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Understanding Pipeline Metrics

Published by Summit Marketing Team on 12 Feb 2020

The Virtual CPA Success Show for Creative Agencies: Episode 7

When it comes to setting sales goals, it’s important that every department of your business is on the same page. So how do you know if the work coming down the pipeline is going to be enough? Or too much?

In this episode, Summit CPA CEO Jody Grunden joins Jamie Nau to discuss measuring pipeline analytics to set sales goals, and to make sure that your sales team is on the same page as those who are fulfilling the services. Listen to learn about the most important pipeline metrics and how to calculate them.

Jody Grunden: Welcome back. This is Jody Grunden. I'm with Jamie Nau. As you can probably tell, if you've listened to the previous podcast, we're kind of switching roles today, so I'm going to be talking to Jamie asking him a few questions. Jamie's been with the company for a long time and I'm going to give Jamie an opportunity to talk a little bit about himself. But before we dive into things the title of the day is: pipeline. We're going to talk about how much you should have in your pipeline. How it really evolves around the entire financial statement process and the importance the CFO has in helping business development with the pipeline itself. So Jamie let me kick things off by throwing it over you. Can you tell us a little bit about yourself? What your background is with Summit. How long you've been here and what you're currently doing at Summit.


Jamie Nau: Yeah for sure. So I've been with Summit for almost four years, so it's been quite a while. Prior to Summit I did the typical accounting road, I did public accounting as an auditor. I did that for almost 10 years with Grant Thornton, and definitely loved my time with Grant Thornton. But as I got a little more mature in the firm and the PCOB got a little bit more mature, I also realized that audit wasn't really where I wanted to be. So I did what everybody told me I had to do and went to industry and I worked for a couple of large Fortune 5000 companies. And again that wasn't a great fit for me as well. So after that I kind of came to the realization that working for a Fortune 5000 company, you know, the CEO and all the business leaders and decision makers of a company have a 10 person, 15 person finance department they can ask questions too. They have a 20 person accounting department that's giving them all the numbers but what do the 10 million dollar shop have? What do those other small companies have? So I was going to start my own company. I was going to say, I could give that part time role to these smaller companies, and so I started calling around and doing some research on how I would start that company, and that's when I met Jody and Adam, and I was asking them questions about how their firm ran. And then I was like, why would I reinvent the wheel when these guys are already doing it perfectly? And so me asking them questions kind of turned into an interview, and I was lucky enough to come on as a CFO.


Jody Grunden: Not to interrupt, but it was really ironic, because at the time you called we were actually interviewing for a CFO position. So it's just completely ironic that you called and so forth, and like I love to tell you quite often. You were our second choice. Our second choice, definitely the best choice. So that was pretty awesome. So you know you started off and you start working with clients?


Jamie Nau: Yes and Summit does a really nice job about integrating us with clients right away. So I started working with clients, starting off just as an accountant, just so I understood how our accounts worked. But the long term goal was always for me to be a CFO. So I think I did accounting work for about two months before I took my first CFO client on, and then I really enjoyed what I was doing for the first time in my career. Like I said, I really liked working at Grant Thornton. I liked working in industry but, I think I liked about 60 percent of what I did. But once I got into doing the CFO work at Summit every day, I was excited to come to work.


There wasn't any part of the job that I didn't enjoy. So I really loved working with clients.


Jody Grunden: How many clients did you work with?


Jamie Nau: The highest number I got up to was 14 clients at one time.


Jody Grunden: And just to reiterate, you weren't doing the accounting for those clients. You had an accountant underneath you doing that, correct? You were doing the CFO role. Can you explain that a little bit more?


