About Improving Sales Forecasting Accuracy

Improving Sales Forecasting Accuracy

 Proven strategies designed to increase forecasting accuracy across the organization

By Javier Jimenez, Chief Revenue Officer, Intraway Corporation

 

1.0 Sales Forecasting – Art or Science?

Sales Forecasting: (n) the process in which a company predicts the variation of sales it will have in the distant future.

Have you ever wondered how companies forecast their sales? Is sales forecasting an art or a science? These are all good questions and if there were just one aspect of strategic sales planning that all companies would love to improve on, it would probably be more accurate sales forecasting. For some, sales forecasting is a little guesswork mixed with some black magic, a gut feeling, and a lot of luck. For others, it’s an involved process that predicates on accuracy and continuous improvement.

Companies that excel in strategic sales planning do so by constantly raising the bar on their forecast accuracy. They understand that accurate forecasting leads to precise inventory counts and correctly assessed cash flow planning. After all, sales drive investment and growth. Without an exact sales forecast, firms are left flying blind. And without a precise cash flow forecast, potential cash shortfalls can be both costly and disruptive.

2.0 Fact-Based Forecasting

Implementing a CRM system alone will not guarantee accurate sales forecasting because forecasting also contains elements of judgment along with sales history and facts.  An organization needs to properly balance facts and judgment in order to improve forecasting accuracy and the more that the organization utilizes facts and history, the greater the accuracy becomes.  Organizations should incorporate the following requirements as part of their sales forecasting process:

  1. Knowing your customers in order to confirm assumptions on situations or purchasing decisions. This includes the history the organization has with the customer along with major milestones, key decision makers, and compelling events.
  2. A thorough understanding of the company’s sales history including average sales cycle, average transaction size, competitors, and resources needed to advance the opportunity.
  3. Ongoing lessons learned sales process that includes previous sales forecasts in order to improve the current sales forecasting process.

3.0 Critical Foundations

According to Bob Apollo, there are four critical areas or processes that need to be established in order to improve and eventually excel at sales forecasting. These are as follows:

  1. A documented and enforced sales process that includes milestones between each of the stages in a sales process
  2. Clearly defined and documented opportunity qualification criteria
  3. A CRM system that includes key customer or prospect data along with opportunity milestones and probability that match the documented sales process, and key figures that can be utilized to improve sales forecasting accuracy.
  4. Rewarding and enforcing accountability and accuracy in the sales forecasting process

Organizations that implement a sales process that includes clear definitions that are consistently applied and reviewed along with effective, user-friendly CRM systems and an environment that fosters personal accountability stand a higher chance of improving the overall sales process and forecasting accuracy (Apollo 2012). Further analysis indicates the following processes, criteria, and training need to be incorporated as part of the sales process:

  1. Sales Process (Sales 101)
  2. Qualification criteria
  3. Documented list of approvers and recommenders along with an action plan for coverage
  4. Budget determination
  5. Contract / P.O. process and timing
  6. Compelling event for the close
  7. Probability assignment
  8. Commitment criteria

 

4.0 Barriers to Effective Sales Forecasting

The organization also needs to consider that there are many factors that have an impact on forecasts, including but not limited to: seasonality, the economy, competition, politics, demographics, the weather, new product releases, pricing action, sales compensation, terms and conditions, sales representative effectiveness, and pipeline growth and activity. Truly effective organizations conduct regular reviews, look outward to determine if any of the aforementioned factors could have an impact on the sales forecast, and adjust outlook accordingly or create plans to overcome factors that could have a negative impact on future business.

