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Forecasting sales is never easy. There
as many reasons why forecasts are missed as there are customers—the
economy, misunderstood sales pipeline, customer budget cuts,
competition, market shifts, product inadequacies, supply shortages,
etc. Anyone who ever carried a quota can create an explanation of
how things did not turn out according to how they were “supposed
to”. Overachieving the forecast is almost as undesirable as
underachieving. Wall Street frowns on management teams that are not
in full control of the business, as demonstrated by missing a
forecast by significant amounts—positive or negative. Forecasts
drive manufacturing line production, which in turn drive inventory,
supply, costs, and ultimately revenues. Most supply problems result
from poor forecasting. The accuracy of sales forecasting needs new
A. Revenue forecasting. This is a projection of what revenue the balance sheet will contain at some point in the future. Revenue consists of sales revenue, annuity revenue, investment revenue, etc. It is an estimate of revenue flow, which may be different from sales revenue. Usually, financial departments within a company generate this forecast using input from other departments, history and judgment.
B. Sales revenue forecasting. Sales revenue is an estimate of the value of the opportunities when they are closed. For example, a customer may sign a contract on June 25 for $50,000, which would be sales revenue. However the actual money paid by the customer may not flow until the hardware is delivered, the customer invoiced, and the check arrives. There may be significant time differences between the Sales revenue and the actual revenue.
Sales Performance International has been working with sales people and sales managers in the area of sales performance improvement for 15 years. We find that the key to improvement lies as much with sales management as with the sales people. Part of sales performance is sales forecasting and improving sales forecasting accuracy is one of the most appealing results of sales performance improvement—appealing to the top management of the company—and to Wall Street. We have seen the accuracy of sales forecasts improve in our clients to percentages better than 95%. What has enabled this improvement in forecast accuracy?
1. Basing the sales forecasts on the existing sales pipeline
There is no better information upon which to base a sales forecast than the set of opportunities being worked on at the moment, i. e., the sales pipeline. No measure of hope or optimism can make up for a thin pipeline. True, your existing pipeline may not cover all the revenue in your forecast if your sell cycle is shorter than the period you are forecasting, but be careful when you “assume” you future pipeline will be significantly better than your current one. Unless you have specific plans in place to build a larger pipeline, don’t assume one. If you want an accurate larger forecast, start by building a larger pipeline.
2. Rigorous use of a sales process: the critical ingredient for accurate forecasts
A sales forecast is a prediction of what sales revenue will happen and when. Some forecasts are account-by-account, when the judgments are made on whether each account is either in or not in the forecast. Other forecasts are high-level revenue estimates based on history, market share, seasonality, or even the personal commitment of a sales person.
Sales people are known for their optimism and their belief in themselves. How many sales people publicly admit there is the slightest possibility they could lose a deal? How many believe they can ‘pull it out’ even though the signs at the moment are not positive? These attitudes are one of the reasons they are in sales—why they were hired. Their opinions—or hope—clouds the facts of the situation. Inaccuracy creeps in, on the upside. Manufacturing inventories are over-planned and revenues fall short of plan.
An accurate forecast in the weather business is based on:
An accurate sales forecast relies on the same three factors:
1. at which step is the opportunity is in the sales process (status)
Over time, the accuracy of forecasts
improve as the sales organization gains experience, becomes more and
more rigorous in using the sales process, measures the third
criterion over time, and applies it to the forecasting activity.
First, the forecasting method must be fine tuned to reflect the makeup of the sales pipeline. Opportunities can be grouped into two groups. Most of our clients have pipelines that contain several “key” opportunities—large dollar value opportunities that will make or break the chances of meeting quota. Then there are all the other opportunities in the same pipeline. In these situations when we can group opportunities into these two groups, there are actually two methods to forecast, one for each group. The first method is focused on the key opportunities and is based on a detailed analysis of each one. Process-based criteria must be set to determine whether each key opportunity is “in” or “not in” the forecast. This part of the forecast is a list of the key opportunities that are expected to close within the period covered by the forecast and the revenue from each.
The second method of forecasting covers the non-key opportunities. We call these opportunities the “bulk” opportunities because they usually represent the majority of opportunities in the pipeline, smaller ones. But they may not represent the majority of the sales revenue. This forecast method examines the pipeline with the key opportunities removed to size the bulk forecast. The total forecast is then the sum of the two parts: the key opportunity forecast plus the bulk opportunity forecast.