Jamie Nau: So as the CFO it’s really my job to help understand what the past meant for the future. And so really a lot of these metrics we're talking about is understanding what they were doing, but also understanding about how we can improve those metrics for the future. So that's again, it's just exactly what I always wanted to do even when I went into accounting and college. It wasn't because I loved accounting. It’s because I loved business, and accounting was kind of the language of business. And so it took me 15 years to get there, but I was finally doing what I really thought I should be doing. Which was taking the numbers and understanding people's businesses and helping them make better decisions. So I did that like I said, for 14 clients was kind of the peak I got before Jody and Adam came to me with the opportunity to be the director of the accounting team. Which is kind of overseeing all the accountants and all the CFOs, and making sure that we're doing things similar and we're doing things well, and keeping our clients happy, as well as our employees happy, so that's the role I am in now. A director role, and again I love it. I get to work with people every day. I get to work with everybody's clients, and I also get to work with like I said, the really smart accountants and CFOs at summit. So like I said, this is the happiest I've been in any job I've had. Which is great to say, which is awesome.


Jody Grunden: How many clients globally are you actually overseeing?


Jamie Nau: Summit just got over the 100 client mark. I think we're at 101 last time I looked and updated our master client log.


Jody Grunden: Yeah. So basically you're talking to those clients at least once a year, right. As part of the service we meet with those clients on an annual basis. Tell me a little bit about that. How's that working out?


Jamie Nau: So it's really the most rewarding part of my jobs is you know, again, clients will reach out to me when there's an issue. But what we do is we try to be proactive, and so we send out an email once every six months to all of our clients and say, hey let's just do a check and call. Let's just talk for 15 - 20 , could be an half hour if the client has lots talk about, and let's just talk about what we're doing well, what we can do better, what you like about your team, what they could do better, and it really is just a really great way for me to learn about the things we're doing really well, and what we need to work on. It's really eye opening for me because a lot of times, we've done this for three cycles now, and every time there tends to be a common thread that you can pull out of it. Like okay, this is something that we need to work on, and it helps me as a director to know that we need to be better at communication, or we need to be better at whatever the topic that has come out of the generality of those calls. And then also you know, fixing those clients as well, and making sure that those things get fixed. And then again the positive feedback we get is usually much higher than what we need to work on. Which is for me, the always the optimist, it's great to hear that we really are making a difference in so many people's lives.


Jody Grunden: Do clients appreciate that? What is the client response for that?


Jamie Nau: I definitely think the clients appreciate it. They appreciate that they know that they, even outside those six months after I started doing those calls I'll get more emails, I'll get more people reaching out to me just with even small things like hey, everything is going well, but we noticed this one thing. Do you mind just talking to the team about it? So I think the clients like having a face outside of just their team just to know that they always have that support. The clients really do appreciate it.


Jody Grunden: And does the pipeline ever come up? Since that's kind of our topic today, does that ever come up in the conversations?


Jamie Nau: Yeah for sure. You know I think this is actually one of the areas that came out. So kind of the backstory on pipeline is we knew it was important for one of our metrics, and when Jody and I were doing a presentation, we kind of worked on developing how can we calculate pipeline? How can we know what the pipeline is? So Jody and I started presenting this at several of our presentations, we talked about it to all the CFOs, but not all CFOs we're delivering the pipeline. So I think that's one thing that came out of these calls was, okay, I saw you and Jody talk, and spent 20 minutes talking about pipeline, but my CFO hasn't brought it up once. So that that's come up. And also different ways to look at the pipeline. I think that's the one thing about pipeline, is that when it comes to the numbers that the pipeline gives you, I always say they're a little more fuzzy. Right? Effective Rate is what it is. Effective Rate is how much money I'm getting for every hour I work pipeline. There's so many inputs that go into it that each of those inputs can mean something different. And so there's a little bit more fuzziness around it, and so that means that there's a lot more interpretation. So what I might see as a great pipeline, Jody might see as a good pipeline, because we're thinking about the inputs a little bit differently. So there's a lot more interpretation around that, and so a lot of times that will come up out of these calls as well as the good conversations we are getting about pipelines and how it's really helping the business.


Jody Grunden: So now you're seeing the teams putting this into play for almost all of our clients?


