When I was asked “What is your Sales Cycle” shortly after I started my business, I thought they were referring to a pipeline as a cycle. After a while and asking what the question meant, it was more about the types of strong and weak cycles we experience.
A sales cycle can often relate to seasons, school calendars, holidays, or other recurring events related to the calendar. Others can relate to things like elections, sporting events, and all kinds of other things.
Who cares about a Sales Cycle?
If a particular cycle happens, and it is somewhat reliable, then what is the point? It’s nice to know, and maybe you can base that off when you might go on vacation, but otherwise what value is there?
A sales cycle is important for a number of reasons. Reasons besides vacations and planning bonuses. The sales cycle can help guide you to increase your marketing spend. If you know that sales typically improve in late summer as people start thinking back to school, you can start marketing to them and that niche. Same with the winter holidays and gift giving season. End of year tax spending is pretty common and might be a cycle you have to market sales on hardware.
Alternatively, if you know that you’re going into a down time, you can adjust some of your advertising spend. You might have a down cycle coordinate with a holiday you might try and drum up more business with a targeted campaign. You might also simply reduce spending during this period. Since the results will be poor anyway, marketing funds might better be spent to increase sales in good times.
What was my Sales Cycle?
After figuring out what the question meant, and understanding the value of knowing, I started looking. I began to review our sales metrics to try and find which holiday, season, or events most contribute to our success. We’d been in business for about 5 years at that point and there was enough data to chart it out and see trends. The volatility of a startup phase was pretty much over and our numbers had some consistency. What I saw didn’t make much sense. I could pick nearly any month of the year and compare it against any other year and they couldn’t be more random.
My mistake was trying to fit our cycle into what I thought were common brackets of time around holidays, seasons, and events.
An Expert Appears
It was then that I attended a business club gathering with many speakers on different aspects of business. There were experts on hiring, marketing, business management and many other topics. The one that caught my eye was one given by an economist on business finance and accounting.
Economists are pretty dry in general, but he made the whole presentation really engaging. I attended this class probably 5 years ago and there’s parts of it that still stick with me (except his name unfortunately). The best part that stuck and I feverishly written down in notes was the keys to building a spreadsheet which could give you what your sales cycle was for your business.
What he gave me in that talk helped me understand much more clearly my sales cycle and it has been a huge help to our business growth.
I’ll give you the details on how to do this, but there’s some concepts to understand about how this all plays out. So as he did, I’ll start with the high-level view.
How it Works
What we’re going to do is jot down your business revenue each month in a column for as much time as possible. This is going to work best if you have been in business at least 3 years. If not, we can always have it built and ready to go. If we can monthly revenue starting day 1, all the better. I wasn’t using tools early on to record the monthly details, but I guesstimated the first year or so.
From this data, we generate two percentages which then get plotted to a chart. We take the year’s sales increases as a percentage, based on 3-month totals, and then another one based on 12-month totals. The 12-month chart line becomes the representation of your annual sales. The 3-month chart line is the more volatile and will give you sales cycles of ups and downs based on where it crosses that 12-month line.
Where the 3-month chart line crosses up over the 12-month chart line, you can see the beginning of a sales cycle. When it crosses below, it is the end of a sales cycle. By measuring the months between the points, a pattern may emerge. This would strongly indicate a regular sales cycle for your business.
Here’s a copy of a starter spreadsheet you can use to get started. You can also build your own by following the instructions below.
Start a sheet with the following columns:
- Month – the month of the data. You might want to include the year to make the chart easier to read. Use “June 2019” for example.
- Income after COGS – We chose gross profit because hardware sales could throw off our numbers a lot in general. We didn’t sell hardware regularly, so it created some outliers which made our cycle hard to read. If you sell hardware regularly, then it will probably be better to go off your monthly total income.
- 3MMT – Three Month Total: This cell sums the last 3 months of data. If this is March, this cell totals January, February and March. April then would total February, March, and April, and so on.
- 3/12 – This cell calculates the percentage of sales increase or loss from the same time the year before, based on the 3-month total field.
- 12MMT – 12 Month Total: This cell sums the last 12 months of data. If this is January, it sums the January Income after COGS cell and all the cells above it until February the previous year for a total of 12 cells added together.
- 12/12 – This cell calculates the percentage of sales increase or loss from the same month the year before, based on the 12-month total field.
Once your data is all in, you can then plot the 3/12 column and the 12/12 columns on a chart to see where the 3/12 crosses the 12/12.
If the 3/12 line crosses up across the 12/12, that is the beginning of a sales cycle. Where it crosses down across the 12/12, it is the end of a sales cycle.
By measuring the months between the points at which the lines cross, you might begin to see a pattern. The number of months could indicate a regularly occurring sales cycle for your business.
There’s always going to be some volatility in your numbers. Your sales cycle might vary by 5-10% on any given period. Try to identify an average. In my case I saw anywhere from 3-5 months in a cycle, never hitting 2 or 6. So I called it about a 4-month cycle.
Significant outside influences can throw off the numbers for a while. During the pandemic, our sales cycles swung between 2 and 6 months.
If you sell hardware regularly make sure you use “Total Income” or “Total Sales” instead of the “Income after COGS” I used.
When you collect your data from your accounting reports, make sure you are using the accrual method rather than cash. Unless your clients pay immediately every month, your numbers might be skewed. By using accrual, you are using the actual sales, not what you have been paid on.
Thanks for checking out this article on Sales Cycles today. I hope it helps you develop your own sales cycle and can start making better plans for your business! If you need some help, please let me know and I can give you some tips on how to use this tool. We might also adjust it to your specific business needs.