Sales forecasts are important to a business for many reasons — chief among them is foretelling cash flow to allow efficient money management.
While forecasts are understood as a tool to manage sales staff, they’re often misunderstood by sales teams relative their importance in managing a company: inventory, staffing, facilities, and infrastructure are all driven by a sales forecast. Public companies use sales forecasts to set expectations with investors and analysts.
Businesses take sales forecasting lightly at their own peril.
An important lesson I learned early in my sales career is under-forecasting is as bad as over-forecasting, both indicate you don’t completely understand or control your sales pipeline, which means your forecast isn’t reliable or trusted to manage a business.
How many companies forecast sales activity
Many companies use a forecasting method based on arbitrary percentages of confidence, both by the reporting salesperson and revenue manager. An example is a salesperson forecasting an opportunity with a percentage of their confidence it will close on a given date and a revenue manager multiplying the total value of a sales forecast by a percentage of their confidence opportunities will close, often reasoned by historical accuracy and gut feeling.
Most CRMs support this forecasting method, allowing a salesperson to assign a percentage of confidence (60%, 70%, etc.) and automatically calculate the expected value of a forecast based on averages.
The obvious fault with this forecasting method is it’s one guess being made upon another.
How you should manage a sales forecast
The best way to manage a forecast and associated sales activity is to have a forecasting methodology that focuses on the salesperson’s percentage of confidence, changing it from an estimated guess to a reasoned expectation. The difference isn’t semantics.
Reasoned expectations remove most, if not all, of the guesswork associated with sales forecasting. It makes you address each step of the sales cycle and consider the buyer’s behavior. Forecast creep (opportunities that move from one close date to another, month after month) greatly become a thing of the past.
The way to accomplish this is to track specific forecast data:
- The next step in the purchase decision
- The next step in the sales cycle
- The timeline for the next step in the purchase and sale
- Depth in understanding the driving mechanism (the thing that’s driving the client to purchase within a given time-frame)
- Forecast creep (recording when and why an opportunity moves from one forecast close date to another)
Tracking forecast creep is especially helpful correcting sales staff from padding the forecast with bogus sales activity and making them more thoughtful identifying a close date.
The idea is to take the guesswork out of forecasting and replace it with thoughtful reporting of what the buyer and seller need to do next, what’s motivating the buyer to act, and the associated time-frames of each buyer and seller activity. While these things are the basis of good sales skills, tracking these items within a forecast keep them first-in-mind and help your sales staff focus.
A side benefit of more accurate forecasting is an increase in your close ratio. As sales staff focus more on the sales process, they’re better able to serve the buyer and keep the sales cycle moving forward.
Tweak your forecast tool to improve accuracy and how to gain buy-in
To focus on your forecast as I suggest above, you need to tweak the way you report sales activity. Good news is this is easy for most CRM solutions. Custom fields can be added to track most items and while narratives are sometimes required, many items can be satisfied with simple pull-down choices.
As with all forecasting methods, buy-in from sales staff is directly proportional to the level of management support. Sales staff will take any forecasting method serious as long as their management values it.
The bottom line
The bottom line is focusing sales activity reporting and forecasting on sales and purchase activities removes guesswork, resulting in a more accurate sales forecast. And accurate sales forecasts enable timely and reliable business decisions, often reducing the cost of business and increasing profitability.
Obviously, this post isn’t exhaustive on the subject, but it points you in the right direction. Let me know if you’d like to talk about your company’s sales forecast practices and explore how your forecast may be able to be more accurate than it is today.