Jamie Nau: Yeah. It’s definitely been an eye opening thing for me, and I think you as well, and I think that's something that in my director role that I made sure of explaining it, to make sure our CFOs all understood it. Understood the calculations, and made sure that it was being used across the board for our clients because it is key.


Jody Grunden: Yeah for sure. I wonder how many times the audience has had that issue where they're going to tell you how great your team's doing. They're doing X Y Z and then find out later that they're only doing X Y that they forget about Z, or they're not incorporating Z because of some other reason. That simple call like what you're doing can rectify that pretty quickly and get everybody back on the same page.


Jamie Nau: No one hundred percent, and I think that goes a lot back into this pipeline discussion. A lot of times the business development team, the sales team, are not necessarily talking to the producers, and I can't tell you how many times I've worked with a client where when you see overages, or you see right offs it is because the things we're selling aren't exactly what we're doing, and both directions right. It can be either we're doing too much, or we're not doing enough, and you can see that in that conversation, and so it definitely relates back to pipeline and making sure that all departments are speaking to each other, and we're a great example that happened to us it could happen to anybody.


Jody Grunden: Now you mentioned something about sales and marketing, your business development team, a CFO five years ago really didn't talk a ton to business development. What are you seeing today?


Jamie Nau: I feel like it's the craziest thing to me because, we work with teams that have a baseline in marketing, or have a baseline, and sales and marketing like, that's a lot of times where our clients work, as they are helping companies with their sales and helping companies with their marketing, yet they look at me as an expert around pipeline, and so I do feel like I need to be an expert in this area. And I think to me it's probably one of the most important metrics because it really is the only one that naturally looks forward, right? When you're looking at effective rate you are looking at the past, but you're using that past to predict the future. But pipeline starts with the future, right? You're largely looking at the future. You're already looking at what you need to cover in order to make sure you have enough sales in the future so every number in that calculation is almost looking at the future. So I think that's really important for me as a CFO to be involved in those conversations, and make sure that I'm giving a baseline behind that. Because oftentimes I'll talk to a business development person, and they'll say, 2 million dollars is where our pipeline needs to be, and that 2 million dollars might cover you if your capacity and what you have under contract is really close. Right? So if you are really close to where your capacity is, and your team is already pretty busy over a period of time usually we look at the next three months, that 2 million dollars might be great but what if you haven't sold very well in the last three months, and what you have a contract isn't as good. Then that 2 million dollars might need to be 3 million dollars, or 4 million dollars, and so it's really important that amount that you have in your pipeline varies depending on what the future outlook looks like.


Jody Grunden: So how often should you be looking at this? Once a month, twice a month, once every other month? How often should we be looking at our pipeline and comparing it to our capacity?


Jamie Nau: I like to look at it once a month, and that's from the finance side. Again I think the business development team looks at it a lot more frequently than that. But I think getting the finance team, the business development team, and the operations team/the sea level suite, getting us all on the same page once a month on where the pipeline should be and where it is—is super important, because it's going to help me forecast. I know we're going to have a future podcast about forecasting, but I feel it's impossible to forecast unless you know what the outlook looks like for the next three months, and so once a month, I usually try to do it at the beginning of the month. I kind of look at my pipeline calculation as a balance sheet type calculation. Which means the point in time what it means today, might be a different a week from now. So I try to be as close to that balance sheet date as I can. So kind of close to that first the month and the previous month.


Jody Grunden: So do the pipeline around the first couple of days of the month. So everybody has got their time in, not worrying about that and you're looking at a set day. It's pretty intriguing. So we will look at the set day. First of the month, every single month we do it, we meet as a team and go through the pipeline. So can you kind of tell me a little bit about the different parts of the pipeline that we're actually looking at? Things that we can actually control because if we can’t control then why look at it. So help me out there—what's important in this pipeline calculation?


