Designing the perfect sales team requires strategic insight. That's where a strong sales capacity model comes in. By building a robust capacity model, you'll optimize gross sales, reach revenue projections, and align your financial planning process with performance management.
Getting these processes right drives your corporate performance management strategy as a whole, ensuring you've got what you need across back, middle, and front office functions to support sales.
What is Sales Capacity Planning?
There are a number of key elements that affect the capacity of a sales team, for instance, a sales capacity model. It is a type of financial model that supports top-line planning by using sales performance or sales capacity to forecast future revenue generation.
A sales capacity model should also define the optimal number of sales representatives and the required sales profiles to meet your company goals. Implementing a data-driven sales capacity model can significantly enhance your organization's revenue forecasting and strategic decision-making.
A sales department that's understaffed won't be able to reach the target revenue. On the other hand, companies that overhire may incur high costs, or, if they're a startup, may risk burning through their cash runway. In fact, replacing a sales rep costs approximately $150,000 and takes 4–5 months. Ramp time for new sales representatives, quota assumptions, and the alignment of specialization of existing sales reps to target industries are also key factors in determining capacity. With so many factors at play, and the sales function so important for enabling business growth, it's critical to take a strategic approach when building your team.
A capacity model provides a data-led method to measure whether there's sufficient performance to hit revenue targets.
Why is Sales Capacity Planning Important for Start-Ups?
It's especially important for a startup to execute strategic sales capacity planning. Startups must position their product on the market, build their credibility in the industry, all while demonstrating rapid growth. To do so, they require significant investment. However, two-thirds of startups fail to make a positive return for their investors. In fact, 65% of new ventures fail because of people issues, specifically issues with senior executives.
It's especially important for a startup to execute strategic sales capacity planning. Startups must position their product on the market, build their credibility in the industry, all while demonstrating rapid growth. To do so, they require significant investment. However, two-thirds of startups fail to make a positive return for their investors. In fact, 90% of startups fail, with 10% failing within the first year and 70% collapsing during years two through five.
One of the most cited reasons for failure is poor capital management.
“Labor costs can account for up to 70% of a business’s expenses, which is why it's critical that startups develop a strong sales capacity planning model to help them plan resources effectively and allocate funds sensibly.”
According to Paycor
How to Measure Sales Capacity
Sales capacity measurement must be accurate, and getting your calculations right requires careful consideration. Access to reliable, quality sales data is essential, which traditionally comes from two sources: your human resources information system (HRIS) and customer relationship management system (CRM). However, savvy startups are also incorporating a financial planning and analysis platform to build an infrastructure that supports company-wide data management, interdepartmental collaboration, and strategic finance direction.
You can calculate your sales capacity as the maximum amount of revenue your sales team can bring in within a set period of time. To calculate your deals per month, multiply your opportunities by your close ratio. Then factor in your average deal size and multiply that number by your deals per month to get your monthly sales capacity.
Sales Capacity (Monthly) = Average Deal Size × (Deal Opportunities × Close Ratio)
Other Key Considerations for Accurate Sales Capacity Modelling
There are many more factors to consider when creating a plan-accurate capacity model. Knowing your sales workforce attrition rate, commonly known as churn, is vital. Churn and employee turnover can block an efficient sales function, and knowing your churn rate and how it's likely to affect sales can enable more accurate capacity modeling.
Similar considerations that should be incorporated into any sales capacity planning are onboarding and ramp-up time, along with the training costs associated with new reps and their level of experience.
Moreover, you should consider your company's dependence on star sales employees.
For example, if a star sales rep left, it would disrupt your sales pipeline and efficiency, but it would also have ramp implications as new employees would be required to fill the gap. Calculate and incorporate a capacity allowance for times when these employees take time off or leave the company.
Then there are circumstances beyond the sales department, including economic changes. These may include a downturn in demand for your product, more expensive credit due to higher interest rates, or a broader economic downturn. These issues can significantly impact your sales capacity planning, among other factors. As a result, it's crucial to regularly conduct scenario planning to weigh options and assess potential outcomes.
How to Build a Sales Capacity Model (Step-by-Step)
With this three-step approach, you'll be able to build a high-performing sales capacity model in no time.
For teams seeking a more hands-on approach, a sales capacity model in an Excel template can be particularly useful. Consider using a dedicated Sales Capacity Planning Calculator or Sales Capacity Planning Template in Excel or Google Sheets, where you'll enter inputs like the number of reps, average deal size, and close ratio to quickly see how capacity changes with each variable.
By organizing your data into tabs for historical performance, forecasts, and headcount requirements, Excel lets you quickly adjust assumptions and gain immediate insights into how different variables impact your total sales capacity.
1. Prepare your data
Data accuracy is a critical component that influences your sales capacity modeling process and its outputs.
Before you can calculate how many sales reps you'll need, you must ensure your data is reliable and up-to-date. By sourcing, moving, and managing relevant data, your management team can paint a clearer picture of your team's operational needs and plan accordingly. Now that you've got accurate data, let's move on to the next step.
Data should provide insight into your efficiencies and the amount of revenue you have to generate. Other important data points include sales pipeline metrics and average sales cycle length. These types of key data metrics enable you to better understand the labor requirements to manage this workload.
2. Identify your inputs and assumptions
The second step focuses on essential questions like:
What are your sales quotas?
What are your salary obligations?
What's your average contract value?
How might different geographies factor into how you build your sales capacity model?
What's your monthly churn rate?
How long will it take for new hires to be fully ramped?
What's the sales conversion rate?
Answer these key questions about quotas, salary obligations, contract values, geographical considerations, churn rate, ramp time, and conversion rates to shape a holistic overview of your sales motion.
This step helps ensure accuracy when using your sales capacity model in Excel or, ideally, a more robust modeling tool. Now that you've identified your key inputs, let's move on to the final step.
3. Define the number of sales representatives your company will need
Sales capacity planning is a systematic approach to developing a sales team. It's about identifying the skills needed to sell your product or service, determining how many salespeople are required, and setting goals for each person. To do this correctly, you must have a clear idea of your target revenue, then reverse-engineer the number of BDRs and AEs needed to achieve those company goals.
By creating a financial model, your finance team can calculate top-line revenue based on your sales team's performance.
Using Sales Capacity Modelling to Plan for Success
Using financial modeling functionalities like capacity modeling is essential for modern businesses aiming for better top-line planning.
Start by calculating your sales capacity—if you haven't yet, we have a sales capacity planning template you can use to quickly gauge your capacity. Once that's done, the best way to model is with dedicated modeling software—like Abacum.
Streamline your sales capacity model with a modern modeling solution
Modern FP&A and financial modeling software can accelerate capacity modeling by automating much of the data management process, enabling interdepartmental collaboration, and reducing manual error.
As a result, you can generate more reliable, precise sales capacity models to drive your organization forward. If you're currently using a sales capacity model in Excel, transitioning to a dedicated platform like Abacum can significantly enhance your forecasting capabilities.
Abacum is the strategic finance FP&A solution that empowers finance teams at the world's fastest-growing startups to streamline their sales capacity modeling process.
