How to Model Sales Funnels and Forecast Revenue

The following article, is part 1 of 4 in a “Finance for Founders” series, authored by Sven Huckstadt, who is a member of enki’s fractional finance community.

Sven is a Fractional CFO, who has just wrapped up his role at a VC firm where he worked closely with 3 x Series A companies, helping them scale, manage finances, and prepare for successful exits.

He brings firsthand insights from the front lines of startup finance - insights that form the backbone of this “Finance for Founders” series.

You can read more from Sven on [his Substack] or connect with him on [LinkedIn].

INTRODUCTION

Any financial model strikes the balance between simplicity and the nuanced reality of your business. Strategic multi-year plans sit on one end of the spectrum. Tactical forecasts sit on the opposite end. This guide aims to meet in the middle, focusing on 18-24 month forward looking forecasts that often sit at the heart of a funding model.

A good model helps you to:

(1) translate your ideas into the objective language of P&L, Balance Sheet and Cash flow

(2) highlight the connection between inputs and outputs across departments, clarifying ownership, bottlenecks and leverage

(3) show how seemingly small actions taken today change the shape of the business in the future - think of customer churn as one metric whose true impact compounds over time

GENERATING LEADS

Most customers start their journey as a lead - a prospect who may or may not become a paying customer in the future. Depending on the size of the business, generating leads can be a solo mission or a joint cross functional effort. This effort is commonly split into outbound and inbound activities.

If business was a hunter gather metaphor:

Your Business Development Representatives (BDRs) hunt for outbound leads. Equipped with mailing lists, LinkedIn profiles and industry databases, they cold-mail or cold-call prospects that seemingly fit your Ideal Customer Profile (ICP). If successful in building a connection and confirming purchase intent, they hand those leads over to an Account Executive (AE) who takes them further down the conversion journey.

Inbound leads on the other hand, are commonly gathered by the Marketing team - organically or by paying for them.

Organic activities build awareness for the pain points you solve and position you as a credible solution.

Think brand awareness campaigns, content marketing (social, podcasts, webinars) and SEO. Whilst they can consume considerable budgets, the lion’s share of the work is done in house or in conjunction with external consultants. Leads that follow a call to action, are screened for fit before being passed on as Marketing Qualified Lead (MQL) to the sales team. There, a Sales Development Representative (SDR), assesses the likelihood of actually closing a deal, using frameworks like BANT (Budget, Authority, Need, Timing), before passing the lead on to an AE.

While organic traffic can be stable, models often have to account for seasonality and the impact of exceptional events.

Conversely, paid activities aim for faster results.

They put specific content directly in front of a well defined audience, e.g. through Search or Social Media ads. Paid marketing is scalable with £-budgets and precise in attributing costs to individual leads, making it an effective growth lever. Resulting leads get equally screened by marketing and SDRs before being passed on to an AE. When forecasting a high number of paid leads, the size of the teams doing the screening (marketing and SDRs) can become a bottleneck to look out for.

Models occasionally assume that those steps happen instantaneously (i.e. within a given month). Whilst this can be viable if time lags are small or even out over 12+ months, your business might require a more granular approach to avoid overstating the number of leads.

The below summarises a simplified SQL model:

Side note: A future article will cover the cost side of this funnel and deep dive into Cost of Acquisition, Customer Lifetime Value and Payback Periods.

CONVERTING LEADS INTO CLOSED DEALS

The real sales process begins once SQLs are handed over to the Account Executives in your sales team.

Whilst there can be many steps to a “closed won” or “closed lost”, models commonly use a single win rate, ideally backed up by historical data. The same applies to the conversion time, the time a lead takes to decide if they buy or drop out. Your CRM (HubSpot, Salesforce, …) can offer valuable insight from past deals to model these KPIs. In the absence of historical data, industry averages can be a helpful proxy.

The shape of your sales process determines if further segmentation is required. Deal volumes, win rates and conversion times can vary when selling to enterprise versus SMBs. Common segmentation criteria include customer size, industry or geography. Equally, not all lead sources generate the same quality of leads. Conversion rates can vary between outbound and inbound channels. Measuring and comparing those nuances is vital to decide how simplistic or complex your model should be.

FROM THE PIPELINE TO THE P&L

Congratulations, you modelled the sales funnel and gained a new customer (at least on paper). The deal volume in the pipeline is usually a proxy for the annual revenue you expect from each customer (AAR, Annual Recurring Revenue). The next step breaks the ARR down into a monthly figure (MRR, Monthly Recurring Revenue) and allocates it to the right month in the P&L. More complex pricing models, e.g. combinations of fixed fees and usage based pricing can require more granular modelling.

Some products require an implementation period. Depending on your contractual terms, the MRR might not start until implementation is completed. Instead, customers commonly pay implementation fees to compensate for these efforts. Any discounts (e.g. “sign now and get the first month for free”) should also be accounted for, unless they are reflected in marketing expenses. In rare cases, customers get lost (i.e. drop out) during the implementation period. If this happens at scale in your business, consider adding a step to model this revenue leakage.

Layering all wins in the planning horizon in this way, results in your revenue from new customers. A solid starting point which I’ll progress further in Part 2 of this series, by addressing revenue retention, cross-selling, up-selling and churn.

CONCLUSION

Modelling the sales funnel leaves you with a transparent framework of inputs, outputs and their connections. Since every input is assigned to an owner in the team, you create accountability. Assuming your model is exhaustive, any variance from plan can be traced back to its cause, forcing attention on the topics that matter. Equally, you can talk precisely about investments in certain areas of the funnel and their expected impact on revenues, supporting discussions with investors.

If you struggle to accurately forecast your SaaS revenue or miss accountability in your leadership team, let’s connect.