Jamie Nau: So once you understand what the next three months looks like. So that's the first thing to understand and that again a lot of times that's not a lever that's just the calculation. And so when Jody talks about what I can control I'd like to think about as levers. Right? So think about the levers that I can control as part of my pipeline, and so there's really three inputs that I would guess any business development person that's listening or is pulling up this podcast is already aware of. But how often do they evaluate these inputs? And so there's really three that I look at. Number one is, my close percentage. I think any business development person you talk to can tell you what their close percentage is, or at least a good idea. So what we look at is qualified leads. So when I'm talking about close percentage, if I'm a design company that only works with universities, and someone hits up my website, and wants me to come work with them, and they’re an oil and gas company, then I would never work for them. I would not consider that a qualified lead. I don't count that as part of my close percentage. So I look at my total qualified leads. Who would I actually want to work on? And then I'd look at those and figure out how many of my wins. So whatever percentage of those I actually win and end up doing work for. That's a really important number for me. And so there's a lot of factors that could make that higher or lower and that's what I'll throw back at the business development person and say hey, you're only winning 10 percent. How can we double that? What can you do? Can you return calls quickly? Can you change the way you're doing your proposals? Can you meet in person instead of on video? What can you do in order to try to make that percentage higher? And that's kind of the part of the business development person who understands their job of what they think they can do in order to get that win percentage up. So that's the first factor.


Jody Grunden: So basically in calculating that they're pulling that off their CRM system. Whether they're using HubSpot, or PipeDrive, or something like that. So they're pulling that information off of there and coming up with that percentage. That percentage changes all the time, right? And are they really looking at that percentage as an overall thing? Or are they breaking it down?


Jamie Nau: No that's a great point. So I think all these inputs I'm talking about, one of the values that I've seen working with clients that is kind of the light bulb goes off sometimes is, oftentimes you might have a higher win percent if it's an existing client. You know if you're already working with client A and they come back to you and say hey, we have another project for you, you know they're only coming to you. They might be asking someone else but you're going to have a much higher win percent on that type of client than you would if someone who's just finding you on your website. So really understanding the more ways you can look at your pipeline, and look at your win percentage, the better off you're going to be. So that's just one example—old clients, or existing clients, first new clients. Another example is by industry. If you work in multiple industries, if you work in education but you also work in not-for-profits, why not split it and see, how often do I win my not-for-profits? For my education companies? Or you know if you work in restaurants, but you also work in retail, you split those out and see what the win percentage is. You really can split them any way that makes sense to you and in a way that makes sense to your business. But I think if you can find a difference in those win percentages it's definitely worth tracking and worth valuing, and saying hey, why do we win? And some of them makes sense. Like I said, it makes sense that you win your internal clients more often than you win a new client. There's logic behind that, but if it's not-for-profits versus universities, you might want to look into that a little bit. Is there a different way that you're proposing them? Is there a different way that those proposals look? You'll want to evaluate that a little bit.


Jody Grunden: Yeah. If you are a design and dev shop and maybe you win 50 percent of the design only work and 50 percent of dev only work, but maybe 75 percent combined, or something like that can really help you. That's obviously a great win percentage but that's something that would be kind of cool to know so that when you're going into these things you can actually bid them effectively. The other thing of course is the obvious, by business development. So if you got multiple biz dev people, then you want to definitely track all those stats, be breaking out by the individual. You might find that business development person 1, does a lot better with not-for-profits than business development 2. You know the just might have more of a synergy there. So you want to make sure that you can flip it around a little bit like you're saying, and making sure that the right person is actually attacking the right type of lead.


Jody Grunden: So close percentage, that's number one. What's number two?