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Figure 1.  Barriers to Effective Sales Forecasting

Figure 1 above shows the major barriers to effective sales forecasting. The majority of companies reported that insufficient data on current deals entered by sales reps represented the biggest barrier to effective sales forecasting within the organization. This was followed by a lack of accountability for the sales reps, and then by overconfidence or “sand-bagging” by sales representatives. A lack of management enforcement represented 36% of the responses and an inability to understand the probability of closing accounted for 25% of the responses from the companies that were surveyed (Ostrow 2011, 6). All of the above barriers could possibly be overcome by incorporating a well-documented sales process with clear guidelines on prospect qualification, improved intelligence, information on customers and their needs, documented CRM data entry, probability assignment, periodic funnel and opportunity reviews, and strict management oversight to ensure sales representatives adhere to the formal sales process.

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Figure 2. Key Business Pressures Impacting Sales Forecasting

5.0 Key Business Pressures Impacting Sales Forecasting

Figure 2 above shows the results of a survey entitled “Key Business Pressures Impacting Sales Forecasting” that was conducted on 304 companies. Fifty-one percent (51%) of the respondents indicated that insufficient knowledge of the prospects or customers in the sales funnel was the leading factor that had an impact on sales forecasting, followed by unacceptable levels of variance in revenue projection. Twenty-nine percent (29%) of the companies surveyed also indicated that insufficient growth in lead conversion rates was a main factor that had an impact on sales forecasting, followed by a close twenty-five percent (25%) that indicated insufficient knowledge of their customers in order to determine the likely profitability of the transaction (Ostrow 2011, 6).

Further analysis into the root cause of the business pressures described above reveals that insufficient knowledge of the customer, their needs, budgets, propensity to purchase, politics, customer agenda, competition, and true intentions to move forward within a forecasted period of time account for all of the top four factors. Revenue variance can also be attributed to an insufficient understanding of the customer. Insufficient growth in lead conversation is attributed to a lack of understanding of prospects and their needs. Lead conversion takes place at the start of a sales cycle and typically triggers the process for an effective sales representative to begin to understand customers, their needs, initiatives, and strategic objectives in order to determine the product or services, as well as the price and terms, to be presented.

As stated earlier, implementing a process that encourages the organization to thoroughly and accurately understand a customer or prospect will minimize many of the unknowns or surprises that companies may encounter throughout the sales cycle.

asd “It’s not only about the tool. You need to consider process, and more importantly culture. A forecast is not something to beat the teams up on.. but a tool used to manage the business.” – Clive Ryan, General Manager, eircom.

Figure 3.  Sales Forecast Accuracy by Best in Class

 

6.0 Sales Forecast Accuracy by Best in Class

Figure 3 depicts sales forecast accuracy by best in class at different points in time prior to the expected close date of the opportunity. The chart compares the forecast accuracy between the best in class, industry average, and industry laggards. Not surprisingly, the survey shows that most companies have no more than 180 days of visibility. During this time frame, the accuracy for the industry average and the best-in-class average is 52% and 53% respectively, with the laggards coming in at 46% accuracy. Interestingly enough, the best-in-class organizations had a better accuracy at 60 days out with an accuracy rate of 76%. In comparison, the industry average had an accuracy rate of 70% two months before the expected close date (Ostrow 2011, 10).

The largest gap between best-in-class organizations and industry laggards was noted in the accuracy at 60 days out from the expected close where the difference in accuracy was 18%. At both 30 days and 90 days out from closing, the gap was 13%. At 180 days and just prior to closing the gap was at 7% (Ostrow 2011, 10). Customers surprise most organizations at the 30 and 60 days mark, when the company realizes that the customer is not ready to purchase, that the evaluation and purchase cycle will extend beyond the expected close date, or that the competition presented a more attractive package. Overall, we see that as the close date approaches, the gap in accuracy between the best in class and the laggards decreases, clearly indicating that the sales representatives increase their activity and information gathering process in order to advance the opportunities or to better gauge the timing for closure. Revenue variances were deemed barriers to proper forecasting and it is at this point where best-in-class organizations are able to properly predict close dates and amounts. The earlier the organization is able to determine which opportunities will or will not close, then the earlier that alternate plans can be put in motion in order to try to advance other opportunities that can be used to close revenue gaps as a result of drop offs or delayed opportunities.

