There are several common pitfalls that SaaS companies can encounter in their planning, and many aren’t very obvious. This second article in our Pitfalls in Planning series will help you avoid the unpleasant surprises that can happen when you don’t factor your sales cycle into your annual plan.
Most SaaS companies today still develop annual plans that typically run from January through December each year with fixed monthly and quarterly targets. This type of planning always takes a lot of time, often requiring finance teams to start 3-5 months ahead in the previous year. When they finally get it done, they have a shiny new plan for the new fiscal year.
However, the reality is that it’s highly unlikely that they will meet their targets with that plan and it will almost immediately force their sales teams into playing catch-up.
The pitfall in fixed annual planning
The crux of the issue is that fixed annual plans don’t take the sales cycle into account. To understand how this pitfall can occur, you need to think about your sales pipeline and the dependencies that exist between marketing, business development, and sales.
In order to create opportunities for your sales team to close a deal, your marketing team has to generate many leads that they qualify as either marketing qualified leads (MQLs) or sales qualified leads (SQLs). MQLs are handed off to the business development team to turn them into sales opportunities. Then when the prospect is ready to make a decision, the lead becomes an SQL and is passed onto the sales team who will work to close the deal.
Your sales cycle encompasses that entire process. It may take a few months or more than a year. The point is that if you’re not thinking about the sales cycle in your planning, you’re not thinking far enough ahead.
If you have a six-month sales cycle, for example, in order to close the number of deals needed to meet the first month’s target, your marketing team would need to have generated those leads six months earlier.
If you aren’t planning as far ahead as your sales cycle is long, your sales teams won’t have the opportunities they need to close when they need to close them. They will always be playing catch-up.
This is especially true if you have long sales cycles, such as those usually associated with selling to mid-market and enterprise customers. If your SaaS has a pretty short sales cycle, you might be okay using fixed annual planning. But your sales teams will still feel the pressure of having too few opportunities to work with and the odds of meeting your targets are not great, especially in the first couple of quarters.
A cautionary tale
Here’s an example of how fixed annual planning can lead to big problems. Let’s say we have a CMO with the Acme Company, who in the annual plan has been given a target number of sales qualified leads that the marketing team has to generate in order for the sales team to meet their target ARR. Since it’s a fixed annual plan, the CMO divides that target by 12 to get a monthly goal for the marketing team. Seems pretty intuitive, right?
This may seem intuitive if your company uses a fixed annual plan, but you can see from the figure below how thinking this way can get you into a lot of trouble at the end of the year.
The problem here is that the CMO didn’t think about the fact that the company’s sales cycle is six months long. If it takes the sales team six months to close a deal, that means the marketing team has only six months (not the 12 months the CMO planned for) to come up with all of the sales qualified leads (SQLs) the sales team needs to meet the company’s ARR target!
If this problem is identified early, the CMO might be able to quickly adjust, hoping that his team can pull off a miracle or face the fact that he can’t deliver the leads necessary for the company to meet its targets. If the problem isn’t identified early, it will get progressively worse with each month that goes by, setting the company and investors up for a very unpleasant surprise at the end of the year.
Avoid this pitfall with a rolling 12-month plan
The immediate future is never under your control with a fixed annual plan. But, with a rolling 12-month plan, you can be confident that your marketing, business development, and sales teams are working in harmony to maintain a pipeline that will help you meet your ARR target no matter how long your sales cycle is.
With a rolling-12-month plan, you update the plan every quarter based on the actuals from the most recently completed quarter, making adjustments where necessary. You can also do this type of planning on a monthly basis, or any other frequency that makes sense for your business.
Regardless of the frequency you choose, this method has a lot of advantages over a fixed annual plan. One is that by its very nature, a rolling 12-month plan is a “living” plan that is always up to date, which gives you greater agility in responding to changes in the market and your business.
Rolling plans are also more accurate because they take into account the most recent performance results. This allows you to continually optimize your assumptions about the key drivers in your business to make your forecasts more accurate and reliable.
Finally, unlike a fixed plan based on past results and updated only once a year, a rolling plan provides you continuously updated forecasts that can inform your business strategy. You never have to wait until the end of the year to evaluate “lessons learned.” Instead, you’re always learning on the fly and adjusting as you go.
Are you ready to develop a more innovative and reliable plan?
Developing a rolling 12-month plan isn’t easy, especially if you’re still using spreadsheets to do your planning, budgeting and forecasting. However, this challenge can be easily overcome with a SaaS financial planning and analysis (FP&A) platform like Drivetrain.
With automated plan vs. actual reporting available in real time and built in forecasting model, Drivetrain can help you switch seamlessly from fixed annual plans and their inherent pitfalls to a 12-month rolling plan. Book a demo to see how Drivetrain can help you innovate your planning to scale your business predictably, without any unpleasant surprises at the end of the year.