Jamie Nau: So number two is close time. So how long does it actually take you to close a deal? So when someone hits up your pipeline. So day 1 they hit up your website. They become qualified. I'm curious of how often does it take for that deal to first hit your website until you start doing work on it? And so that's a really important number and the faster that number can be obviously the better off you're going to be. I've been to enough conferences in this industry that it's a very common question of how can we close things faster and there's a lot of theories on it. There's a lot of very smart people doing research on this, but that's something you need to know in order to improve. Right? So you're already closing things in 30 days then this is an area you need to improve, and so I think that's the important thing, is you need to know what that number is, and then back to the same question you asked earlier, Jody. Same thing, split this out. How long does it take you to close an internal deal versus an external deal? The other part of this that is very often looked at, what about size of deals? If I'm trying to win a million dollar project it might take me a little bit longer to close it because that company really wants to spend their million dollars wisely. Whereas if it's just the five thousand dollar project that you know it's one person within the company, the only person you're working with, and they're the only decision maker, you probably can close out a little bit quicker. So that's another way to break it down. And again you'd want to look at close percentage in that same area, or win percentage in that same area, but definitely you can split this in a lot of different ways as well. Which again, the more you split it, the more data you're going to have, and the more decisions you can make and actually change the way you're doing things to get it.


Jody Grunden: And you can break the close time in different stages too, right? I mean from Stage 1, to Stage 2, how long will it take to get to this stage? Self-defined stages. And it’s not a big deal, or not a rhyme or reason on how many stages you could have in your closing. You just want to be consistent when you're capturing the data so you have a good idea.


Jody Grunden: So number three. What's your number three?


Jamie Nau: Yes, number three is the input. This one is more of a business decision, but a lot of times it's how long is the work going to take to win, or to actually achieve and finish. This one is gets a little complicated, but the way I always describe it is, if I have a million dollar project that I just won, and it's going to take me three months during that million dollars, that's a lot different than I have a million dollar project that's going to take me a year to earn. So you want to make sure you understand on average how long your projects last what you actually do the work. And again a lot of times this is a business decision. A lot of times in this industry people work on a subscription model. So if I have someone that I'm working on, and I know I’m going to work on them monthly for the next year, that's just my model. There is nothing I can do about it unless I want to change my model. But overall it's really just my business model in a business decision we made. Whereas if I'm doing projects, a lot of times projects do just last three months. Sometimes they last longer than that, but it just depends on the type of project you’re doing. And this one's probably the least, the one I'd consider the least lever, unless you're willing to change the way you do business, or you want to add a new business element to your business. You want to look at that and figure out what your pipeline would look like when you're first starting off of hey, we are already doing design. We're already doing some maintenance work that are more long term contracts. Let's add a third element, let's do something new. That's in-between those two. Let’s try to get some six month projects that are a little bit longer than three months but they're not the retainer type work. You want to evaluate how much pipeline you would need to do that before you went down that path.


Jody Grunden: So you get them to three different ones: a closing percentage, your close time, and then how long the job takes. Is there any other metrics that you need to know outside of that to put together that really cool crazy formula that we've got in the notes?


Jamie Nau: Yeah. So we will definitely tell you how all of those numbers work into this formula in our show notes. So it's really important that you download those because the formula looks a little intimidating until you understand it. Basically all we're doing is applying those three factors to whatever you have under capacity. So for example if your team's capacity, you can do nine hundred thousand dollars of work over three months. You already have six hundred thousand dollars under contract. I'm concerned about the difference between those two, the nine hundred cases let's say.


Jody Grunen: Let's back up real quick. You mentioned capacity. Can you, basically for those who hadn't seen it or listen to previous podcast, what is capacity?


Jamie Nau: So to calculate capacity what we do is we take your team and we figure out how much revenue they can earn in a period of time. And that's a lot of time based on hours, especially in this industry. So I figure out how many hours my team can work by person. Say okay, this person works 30 hours, or bills 30 hours a week. This person bills 20 hours a week. I put that all together in a mathematical calculation, figure out how many days there are in a month, and take that times when I want my average bill rate to be. And that gives me a number that I know each month how much revenue my team can actually fulfill. Again, it might sound more complicated than it is, but the easy definition is based on: this team I have, how much revenue can this team work? And so that's what I'm trying to get down to. How much revenue could I earn before this team starts working overtime, or before people start leaving me because they're working 80 - 90 hours a week. That's really what you're concerned with, how much can my team earn over a period of time. And again we'd like to look at three months.


