Playbook

Pipeline coverage ratio and the cash cliff in a services business

Separate your sustainable ceiling from your best month, and read your pipeline as two questions instead of one reassuring percentage.

The methodThe Ceiling Test

This playbook shows a services business how to read its pipeline coverage ratio as two questions rather than one reassuring percentage, and how to find its sustainable revenue ceiling from twelve months of recognised (recognized) revenue before that ceiling meets the cost base. It is for founders, managing directors and finance leads of consultancies, agencies and managed service providers past their first few million who are growing, feel fine, and have not tested lately whether the growth is still happening. The two questions are will we win it and when will it start, and a coverage percentage answers neither of them on its own.

A services business can be months into a problem before the bank balance shows it. Sales cycles are long, so the pipeline you see today is revenue in two or three quarters; payroll is monthly; and the weighted coverage figure that goes into the board pack blends the two questions into one number. Coverage well above target feels safe. But a probability-weighted pipeline can be more than adequate on paper while every deal in it slips its start date by a quarter, and the revenue arrives after the cash has gone. The other half of the problem is the ceiling. One excellent month is evidence of capability, not of a run rate, and a cost base built on the best month is a cliff with a view.

The Ceiling Test takes twelve months of your own revenue, strips out one-off work, and finds the level the business reached in at least half of them. That is the ceiling: what the machine as built reliably produces, which is not the same as what it once produced. The ceiling is then set against the direct-cost and overhead lines to show the monthly gap, if there is one, and how many months of cash that gap consumes. The forecast is rebuilt from your own history rather than from stage weightings: observed win rates by stage, and observed slippage in start dates, both taken from your own closed deals. Finally the pipeline is read as two separate questions. Will we win it is a sales question, answered by the win rate. When will it start is a cash question, answered by the slippage record. The sales forecast and the cash forecast come out as two documents, and coverage becomes a ratio you can act on, because you know which question it is answering.

There is no benchmark in it for what a good coverage ratio is; the number depends on your win rate and your cycle length, both of which the playbook has you measure rather than assume. It does not cover what to cut when the ceiling sits below the cost base; that is a separate playbook, and the order matters. And it is board arithmetic only. There is nothing in it about managing creditors or raising money, because by the time those are the questions, this playbook's work is already late.

The business that became DevOpsGroup, a services company helping other businesses build and run software, hit this in a year when growth stopped and it took a while for that to be visible. I knew the revenue every month, and the pipeline coverage figures in the board pack were comfortably above what the plan required. Both were true. What the percentage did not say was that the deals behind it were slipping their start dates in step with one another, so that winning and starting were separated by a season, and payroll did not wait for either. When I ran the ceiling arithmetic, the level the business reliably produced sat just below what it cost to run; the best months had persuaded us that it sat above. Seeing that separated the two questions for good. We rebuilt the forecast from our own history, weighted by what had actually happened rather than by what stage a deal was in, and it turned out to be both the more pessimistic forecast and the more accurate one. What followed was the cut order, and that has its own playbook.

The playbook is in development, alongside an interactive ceiling model and a cash cliff worksheet. Joining the waitlist means you hear when it is ready, and tells me who is waiting and what they are looking at. Nothing is for sale yet and there is no date.

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