Before going into models for sales forecasting, there is key point which must be considered.
Are you producing a sales plan or forecasting revenue that will be closed?
The reason for asking this is that, in my 20 years of experience of working in this area, many companies seem to confuse the two. What they call ‘sales forecast’ is actually an expectation of what the company would like to come in. I’ve always referred to this as ‘top down forecasting’.
In very revenue driven companies the sales figure starts at the top, is divided up and cascaded down. Probably a first line sales manager then has a number which needs hitting. These people then tend to have a tricky job, marrying up what revenue the sales people have in their pipeline with what the company is demanding.
I have never seen a case where the expected number is very low and forecasting is, therefore, genuinely about what is going to close. Moreover, deals are put forward which might not be ready to close and pressure applied to situations needlessly. It can be argued that this ‘sets an expectation’, thereby driving the sales person. I think not. What it actually leads to is unreliable forecasting and bad sales behaviour.
It must be said, and I am sure this is preaching to the converted, that many who are caught in the middle of an ‘aspirational forecast’ simply can’t manage the politics necessary to enforce change.
So how should it be done?
There are some pre-requisites, which are each a subject in their own right (good people, pipeline development, good management, correct incentives, saleable solution) but sales forecasting should be done from the bottom up.
For each deal the following should be put in place and discussed/ reviewed.
- A sales stage progression (i.e. stages of sales cycle from ‘suspect’ to close),
- Qualification check (budget, approval, compelling event).
- Close date
It is then a matter of saying that x% of revenue with all qualifying criteria in the penultimate sales stages will close within the expected close period. Working out the percentage does rely on how confident and well defined the process is and the pre-requisites play a part. However, in my experience, forecasting bottom up is a simple, more accurate and less stressful process.
- A top down sales forecast is a sales plan and aspiration, not a forecast
- Forecast from the ‘bottom up’ (assuming good people etc.)
- Put in place a sales stage description, close date and an opportunity check
- Get buy in throughout the organisation and use this as the basis for forecasting
- On February 8, 2016