Jody Grunden: So my typical producer can produce two hundred thousand dollars of work in a year. How many producers would I need? So if have five producers, a million dollars, and then that's going to be divided based on the month, not equally of course, but based on days and so forth. And so January will be a little bit higher than February. It depends on when vacations are and all that kind of stuff too. So there's a lot of factors that go in there. But you're saying from like January, let's say from January, February, March we're looking at three months and you're saying, oh our team can do nine hundred thousand hours in those three months. That's our capacity.That’s what you are talking about.


Jamie Nau: Exactly.


Jody Grunden: So flipping around, what's contract then? What do you mean by contract?


Jamie Nau: So a contract is and sometimes this is a difficult thing for companies to get when I first start working with them, but I mean is it really important. Its if we don't sell any work over these next three months how much revenue would I earn? So as of today, if we just worked out what's already under contract, what we already have signed, how much revenue will I earned? And so that's a really important number. A lot of times if you're doing some really good forecasting you know a lot of companies will use harvest forecast, or ten thousand feet and go in and plan each person out. You can take those hours that are planned out, times the average bill rate and come up with what you have under contract currently. A lot of times people will just do it by contract and say, I have these four contracts. This is when they're earning out, and I'll lay them out that way. But again, knowing that number is really important because the closer it is to that nine hundred thousand, the less pipeline you're going to need because you have less work to make up.


Jody Gruden: So let me make sure I understand, and correct me if I'm wrong here. So it sounds like revenue recognition is really an important part of the whole formula. How you're recognizing revenue for a project. So if I had a million dollar project that started back in October, here I am in December. I've got what, three or four months left to get that project completed. I would have three or four months of revenue to be recognized, right? So if it’s a million dollar project I might have like a hundred thousand dollars in January based on what we think is recognized, or maybe two hundred thousand, or maybe you know three thousand. So that number could vary pretty significantly based on when that revenue is being recognized.


Jamie Nau: Yeah you definitely need to understand how much of that you earned. You need to understand how much you've earned already. If it's a million dollar project, and you've already earned nine hundred thousand of it and yet you still have six months to work, that's six months of work and a lot of it might have already been recognized. So yeah. It's really important to understand revenue recognition and how your company recognizes revenue.


Jody Grunden: So you could have three hundred thousand on that job, maybe a hundred thousand on another job. Fifty hundred thousand on another job and so forth, and that might end in February. One of those jobs end in February so you are not going to see that in March or so forth. So you're looking at an entire three month picture. Why three months?


Jamie Nau: So like I mentioned earlier, it's really hard for design and Dev and SEO shops to look out too much further than three months. You know again, especially when you're project based, again I know clients are really working for that recurring revenue model, but a lot of times the recurring revenue model in this industry is a little bit hard to come by. So a lot of times when we're looking at it we're looking at those projects, and on average just from our experience, projects last about three months. So if I can look three months out it really helps me understand. And then again it's hard to make decisions six months out. Again, I want to make decisions for the next three months because that's the shortest period that I can affect. You know it's the next quarter, and so we really want to make sure we're not getting too far ahead of ourselves, and trying to think about okay, what does my pipeline need to look like in order to have a really good year? You know I'm really concerned about the next three months because the majority of the time if I sell something I’m going to recognize the majority of that revenue in the next three months. That's why we try to only look at three months.


Jody Grunden: Okay. So basically you take what's under contract and you divide that and your capacity to come up with a percentage. And so that percentage, let's say is 65 percent, what's the significance of 65 percent to me?


