Why build a sales forecast? | Metric Monday

We hear from so many of our customers that they want an easier way to build their sales forecast. They are interested in more data from their salesforce reports because they want a more accurate forecast.

But before you start working on improving your sales forecast accuracy, it is important to set out why you are delivering it in the first place. Knowing “why” will help you to determine how you can improve your forecast so that it is more useful to your organization. At the most basic level, a forecast is a prediction of the future. You are setting expectations inside your organization with regards to your team’s performance. Understanding how this prediction of the future is going to be used, will help you focus on the best way to improve your forecast.

(For more detailed information about sales forecasting, check out our FREE eBook: The Definitive Guide to Data-Driven Sales Forecasting.)


1. Provide a leading indicator on your strategy

Very often, the consumer of a sales forecast will be your CEO, VP of Sales or your company’s board of directors. This group concerns itself with the high-level decisions it is making for your business. They might be targeting particular segments, kicking off new expansion initiatives or spearheading a project to reinvigorate a lagging element of your business.

They have made decisions on company strategy and want the earliest prediction on the effectiveness of these decisions. The sales forecast is one such leading indicator that your CEO and board can use.

In these cases, you want to make sure your forecast is “aware” of your corporate strategy and divides itself up to help determine the forecast for whatever project is the strategic focus. For example, say your business is split into SMB and enterprise. And your enterprise business has been lagging and your company has decided to focus on improving it with various tactics.

If your probability of closing deals in SMB is different vs. Enterprise, you want to calculate those probabilities separately to ensure that your forecast for the Enterprise segment is as accurate as possible. Don’t let the probability of success in your SMB segment put a more optimistic prediction in place for Enterprise.

2. Planning cash flow

Your CFO cares about your forecast as well. She cares because she needs to plan for the cash flow of your business. She wants to know how much business is closing so that she can plan to cover the expenses of the business. If you are going to come up short of your plan, she wants to know so she has enough cash on hand. Maybe she needs to open a line of credit. If you are going to kill it this month, maybe she will be more aggressive in negotiating up-front terms when discussing new deals with your vendors.

To help your CFO, you might enhance your forecast in two manners.

First, you might create a forecast that acknowledges that your bookings are different from your revenue. You might be booking deals this month, but the revenue might not be realized and collected all up front. In that case, you can bias your forecast to be one focused on billing schedules and revenue recognition as opposed to sales bookings. Creating a forecast that more accurately reflects the reality of your organization’s cash flow can both make your CFO’s life easier and build a better incentive system for your reps (collect more up front!)

Second, rather than build your forecast with probabilities derived on the number of deals you’ve historically closed, derive your forecast probabilities using the monetary value that has flowed through your sales funnel.

It is the difference between saying “For every 10 deals that start at the top of the funnel, 30% will close” and “For every $100 that starts at the top of my sales funnel, 30% will close”. If your deals tend to range widely in terms of value, a value-focused probability calculation might be more useful to your CFO . . . and more accurate for your business.

3. Planning Post-Sales Execution

Separate for the financial concerns your CFO is worrying about, you might have a services team waiting on the other side of the sales process for your newly minted customers. The services team doesn’t care so much about the finances of your company. They are primarily concerned with providing good customer service. And that means they need to be ready for the customers that hit them.

The VP of Services is going to care about pure number of deals. He’s asking questions like “How many new customers will I need to on board?” and “Do I have enough consultants?” and “Will I have enough staff on-hand for handling customer support inquiries on the phone next month?”

You VP of Services wants a customer-centric forecast to be ready with the right execution for helping your new customers.

4. Optimizing your sales execution

Hey, what about my own team? Having a forecast is also of course a tool for your sales team. How are we looking relative to our goal? What do we need to do to hit our number this month? If you are coming up short in a particular month, your forecast will alert you to this problem. In this case, your forecast is about helping your execution plan for a particular month and making early adjustments. Coming up short? Then let’s look for deals that are low probability and try to accelerate them to improve our odds. In this case, you are using your forecast to help manage your pipeline.

With that in mind, you want to bias your forecasting method with a “bottom up” approach. A bottom up forecast approach assesses the likelihood of each deal closing and determines the value that each deal can be expected to deliver. The opposite of a bottom-up approach is a “top-down” approach. A top-down forecast is one in which you make broader assumptions about your business and historic performance overall, like “I typically close $10K in business per day, the last 10 days of the month. If we’ve already closed $40K this month and there are 10 days left, I forecast $140K.”

With a bottom-up forecast, you can identify the pieces of your pipeline that should be accelerated through the process to help goose your short term results.

Who uses your sales forecast? How do you cater to their needs?