More Accurate Sales Forecasts
You know the drill. Every month you have to predict how much your company is going to sell. If you sell less than the plan, you are under pressure. If you sell more, you are a hero. If you sell too much more, you are a holding back. It seems like you can't win!
There is a better way to answer the question: What is the number?
Forecasting is the king of stress creation among members of senior teams. From the Sales Leader to the CEO, the act of coming up with an accurate, yet not too low/not too high, forecast is often a lethal mix of art, science, and wishful thinking. It is also the one area where weaknesses in your sales plan and performance management come home to roost with a vengeance. Sales studies consistently find that accurate sales forecasting is a tremendous challenge. Several surveys show that the majority of sales organizations miss their forecast over 75% of the time; furthermore, one study showed that close to half of deals that are forecast never close! We will discuss several practices here and demonstrate some analytic techniques that can help you improve forecast accuracy and maintain it in the face of circumstances that change beyond your control.
There is often pressure to raise a revenue forecast when it is below the revenue plan. We believe that it is more important for a forecast to be accurate even if it is below the sales plan than to inject wishful thinking into an already difficult process. Revenue production that is below plan represents a different (yet related) set of challenges than an inaccurate sales forecast. Both should be diagnosed and dealt with separately.
- Practice quality pipeline measurement
- Maintain a “committed” forecast from all levels of the organization
- Ensure senior involvement in deals above a certain threshold
Practice quality pipeline measurement.
What determines how a transaction advances from one step in the sales pipeline to the next?
Each step in your company’s sales cycle should be validated by objective criteria based on actions taken by prospects/customers, not by a salesperson’s subjective judgment. In other words, specific actions taken by customers qualify as sales progress - not wishful thinking. This is the best way to know that your pipeline information is credible and that measures of sales progress are uniform across the entire company. Examine each step in your company’s sales cycle and identify the specific actions customers can take to advance to the next step (keep it to no more than 3 criteria per step). Examples include a prospect/customer granting access to power, scheduling a demonstration, providing test data, negotiating a proposal.
Maintain a Committed Forecast
At some point during the sales cycle, a transaction reaches a level of certainty where a salesperson can commit to the transaction occurring at a specific time and for a specific amount. This knowledge is based on the salesperson being in alignment with the prospect’s buying process and receiving some kind of commitment from the prospect. The company’s forecasted revenue should contain only “committed” items and the culture of accountability for commitments should be infused throughout the entire organization. If no one in your organization owns the delivery of that transaction, then it should not show up on your forecast. Lastly, require that all forecast commitments are updated in your company’s forecasting system frequently during the last five days of the sales period.
Ensure Senior Involvement
For all deals above a certain threshold in size and importance, someone senior in the sales organization should have “hands-on” involvement in the transaction. The seniority of this involvement will vary greatly with the structure, size, and maturity of the sales organization and the company. There is no substitute for teamwork and quality sales supervision when it comes to judging the closure of a sale and helping to deliver it. We see many companies in our practice where this occurs in an ad-hoc fashion. When the company has a high concentration of large deals that dominate the forecast, this practice becomes crucial.
Forecast Adjustment based on Historical Accuracy (Handicapping)
How solid is your company’s revenue forecast? Adjust the committed forecast based on the historical accuracy of the salespeople and sales managers who provide it. This requires the ability to track and calculate the track-record sales people and sales managers develop over time as they commit to forecasted revenue and it happens or not. You want to track both changes in the timing of opportunities that slip off the forecast in addition to changes in the forecasted sales amount. Because there are factors beyond your sales team’s control, there will often be some forecast variability. The goal is to adjust the final forecast by balancing the optimistic or cautious tendency of the sales person or sales manager producing the forecast and produce a more uniform corporate-wide result.
Let’s look at forecasting accuracy by sales regions:
Historical Forecasting Accuracy By Sales Region
The above screen shot shows a sample of forecasting history by sales region. The tracking tallies deals that miss their committed timeframe and deals where the revenue amount changes, or both. Both types of change are important and will be used to handicap the final forecast differently. Additionally, forecasting patterns by region are an excellent way to understand coaching needs for sales managers.
Now, lets examine accuracy by individuals:
Historical Forecasting Accuracy By Sales Rep
By drilling down to the next level of detail, we see forecasting accuracy by Sales Rep within region and some other useful statistics. The column “Opps Won Within” tracks deals that did close in the committed timeframe while “Opps Won Missed” tracks deals that closed outside the committed timeframe. This may seem like a lot of information to keep track of; however, it can be very helpful in creating a risk-adjusted forecast that is accurate. Why? Sales people and their innate bias (along with their skill at closing sales) are a primary driver of forecast accuracy. You can also keep track of accuracy by deal size, customer type, and specific customer - note the tabs in the top bar of this screen shot (Our SalesOps system does this). As the size of your sales team grows, this kind of insight becomes very important.
Other actions to look for include: Has the same deal slipped several times? How large was the change in the sales amount? How late in the forecasting period did the deal change or fall off the forecast completely? We have seen many cases of companies who have a significant percentage of their committed revenue forecast evaporate in the last couple of days in a sales period. This is a clear sign that forecasting techniques and pipeline management procedures need to modified.
Let’s look at an example of an adjustment to the forecast:
Handicapping Adjustments of Forecast Compared to Revenue Plan
This screen shot illustrates a simple forecast adjustment and compares the resulting predicted amount to the sales person’s revenue plan for the period. It then shows the variance to plan. By keeping all potential adjustments in a calculation matrix, the senior team can quickly assess the total impact of any number of risk-based adjustments automatically.
Comparison to pipeline yield
Another test to determine the reasonableness of your forecast is to compare it to your sales pipeline and your company’s demonstrated ability to close sales from it. The performance management techniques expected revenue production calculation and planned pipeline activity discussed elsewhere give you direct information to make this judgment. As the CEO/CFO/Sales Leader, you want to know if the forecast commitments your team provide represent a higher level of difficulty than what they have tackled in the past. For Example, your team gives you a committed forecast of $12m and your team historically closes 75% of the transactions that are pending. If you don’t have at least $16m at the pending stage of your sales pipeline you should dig deeper.