Jamie Nau: Yes so that's a separate calculation. I talked a little bit about the dollar amount there that you're trying to make up, and how we take those factors, and we apply that to it and that gives me what my pipeline needs to be. Now the other way to look at this is you can look at your past experiences of how much you normally catch up. And so we call this contract to capacity calculation. So if I normally catch up over a period of time just buy change orders, by winning new work, and I normally catch


Jody Grunden: What do you mean by catch up?


Jamie Nau: By catch up I mean how much did that 65 percent turn to after the months are over. So I can use hindsight over the past. So let's say I'm in January, I can look at what happened over the last three months and say, okay when I looked at the exact same calculation in September I was at 45 percent, but I ended those three months, once they were already done, I was a lot closer to my capacity than I thought I was going to be. I actually ended up at 95 percent of my capacity. So I caught up 50 percent there. So you can do that over a period of time. Basically if you have 12 months of data of how much you've caught up, you can take an average and it becomes pretty darn accurate. It's a great way to forecast revenue because that forty five percent, or sixty five percent you mentioned earlier, if I know how much to add to that based on what I normally do I can just take that percentage, and take it times my capacity, and get a pretty accurate revenue number for what I think I’m going to do over the next three months based on my own history.


Jody Grunden: So would you say that number is a real important number especially for maybe the CEO to look at and say, hey you know we're at 65 percent capacity, typically we're at 65 percent. So we're doing pretty well. Would that be like the first light bulb that comes on? Like hey, we're doing well or, hey we're not doing well or, oh no, we've got a lot more business than what we can handle.


Jamie Nau: Yeah exactly. And I like to look at those two numbers together, right? So let's say my contract capacity is a little bit light. Normally I like to be at 65 percent, but I'm only at 50 percent. But based on the other calculation I'm doing with pipeline, which we talked about a little bit earlier, my pipelines a million dollars more than I needed to be. So I have enough pipeline to catch up more than I normally do. So that's a great thing. So those two numbers are working in the same direction. If they're both below where I wanted to be then I have some reason to be concerned. We talked about this earlier, if I had my cash reserve in place, I have a little less reason to be concerned because I will probably have to eat into my cash reserve a little bit, but I will have to catch up. If they're both over then I may need to hire. If both of my account traffic capacity are higher than I wanted them to be and my pipeline is higher than they normally are, I'd better either have some contractors I can hire really quick, or I need to prepare my employees they may have to work some overtime over the next three months, or hire some new people to come in and take care of that capacity. So it really helps me understand what I need to do over my next three months if I look at those two numbers together.


Jody Grunden: So again contract capacity. Real simple to calculate. You do it the first of every month. You look what’s under contract, divide that, and your capacity, your team, and it's a really simple process to go back in time and do, correct?


Jamie Nau: Well it is as long as you are tracking the contract capacity all the time. So the hard part about it is, is a lot of people, if you haven't tracked that contract capacity for the past nine months it is impossible to go back and rebuild. So once you start doing it it's really easy to go back and look at what you caught up. But the hard part to calculate is you can't go back in time and say oh, my contract capacity as of August was here. No matter what system you're using it's really hard to go back and rebuild that number. So you need to have, once you start doing it it's going to take you probably a year before you know how much you normally catch up because you want that 12 months of history.


Jody Grunden: So a good time to start is today or whatever day the first of every month is—as close as you can get to the beginning of the month should be a good number. And the reason you do it the first of the month is because?


Jamie Nau: If you’re doing it at the first a month you have 90 days that you're trying to catch up. So I'm looking at the next three months, I'm doing it the first of the month, I have more time in order to make changes. I can either hire, I can work harder in my pipeline, I can try to sell more, I can go after a couple more deals, I can do some outreach, whatever I can do to make improvements or again, we know how long it takes to hire a good employee. So if these next three months look like they're going to be really tough, and I'm going to have a ton of hours worked, I'm not going to hire someone tomorrow. So the earlier I look at this calculation the better.


