I can tell you how much business I will close this year, and it didn’t take a deal with the devil to come up with the number. Despite what you might hear, read, or assume, if you stick to a sales forecasting model that works, it is possible at any given time to know how much business your company is going to close within a specific amount of time.
Counting on unreliable sales forecasting methods prevents you from making smart decisions about the future of your business. Mastering sales forecasting puts you in the driver’s seat so you can invest and act on your own terms instead of constantly reacting to unforeseen ups and downs.
The three things you need to know in order to forecast sales are:
1. What business you currently have
2. What’s in the pipeline, and
3. The likelihood — based on tangible evidence — that the business in your pipeline will close.
That seems simple enough, but the real obstacles to sales forecasting often lie in what you don’t have.
Before your business can effectively learn how to forecast sales, you need to consider what you might be missing. Here are the three things I consistently see as missing links to reliable forecasting.
1. ACTIVE SALES PROCESS
A process is something that people actually follow on an annual, weekly, even hourly basis. If you have a lot of people following a loose process for themselves but not one for the entire company, you don’t have a sales process in place. Working in silos, your people can’t learn what’s working and not working, and you can’t recognize where in the process there’s a challenge. If you have only one person stumbling in a certain part of the process, for example, you might have a coaching issue. If you have lots of people stuck, you probably need to reevaluate that part of your process. Either way, if you don’t have everyone using the same playbook, sales and your sales forecast suffer.
2. ACTUAL LOGIC
The calculations that people use to determine sales forecasts are typically incorrect. People make blanket statements. They say, “We’ll close 25 percent of all business in the pipeline,” but there’s no reason or logic to back up the claim. It’s just a trend they repeat and allow to proliferate. You must ask why that particular percentage is being used. Why is that the benchmark? Rules of thumb are not reliable budgeting and sales forecasting tools.
3. CONSISTENT TRACKING
Businesses don’t put enough emphasis on how they plan to get their forecasted sales. Take a sales forecasting example: A company says it will do $1 million in sales this year. While the business might have a consistent track record of being close to that number, what is the real likelihood that it will hit $1 million? Has the company considered when business is booked AND collected in that forecast? What are the individual steps it will take to hit that number?
When you use a tracking plan as a mini forecast, you can evaluate how sales are progressing in the short term, which makes your long-term forecasts more accurate and valuable. This sort of tracking must be done and evaluated as much as possible to make sure we know where things are.
KNOW YOUR PIPELINES
You want to know how to forecast sales and if you’re going to hit your numbers. Understanding the intricacies of your pipeline is vital to this calculation. Let’s look at some terms:
Pipeline: Your pipeline refers to how valuable — in dollars — the opportunities you or your sales team are currently working on are.
Weighted pipeline: This is the overall percentage chance that you will close the business in your pipeline. For example, if there is a 10 percent chance you will close the $20 million of business in your pipeline, you will close $2 million.
Historical pipeline: A historical pipeline considers each stage of the pipeline. It takes into consideration each stage of the sales process and the likelihood that a prospect will progress to the next stage. For example, how likely is someone to reach Stage 2 after reaching Stage 1, Stage 3 after Stage 2, and so on, until the deal is closed? The historical pipeline examines actual results in the past as a check against what is predicted for the future. If a salesperson is claiming that something will close in a month, but that type of opportunity has never closed in that length of time, alarms should be going off.
Mastering sales forecasting isn’t rocket science — and it’s certainly not magical — but it takes discipline to use your CRM and enter in the data. You have to follow the stages. You have to have a disciplined manager. You have to commit to the data because missing data will make your forecast wrong.
If your (naturally optimistic) salespeople are licking a finger, putting it in the wind and picking a sales goal number, your forecasts aren’t going to work for you. Don’t trust your gut. Trust the data, and your sales forecasting can be incredibly valuable.