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Figure 4. Active Sales Forecast Contributors by Best in Class

7.0 Active Sales Forecast Contributors

Figure 4, “Active Sales Forecast Contributors by Best in Class,” is designed to show the level of organizational contribution to forecasting between best in class and all other companies. The chart shows the level of contributions made by sales reps, sales supervisors, senior sales managers, executive managers, marketing managers, and operational managers. Seventy-seven percent (77%) of respondents reported that sales representatives contributed in best-in-class organizations, 70% for sales supervisors, 70% for senior sales managers, 48% for executive management, 32% for marketing management, and 31% for operational management (Ostrow 2011, 17). The best-in-class organizations made the biggest impact on forecasting accuracy when senior sales managers, executive management, and marketing management increased their levels of contribution and review of the forecasting process where the results yielded 14%, 16%, and 16%+ accuracy in comparison with other companies, respectively. This tells us that although sales representatives are responsible for forecasting and tracking, higher levels of accuracy are obtained when senior sales managers and executive management take a proactive approach in reviewing and discussing the status of opportunities with sales representatives.

8.0 Best Practices for Improving Sales Forecasting Accuracy

We now understand that best-in-class organizations utilize facts and company sales history, along with critical foundations and a periodic review of external factors that could potentially have an impact on forecasting accuracy, as part of their forecasting process. We have also seen the importance of periodic reviews by senior sales managers, executive management, and marketing management in the process of quickly identifying revenue gaps and helping sales representatives to improve forecasting accuracy. According to Heinz Marketing, the following are seven best practices that best-in-class organizations have implemented as part of their sales forecasting process:

  1. Consistent and Documented Definitions

Organizations need to create, document, and enforce a sales process including consistent definitions in order to trust the data being presented by the sales organization.  Companies that excel at sales forecasting ensure that sales, sales engineering, marketing, operations, and senior management understand the sales process and the definitions and that these are enforced in the day-to-day operations.

  1. Sales Cycle Length

Knowing the average sales cycle of your company’s product is key to improving sales accuracy.  As stated earlier, facts and history play an important part in improving the accuracy of a pipeline by serving as a checks and balances system against the possible subjectivity of an overly optimistic sales person.  Knowing that the average sales cycle is nine months once an opportunity is qualified will help you determine which month or quarter that opportunity will close and will also allow sales and sales management to track and monitor advances or delays in the documented process.  Organizations that excel at forecasting typically have additional levels of granularity including sales cycle by product, region, and by account.

  1. Market Changes/Conditions

Organizations also need to consider market conditions and their impact on their sales process, including average sales cycle, pricing, licensing models, and additional oversight from your customer’s senior management.  Market conditions such as recessions, inflation, currency valuations, changes in government or new licensing trends can all impact your company’s sales cycle and average transaction value.  Companies need to review external market conditions on a regular basis and adjust their sales process accordingly.

  1. Compelling Event

One of the biggest reasons why opportunities do not close is due to a lack of a compelling event as part of the qualification of an opportunity in the sales process.  From experience, many companies will take a vendor through the process that can last from 3 to 18 months, but will never make the decision to purchase because the solution or return on investment was not sufficiently compelling.  Organizations that excel at forecasting qualify and invest time and resources only on opportunities that have a compelling event.  Sales personnel need to incorporate the “compelling event” definition as part of their qualification process and need to ask the hard questions such as: is there a need for my product or service? Is it a priority project? Does it solve the customer’s problem? Is my solution or product key to their strategic initiatives?  Qualifying based on compelling events will most likely reduce the number of opportunities in your sales funnel, but will also increase the probability that the properly qualified opportunities will close, thereby making your sales forecast more accurate.

