Hey finance professionals! Have you ever wondered how the folks in Sales and Marketing arrive at their forecasts for Revenue, and hoped they use more than just ‘gut feel’? Have you begun to adjust for consistently high or low forecasters, and maybe even been told, “If you haven’t carried a target you won’t understand”?

And Sales managers, have you ever felt inclined to submit pessimistic forecasts so Finance set more practical (lower) targets, or provide inflated forecasts to justify resources? How much time do you spend answering the same questions to multiple non-sales people in Head Office?

What is the aim of forecasting?

All organisations need to predict and manage cashflow. Most need to procure materials and roster resources to meet predicted demand.

The salesforce needs to demonstrate confidence in reaching existing targets to justify pre-sales resources and underpin future targets. It also needs to identify coaching opportunities and develop and optimise the salesforce, while Salespeople themselves need to continually fine-tune their activities to maximise their confidence of achieving targets.

In some industries, sales forecasting involves mostly extrapolating current volumes and prices (‘run rates’) with adjustments for contemporary conditions. Mining and agriculture rely on changes to customer volumes and competitor supply, with prices heavily influenced by demand versus supply. In Retail, FMCG might adjust run rates for changes in broad economic conditions and local consumer sentiment, but fashion retailers also need to estimate the change in the run rate with new season ‘indent’ sales and take guidance from industry opinion leaders.

Business-to-business sales can be somewhat “lumpy”, and sometimes just once-only events. Theoretically each one or two could be forecast on a Yes/No basis, but where more than a couple of sales opportunities are being considered, a more granular and evidentiary process is required.

It should be in everyone’s interest to have timely, accurate, and transparent forecasts, thus saving valuable time for all.

What are the key contentious elements of forecasting?

Both Finance and Sales too often simply revert to stereotypes …. Finance refuse to believe Sales’ inputs (too high OR too low), and Sales do sometimes overstate their chances due to natural optimism or keep some opportunities “in the bottom drawer” for the next sales period.

If Finance believe Sales are understating the probable outcome, they will adjust it upwards as well as set higher targets next time. They will do the opposite if they believe Sales are overly optimistic with their demand for resources to assist the sales effort, and so it goes round and round.

Salespeople are naturally optimistic, but do all Pipeline entries REALLY deserve to be in the Pipeline? Sometimes it’s just too early in that particular sales cycle. Few salespeople really enjoy cold calling so many are inclined to spend time preparing Proposals not required by the Prospect.

Fewer but better qualified Prospects in the Pipeline will lead to higher sales conversions and wins, so less is more, or quality outweighs quantity … unless you’re trying to look busier that you are.

… And the best way forward?

The only way forward is to have an agreed set of forecasting percentages aligned with the agreed sales cycle, and with any entry in the forecast backed by evidence rather than “gut feel”.

The process relies on the mathematics of marrying the dollar value of each deal with the current estimated odds of winning, thus yielding a ‘weighted estimate’. It relies on the sales rep being sufficiently close to the customer to know their current situation, future priorities, and internal decision-making processes. It keeps the weighted outlook low until those things are known so as not to distort the total forecast, and avoids being blindsided when customers decide to simply “do nothing” for several months.

A typical system might be:

Working backwards from the desired outcome clearly spells out the required steps, in sequence, and clearly some steps may need to be repeated as new information comes to light.

Submitting a Proposal without the Prospect specifically asking for it should attract no higher than 50% odds.

Questions should be asked as early as possible to ensure we cover all the bases, including:

• What is the prospect’s timeline and degree of urgency?
• Do they have a ‘compelling reason’ for making a purchase? Sooner than later?
• What is their budgetary situation?
• What is their decision-making process?
• What are the competing internal priorities?
• Who are we competing against externally?
• How do they value our own solution and our capabilities? How do we compare?

Other regular, ongoing questions of the salesperson should include:

• Where is this opportunity (really) up to?
• Can we (still) win it? What evidence do you have to justify your assessment?
• What else do you plan to do to improve our position?
• What help do you need from our organisation, including from your Manager?

Outcomes and benefits

A standard, evidence-based process based on agreed stages of your sales cycle will save a lot of time arguing once the subjectivity has been considerably reduced.

Salespeople and their management will know sooner rather than later when they need to spend less time on any given opportunity and spend that time generating several other better-quality opportunities. Management can allocate resources to the right opportunities at the right time and reduce waste in the pre-sales process.

Everyone wins over the medium term!

Follow intrepid new sales manager, Mick, as he works through a sales forecasting process in an effort to provide a more detailed forecast report for his boss

Download the Sales Forecasting chapter from Greg Lee’s book ‘So Now You’re A Sales Manager?’

You many also like our: Pipeline Forecasting Weighting Percentages Tool