (triple or more previous year's revenue)

Now let's tackle the second oft-repeated question:

How should I compensate salespeople who are contract/paid for performance? Or on salary?

I'll start with this example, which I adapted from a reader's question: "I have a salesperson I am planning on paying a commission to secure corporate sponsorships. Her job will be to complete proposals, call companies, obtain sponsorships, and follow up throughout the year with them. I would appreciate your advice on how to structure payments to her. I was planning 100% commission (no base), but I am not sure of the commission amount."

Rules of Thumb

There is a learning curve for salespeople—often up to 60 days. Also, you must give your salesperson a standard process to follow, and it will take you some time to develop this if you don't have it already. Follow these rules of thumb to get going.

If you provide the leads and your commission-only salesperson closes them yet you are still involved, that's worth about 10% commission.

If your commission-only salesperson generates and closes leads, that's worth 20% commission. Always provide a quota and accelerators so salespeople have an incentive to exceed their quota. Here's an example to clarify what I mean by accelerators: The commission-only salesperson gets 20% commission on all sales up to her quota amount. When she exceeds her quota, she gets 22% on all sales from there to the next level.

Don't cap the amount of compensation salespeople get. This will kill their motivation once they reach their cap.

Paying Commission in Tiers

Use the following example to understand how the above scenario would work. Let's say the salesperson has a quota of $100,000 annually.

For all sales up to her quota of $100,000, she gets 20% commission.

For every dollar of sales over her quota and up to 25% over it, she gets 22% commission (sales from $100,001 through $125,000).

For every dollar of sales over 25% of her quota and up to 50%, she gets 25% commission (sales from $125,001 through $150,000).

For every dollar of sales over 50% of her quota, she gets 27% commission (sales from $150,001 and above).

You can apply this commission rate quarterly or annually, depending on how you structure your compensation. If annually, you'll have to pay a balloon payment at the end of the year to accurately account for the total of accelerated commission for the fiscal year.

If your salespeople are paid a salary, you'll probably want to start their sales commission at 5%, and have accelerators set from there on upward, using the formulas above.

Phew! We tackled two of the biggest dilemmas I keep hearing companies struggle with when trying to scale up. What are your two biggest expansion challenges?

Christine Comaford, CEO of business accelerator Mighty Ventures is the author of the best-selling book Rules for Renegades. She invites you to participate in her next QA call by registering at www.AskChristineNow.com. She writes her column on small business growth strategies every other week.

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