Some sales organizations may have only key opportunities. Their pipeline has only a few large opportunities. Since there are such a small number, every one is a key opportunity can be individually forecasted by name.
Other sales organizations have a large number of small opportunities, too many to look at each one individually. The method for forecasting these would be based on the historical chances of closing, giving a forecast based on both the historical data and the progress through the process of all the opportunities in the pipeline. I’ll describe this method in more detail later.
Most of our clients have a mix of key and non-key opportunities. They use both key and bulk forecasting methods and add the two forecasts to provide the total sales forecast. Even when all the opportunities are small, some of them may be individually analyzed to the point where they can be treated as key opportunities.
4. Perform forecast post-mortems
All business processes must continually
look at what worked and what did not in order to improve their
effectiveness. Forecasting is especially subject to this inspection,
of forecasts that were not met, and of those that were—of forecasts
that were over-achieved, and of those over-achieved. Wall Street
looks on a company that continually over-achieves its forecast as
skeptically as one that under-achieves. A bellwether of well-managed
companies is the consistent accuracy of forecasts. The forecasting process should be
continually examined to improve it.
1. Compare the actual sales revenue achieved against the sales forecast.
Sales forecasting is, after all, a prediction of what customers will do. Why not involve customers in the forecasting process, especially existing customers? If there is a strong relationship with your customers and you are bringing real value to the relationship, don’t hesitate to have a discussion about the future. You might not be comfortable asking the direct question, “How much do you expect to spend?” But there are some non-committing questions that will help you increase the confidence level of your forecast:
The focus of these questions is to validate the assumptions behind your forecast and determine whether any new factors are coming into play that you do not know.
5. Precisely define the pipeline and accurately grade the opportunities
A pipeline is a collection of opportunities being worked on. It is two-dimensional—the dollar amount of opportunities vs. how far along the opportunities are on the way to closing.
As opportunities are identified and enter the pipeline they are Milestone ‘A’ opportunities. As the sell cycle progresses, the opportunities move through the milestones—A to B, B to C, C to D, etc. The dollar amount represents the expected amount of revenue for opportunities that are currently at the particular milestone.
In order to draw any conclusions about what the pipeline will produce based on history, there must first be a precise qualitative and quantitative definition of what each milestone means. If the definitions are based on opinions, the result will be imprecise. If they are based on facts, they will be precise because a certain set of facts (the environment) produces consistent results. The easiest way to set these definitions is to use a well-defined sales process, in which the milestones are defined by the facts of what has been accomplished in the sales process and opportunities are religiously graded accordingly. The definitions are unambiguous and consistent from seller to seller, and from opportunity to opportunity. Just as weather forecasters depend on precise terminology and accurate meteorology on which to base their forecast, so do sales managers.
6. Forecast sales volumes based on history
A sales revenue forecast has two elements: 1. sales revenue volume and 2. sales revenue timing. For sales revenue volume forecasting, ‘history’ means “What has been the percent of opportunities that actually closed once they have made it to a particular milestone?” Think of this as the win odds. Tracking the experience of a particular sales process over time will give the answer. Many sales processes have a ‘starter’ percentage that is useful until more experience has been gained. This is a simple parameter to measure if the sales organization has good Sales Force Automation (SFA). When a well managed sales process has been implemented, these percentages can be derived with several months’ experience.
7. Forecast sales timing based on history
When the revenue will happen, i.e., when the opportunity will close, is again based on history. Specifically, “When will the ‘typical’ opportunity at milestone A close?” At B?, etc.
ConclusionSales forecasting will always contain elements of factual basis and judgement. We will never eliminate the judgement required. That is the reason we do not have a system or programming that can create a credible sales forecast. The balance between these two factors is the key to improving accuracy. The more the forecast is based on facts, the more accurate is it likely to be. The facts are drawn from:
Bob McGarrah is a Senior Sales Mangement Consultant with SPI-Sales Performance International Inc. ( www.spisales.com ) where he specializes in the development of courseware and intellectual property, sales management process design and implementation. Bob can be reached at 704.364.9298
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