Pipeline In Finance: What Is It, Working, Importance, And More

Pipeline in Finance

A pipeline in finance is a series of discrete stages that describe progress toward a long-term goal. However, the definition of the term changes with different organizations, as they have their own variations on the term. Based on the company, it can be a sales pipeline, R&D pipeline, acquisition pipeline, etc. The term also applies to those companies that faced restructuring so as to avoid double taxation.

In this article, you will learn about pipelines in finance and how it works for businesses. Here, you will also learn about how different types of businesses deal with their own pipelines. Apart from that, we will also discuss the meaning of the sales pipeline and the various stages of the sales pipeline in business. Hence, to learn more about pipelines, read on through to the end of the article.

What Is Pipeline in Finance?

Investopedia states –

“In finance, the term pipeline is used to describe progress toward a long-term goal that involves a series of discrete stages. For example, private equity (PE) firms will use the term “acquisition pipeline” to refer to a series of companies they have flagged as potential acquisition targets. This pipeline would include several stages, such as industry research, lead generation, negotiations, due diligence, and closing.”

The pipeline works as per the pipeline theory. The theory works with the idea that any investment firm or a company that passes all its returns to its clients must not pay taxes like regular companies. This theory is also known as conduit theory, and these types of companies are called conduits.

For example, if a particular investment firm passes its income directly to its investors, then the investors pay taxes like individuals. Hence, if the government (or IRS) taxes the company again, then it would be taxing the same income twice. The pipeline theory states that those companies must not be considered for taxation.

However, in other cases, regular companies face double taxation. They pay taxes in the case on the company’s income and also the income on distributions they pay to shareholders. Hence, this issue comes under considerable debate from time to time.

Pipeline in Finance: How Does It Work?

As already discussed, in most cases, the company’s pipeline in finance works as per the pipeline theory.

According to Investopedia,

“The pipeline theory sustains the idea that an investment firm that passes all returns on to clients should not be taxed like regular companies. Capital gains, interest, and dividends as returns are key concepts to understand the pipeline theory. The pipeline theory is also referred to as the conduit theory.”

Companies that seek tax advantages as per the pipeline theory are also called pipeline companies. If the company passes all its returns to its shareholders, they must not come under taxation like regular companies.

If a company adheres to this standard, they get an exemption from corporate income taxes. The premise they use is that they are effectively an investment pipeline. This is because the company passes its income directly to its investors.

In other cases, experts use the pipeline as a metaphor for describing the progress of a company toward achieving its long-term goal. Hence, it describes the ongoing process of the company.

Consider the acquisition pipeline of a private equity firm. In this case, the pipeline might not end because it is always facing new deals once the old ones face completion.

What Is A Sales Pipeline? (A Popular Pipeline In Finance)

According to HubSpot.com,

“A sales pipeline is a representation of how a prospect moves through every stage of your sales process. A prospect moves through your sales pipeline by completing specific actions which are depicted visually in your CRM.”

For every company, there sales processes are different. The processes also change with differences in products. Hence, every company needs a unique sales pipeline that reflects the buyer’s journey in the best way possible.

The company makes each prospect move through the sales pipeline at different rates. They do it by considering the level of urgency, interest, and the amount of research behind a product or service. In some cases, certain prospects even skip stages in the pipeline. In cases like these, you will need to skip stages to deal with the prospect as well.

Hence, with the help of a proper sales pipeline, you will also be able to determine what stage of the sales process your prospects are at. Furthermore, you will also be able to find out the number of sales you will be able to close within a given timeframe. Here, the sales pipeline allows representatives and managers to forecast revenue better.

What Are The Stages Of Sales Pipeline?

The following are the major stages of a sales pipeline:

1. Prospecting: With this process, the business lets potential customers discover the company and its products and services. The business uses ads, promotional activities, and public relations.

2. Lead Qualification: The company offers resources and information to the lead to move them downstream. If the prospect wants to learn more, the company offers more lead magnets.

3. Demonstration or Meeting: Later, the sales reps schedule a demo or meeting with the prospect of the product or the service. Here, the business evaluates whether there is a strong case for the business to close the sale or not.

4. Proposal: Here, the company makes its case about how it can address the needs and demands of the customers.

5. Commitment and Negotiation: Here, the company discusses the expanding or shrinking scope of work. In this case, the company adjusts prices to manage expectations. The goal is to come to an agreement at last.

6. Closing the Sale: Here, the salesperson closes the sale and makes way for order fulfillment.

7. Post-Purchase Interaction: This includes offering exceptional service even after the sale, like customer service or asking the customer for feedback and other services.

Wrapping Up

Hope this article was helpful for you in getting a better idea of how a pipeline in finance works. You can see that the term has different meanings in different cases, based on the situation of the business. Do you have more information to offer? Consider sharing them with us in the comments section below.

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