Jody Grunden: Yeah. And it's important to be consistent when you do your billing. So I guess if you're doing your invoicing and you get your invoicing done by the end of the month then doing it right after invoicing is key because now you know what you truly do have under contract. Or if it's on the 20th you can just be consistent on the 1st, the 20th, whenever that is you know to have that number so it's a consistency thing going forward. You don't want to randomly do it throughout the month. Make it on the first of the month. Make a sticky note on your computer.


Jody Gruden: So sounds like you've got everything covered there. So you've got the contract capacity you've got the pipeline. So how does that all fit into all the other metrics that we talked about. I mean we talked about the metrics earlier. How does the pipeline fit to that?


Jamie Nau: Yes. Like I mentioned earlier, pipeline is the most forward looking of all of our metrics. So you know again a lot of times the other metrics are a play out of what happened. Again you're going to use it. If your effective rate is 70 dollars and you want it to be 90 dollars you're going to have to find ways to make it better, you're going to have to improve that. But a lot of times the pipeline is telling you if you have the ability to do that. So another thing I mentioned earlier, is that if your contract capacity was super high, and your pipeline was super high, this might be the time to experiment with a higher bill rate, right? So if you always wanted to increase your average bill rate now this would be the time to do it, because you're already over capacity, your pipelines look really good. Instead of charging 150 like you normally do let's just charge 175 and see what it does to your win percentage. Maybe it doesn't affect it that much. Maybe the market can handle it. And then you've just learned that you can get 25 dollars more an hour for every hour worked because you have the capacity to do it because it's time to do it. Now on the flip side if your low this isn't the time to experiment with your bill rate. Because then you're already trying to get as much work as you can. So you may have to even go in a lower rate sometimes just like keep your people, because you know, you can still make a pretty good profit.,125 dollars an hour, and if we're going to have to do it because it’s really slow times. That's one example of the way it goes to the other ones, and then obviously cash. Everything goes back to cash. No we talked about this all the time, but we're pretty repetitive with this, the more cash you have in the bank the easier it is to make decisions. And so if I have a lot of cash in the bank, you know, the pipelines can be a little bit easier for me to handle. The meetings can be a little less stressful. Where if I'm really close to not be able to make payroll next month, then the pipeline is a very stressful call because the second I see that number, and it's low, I just get that pit in my stomach because I'm not going bill pay my employees. And so I think it's just helps you relieve the stress, and it helps you take advantage because we all know there's no magic formula for me knowing how much I need the bill , or from me knowing how many hours I can handle. It really is a lot of what the market can bear. And so the more cash you have, the more you can experiment on that type of stuff. So it all comes back to cash for sure.


Jody Grunden: Yeah I love that. Great tip on the increase in your pricing. So if you know your pipeline is strong, you know what, why not just throw it out there, it does it doesn't hurt. If your pipeline is really weak then maybe you need to look and see hey, what's the least amount I can actually lower it to? So there's got to be that ebb and flow a little bit. I think you nailed it on the head. The pipeline is a great tool that can help you make that decision along with course of cash. Great topic, great conversation. A lot of good insight here today. To the listeners, if you have any questions, feel free to reach out to Jamie or myself at the vcfo@summitcpa.net. That's vcfo@summitcpa.net, we'd be happy to answer your questions, or if you would like to be a guest on the show feel free to reach out for that as well. Appreciate the conversation Jamie. Do you have anything to add before we wrap it up?


Jamie Nau: No I do think that e-mail address is very important. I know that we talked a lot more numbers than we'd like to today because there is a lot of numbers that go into pipeline. But if you have any questions, always feel free to reach out to us. We really do like the community. We love the community, we work with them a lot. So we are always answering questions and taking calls, whatever we can do to help, because we want to make sure that this business development area, this area, is always going strong and so we want to help people as much as we can. So yeah, definitely take that e-mail address down reach out to us was great.


Jody Grunden: Thanks for joining.

Understanding Pipeline Metrics

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