Sales forecasts by nature are inaccurate otherwise they would not be forecasts anymore. Obviously, as we’ll see later, it’s important to consider what level of inaccuracy is tolerable for the organization and the enterprise as a whole.
Thomas F. Wallace and Robert A. Stahl, in their book Sales Forecasting – A New Approach, consider that focusing on “reasoned and more reasonable forecasts” is a much better objective than just “blindly strive for higher forecast accuracy”. Insisting on reasoned and reasonable forecasts allow to optimize the forecast process and reduce forecast error. Tom Wallace actually tries not to use the terms Accuracy and Sales Forecast in the same sentence.
It’s a given that no one can forecast with 100 percent accuracy. Yet we can say with 100 percent accuracy that a poor forecast will negatively impact a company. Of course, you’ll never completely eliminate the uncertainty in forecasts, but you can reduce it to a manageable level. By collecting proven facts and testing any major assumptions in a forecast before you conduct the forecast, you can greatly reduce the guesswork and increase the accuracy of your forecast.
Problems arise not only when forecasts are too high, but also when they are too low. Believe it or not, I have seen Sales Managers whose desire to avoid hassles with their superiors was so big, that they imposed “forecast optimism” to their sales reps. They did not accept any deviation of the forecast from the business plan. Sales representatives, showing up with forecasts not meeting this requirement, were asked to add fictive opportunities to their forecast and were told “I am sure with a bit of effort you will be able to turn this opportunity into a “real” one”. When the forecast is too low, although the final results could be considered as an “overachievement”, they usually raise skepticism about the sales manager’s ability to control their team. Trends between past forecasts and actual performance need to be established and fed back to the forecaster to correct their optimism or pessimism in future forecasting.
There are of course a number of reasons for slight deviations between projections and actual performance. Perhaps because external factors, such as trends or new legislation, weren’t taken into consideration or new internal tools or methods were recently introduced in the forecasting process, or because a sales rep has left, territories have changed etc…
However, according to many experts, significant discrepancies, such as a deviation of 15 percent or more in a month, or a cumulative deviation of 10 percent in a year, signals a need for much more detailed analysis to determine what has occurred. Just as weather forecasters depend on precise terminology and accurate meteorology on which to base their forecast, so do sales managers.
Forecast meetings often tend to be centered on questions to find out why things have not turned out as forecast. Such meetings tend to be a waste of time.
Don’t get me wrong; I am all for accountability, that is what qualification of leads and opportunities is all about, but the essential questions of any sales forecast should be:
- Where is the customer in the buying process?
- Why do I expect the customer to buy?
- Why would the customer buy our solution, product or service?
- When do I expect the customer to buy what for how much?
Basically, a customer-centric approach, with clear and well defined buying milestones which outcome sales rep are able to identify and explain, can dramatically reduce the level of inaccuracy of a sales forecast.
Obviously, as we’ll see later it’s also important to understand what the pipeline will produce based on “history”, but an improved sales forecast definitely relies on a precise control of the pipeline and how accurately graded the opportunities are.
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.
A possible sequence of customer buying milestones could be:
1. Customer has assigned a contact person who will help us to better understand the customers problem,
2. Customer has secured the necessary funds for a solution to the problem we try help to solve or we are directly connected to the person who has the authority and is willing to make funds available,
3. Customer has expressed that we have presented a viable approach to solve his/her problem.
4. Customer agrees that the value we provide outweighs the total cost of our solution,
5. Customer has declared that our Terms and Conditions are acceptable.
6. Customer has signed contract.
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:
- “When will you satisfy all your decision criteria and be able to make the decision?”
- “At this point in time, what do you see as my company’s chances of winning?”
- “Are there any new factors that would delay your decision?”
- “Have there been any recent personnel changes or reorganizations that will impact your decision?”
- “How do you view my company as compared with our competition?”
- “Is the current economic environment causing changes in your plans to buy?”
You probably agree with me that there are always opportunities that do not make it to next stage in the funnel. Therefore, those milestones also show the points where the funnel leaks. This approach usually helps sales managers to hold more meaningful discussions with sales people. They start asking questions such as: “What is the most critical factor for the opportunity to reach the next mile stone, and how can I help?” Instead of arguing why the deal has not been closed as forecasted. A Sales Funnel segmented by customer milestones turns out to be a good help for coaching sales people.
Now, after we’ve made sure that the pipeline is precisely controlled and the opportunities accurately graded, we can start thinking about what the pipeline will produce based on “history”.
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? or “What are the historical chances of an opportunity ultimately closing at each step of the process?”
Tracking the experience of a particular sales process over time will give the answer. 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 E close?” At D?, etc.
Now you have all you need to construct a “reasoned and more reasonable forecasts” based sales forecast.
PS: In their book Sales Forecasting Management –A Demand Management Approach, John T. Mentzer and Mark A. Moon give us an indication on how much time sales people in B2B sales organizations spend on forecasting. The average was 3 hours per month. If you are in this range you might not be so concerned about the efforts that go into forecasting.