One of the most critical documents and processes in a company of any stage is the sales forecast.  This is a document that highlights the company’s prospects for sales over the next 3-6 months.  Yet many organizations struggle with how to do this properly, efficiently and effectively.  There are several fundamental problems with the sales forecast.  First, CRM’s don’t easily produce the exact document that the CEO, CFO and management team want and expect.  Yet most companies use a CRM system and want to centralize on that system.  Second, many entrepreneurial CEO’s lack sales experience and don’t even know what specific information they want in a sales forecast.  The third problem is that many organizations that have a sales force do not fully appreciate that sales people can dilute the information on a sales forecast and (either overtly or not) hide the real issues going on in sales.  Finally, many organizations produce the sales forecast report but do not use it to fully understand and manage sales.  The discipline to go through the data is the critical part of the process.  Good CEOs understand the criticality of this document and go through it and use it weekly to better understand the business and the forecasted financial position of the company.

The sales forecast is the lifeblood of your organization and how it will achieve its revenue goals.  It needs to be realistic in order to help the company achieve sales goals, collect cash, and, often, even to make payroll.  Many organizations lie to themselves about the state of the forecast and these organizations often pay a huge price when the deals do not close as forecasted.  The sales forecast also can tell you how much of a revenue gap you should expect and where and when you may need to increase your lead generation process to help fill that gap.  For this reason, organizations will sometimes forecast sales out 6 months.

Here are some questions that a good sales forecast can address?

Purpose

  • What is going to close in each month over the next 3-6 months and how does this compare to company quota or revenue targets?
  • How likely are these deals to happen?  How likely are we to achieve our revenue targets?
  • Are we selling recurring subscription revenue or services revenue?
  • Are we selling to new accounts or add-on business to existing accounts?
  • How does activity and revenue look on the horizon?  Do we have sufficient opportunities out 4-6 months and should we increase marketing efforts?
  • Who is closing business (which reps)?
  • What lead generation source is actually generating the deals?
  • What happens to deals that don’t close?  Why do we lose them?  Are these competitive losses or no decisions?
  • What is the historical rate of close of opportunities at various stages in the sales cycle?  For instance, what percentage of opportunities that get a demo have historically closed and in what average time frame?

A good sales forecast is a one page document that has the following information:

  • Account
  • Client or new prospect
  • Sales person responsible
  • Source of lead (if known)
  • Stage in the sales process.  This should match to the formal sales process.
  • Forecasted close date (Month and date)
  • Forecasted revenue split out by forecasted annual subscription revenue and services fees.
  • Probability of close (expressed as a percent) either based on stage in the sales cycle or gut feel from sales person.  (stage is recommended since reps are often overly optimistic about the probability)
  • Probability adjusted revenue forecast (This is forecasted revenue per each account multiplied by probability of close)
  • Number of days that this prospect has been engaged in the sales process.  This tells how long this account has been active.  There is normally a problem with accounts that have been on the sales forecast for a long time.
  • Next steps or steps required to close the deal. This is expressed as a text field with notes from the sales rep.

The sort sequence is critical for management usability purposes.  The report should be sorted by forecasted close date with a total dollar sub-total by month.  The next sub-sort should be on the probability of close.  In other words, if five deals are forecasted in the next month, they should be sorted on highest to lowest probability of close.  This is what CEOs and CFOs find most useful.

Normally, organizations should have a total forecast that is 3 times larger than their quota for any given month.  So, if you need to achieve a sales number of $50,000 in contract value for some month, you should have a sales forecast of $150,000 for that month.  Alternatively, your probability adjusted number for the month should be 2x what you need.

Some organizations will re-sort the sales forecast by sales person and then the above criteria.  This can normally show which sales person has a strong pipeline and which doesn’t.  This can also be done by “eye-balling” the report if you don’t want to resort it.

Over time, if you properly track what percentage of prospects in one stage actually end up closing and in what time period, on average the close time, you can hone your metrics to what the actual historical performance has been.  Two things are certain.  Deals always take longer than expected and time kills all deals.  The longer an opportunity sits on your forecast the more likely it is to blow up due to competition, champion turnover or the prospect being distracted by layoffs, acquisitions or others political issues.

Most organizations will also leave the current year closed deals in the sales forecast sorted by month.  This helps finance, management reconcile revenues to the financial statements.

Most organizations also create a separate report for lost deals.  This helps explain which reps are losing the most or fewest deals and what we believe was the reason for the losses.  No decisions are considered losses.  Anything that hits the sales forecast and then is removed should go to the loss report.  This report can be sorted by many factors including loss to competition or loss to no decision.

Organizations will, incorrectly, list all of the opportunities that have shown any interest in the company’s products.  This provides a more impressive list, but is not a sales forecast.  This larger report is an opportunity pipeline report, not a sales forecast.  Only deals that have a reasonable probability (greater than 50%) of closing in the next 3-6 months should appear on the sales forecast.  The “reasonableness” factor is that the prospect has stated their intention to sign a contract in that time period and that the prospect is at a stage in the sales process that would make this achievable.  So, for instance, forecasting a deal to close next month with a probability of, (example) 75% with a prospect that only received their first demo last week and knowing that the average sales cycle is three months from demo to close is not realistic.  This should not be forecasted next month at 75%.  It might be more appropriate to forecast this deal for close in three months with a probability of 10% (since historically only 10% of prospects that get a demo, actually close and the average is 3 months.

Investors and board members tend to spend much more time with the sales forecast than any other report or analysis produced by a company.  The sales forecast must also tie to the financial projections.  Many organizations link these two processes to ensure consistency and accuracy.  A good CEO and certainly any CRO will be intimately familiar with the details of the sales forecast.

Often, sales people are also asked to write up a more detailed analysis of the top 5-6 sales opportunities that they expect to close over the next 60 days for board reporting purposes.

Sales forecasting should be more science than art.  But knowing what to track, how to track and measure it and how to properly qualify sales opportunities is critical to a better sales forecast. If you produce the reports, but not use them regularly (weekly), then you are wasting an opportunity to better understand your business and forecast your revenues and cash.

Samples of sales forecasts, detailed account write-ups and how to tie the sales forecast to the financial forecast are available from Arbor Dakota.

For more information on how to improve sales forecasting and improve the analysis contained within, contact Arbor Dakota below. Arbor Dakota is committed to helping CEO’s grow their great ideas into great companies.