The answer to any commercial problem is always cash. It doesn’t matter what the question is. Cash is king, and the more cash a company can generate, quickly, the more successful they will ultimately be.

Sales velocity is a measurement of how fast a company is making money. It measures and describes both how quickly leads are moving through a company’s pipeline and how much value new customers provide over a given period.

A company’s sales velocity plays a huge role in its ability to thrive and grow. The less time it takes for a company to convert leads, the faster it can generate cash. This is particularly important for companies with limited capital reserves i.e. pre-profit start-ups.

To calculate sales velocity, we need four things.

1. The number of leads a company has generated over a period of time (Opportunities)
2. The average deal size of converted sales (average deal size)
3. The lead conversion rate (conversation rate)
4. The average length (time) of the sales cycle. (length of sales cycle)

Sales velocity is then calculated using the formula:

SV = (opportunities * average deal size * conversion rate) / length of sale cycle.

This formula also provides a company with a map of how to improve its sales velocity over time.

In short, a company can either increase the number of sales opportunities they have, improve their average deal value, improve conversion rates, or reduce the sales cycle. All will individually increase the sales velocity figure, as will any combination of the above when proportions are correctly managed.

Let’s explore that a little further and understand what would happen to sales velocity if a company decided to offer their product at a discount. In theory, a discounted product would reduce the length of sale and thus increase sales velocity. It’s practice, it’s never that simple.

The impact a change like discounting has on the sales velocity will depend on the proportion change to all other factors. Ie, by offering a discount, the company will also reduce its average deal size, which could negate the impact reduced length of sale.

As such, any efforts to improve sale velocity need to be measured and monitored closely by the company because it’s the proportional differences between the factors of the equation that will determine the effect any initiatives have on improving sales velocity.

Another point to consider when discussing sales velocity is how it’s changing over time. It is important for a company to understand both their sales velocity and acceleration as both have an impact on cash flow. In particular, a company may have what appear to be a good sales velocity, but if this velocity is decelerating, or getting smaller over time, this would need to be addressed.

And, this starts to elude to what needs to be considered when introducing any new commercial metric into the fold. Sales velocity shouldn’t be used in isolation of other growth metrics. It needs other measurements and metrics to provide a full picture of what’s going on. A company needs to account for its sales velocity, acceleration, burn rate, margins, and cashflow to get a complete picture of how it is growing.

In conclusion, how quickly a company can generate cash is so critical to its success. A measure of how quickly a company is generating cash is thus really important. Sales velocity is this measure and it is an important metric for scaling companies.

Embedding this metric into the framework of your sales and marketing efforts could just be the missing key to support your companies scaling efforts assuming it is viewed and managed within the context of a company’s other sales and growth metrics.