  1. Deal Reviews

Deal reviews should be conducted on a regular basis in order for sales, sales management, sales operations, sales engineering, and marketing to be thoroughly aligned on the status of each opportunity being discussed.  Exceptional companies take this time to review numbers, dates, and next steps, but also the history of the client and opportunity, the compelling event, the market situation, and the competitive environment.  It is also important to share ideas on how to advance the opportunity, or to bring in additional resources to assist with a critical milestone, or even to brainstorm as a group on how to maximize revenue.  These sessions will help to create trust amongst team members and to create a culture of accountability, collaboration and learning.  All of these will, of course, give you greater visibility into the quality and accuracy of the sales pipeline.

  1. CRM Updates

By nature, most sales people are averse to documenting the status of sales opportunities in a CRM system.  Organizations should consider the need to implement a sales process and CRM system that makes updating opportunities fast, easy and mandatory for each of the sales representatives.  Some sales personnel guard information and resist documenting changes in close dates, amounts, or probabilities for fear that they will be reprimanded if the deal is stalling or the value of the opportunity decreases.  Periodic pipeline or deal reviews help to ensure that the opportunities are being updated and as pointed out in the previous paragraph help create trust and accountability.

  1. Reward Forecasting Accuracy and Honesty

Sales personnel should be made to feel that the company values honesty and accuracy in sales forecasting just as much as it values won business.  Organizations need to create an environment and policies such as KPIs and incentives that reward sales personnel being transparent in reporting the status of an opportunity even if the news is not good (Heinz 2011).

 

9.0 Sales Forecasting Methods

Now let us look at the most popular methods in sales forecasting: the weighted pipeline and the forecast category.

The weighted pipeline method applies a closing probability to an active opportunity, which is likely related to its stage within the pipeline. The sales forecast for a given period of time (quarter or year) equals the number of opportunities closing in the time frame times the probability that has been assigned. Simplicity is the main advantage of this method; however, it is prone to the “all or nothing” nature of opportunities, judgmental amounts, dates, and closing probabilities.

The forecast category method allocates forecast categories (Commit, Best Case, or Pipeline) that represent the various degrees of forecast accuracy. Simplicity and the acknowledgment of the “all or nothing” nature of the opportunity are its main advantages. Judgmental close dates and amounts are the main disadvantages of this method. At Intraway, we use both methods as part of our sales forecasting process. We have configured our CRM to provide reports that provide both views, which are used as a checks and balances system.

In addition to weighted pipeline and forecast category there is another method call the Project Evaluation and Review Technique, or PERT (Allen 2011). PERT uses three possible scenarios and assigns values to each in order to come up with the most likely forecast number.  PERT was adopted by the United States Navy in its design of the Polaris submarine. In order to apply it to sales forecasting sales personnel is asked to provide the best possible scenario (A), the most likely scenario (B), and the worst-case scenario (C) in their forecast. The three scenarios represent the three variables that are then applied to the PERT analysis calculation below (Allen 2011).

PERT analysis calculation = {1(A) + 4(B) +1(C)} / 6

For example, if the sales person feels that the best possible scenario in a particular quarter or year is $2.0M, the most likely scenario is $1.5M, and the worst possible scenario is $1.0M, then these values would be placed inside the PERT calculation as shown below.

  1. Best case scenario (A) = $2,000,000
  2. Most Likely scenario (B)- $1,500,000
  3. Worst Case scenario (C) – $1,000,000

PERT analysis calculation = {1(A) + 4(B) +1(C)} / 6

PERT analysis calculation = {1($2,000,000) + 4($1,500,000) + 1($1,000,000)} / 6

PERT analysis calculation = {$9,000,000}/6

PERT analysis calculation = $1,500,000

In the above example, all three scenarios were taken into account and the formula yields a most likely scenario of $1.5 million as a projection.  This approach can be used as a means to double check a sales forecast or it can be incorporated into a spreadsheet application if the organization does not have a CRM system.

10.0 Summary

A well-documented sales process is key. Sales reps must understand where they are and what they should do based on their prospect’s buying process. For each stage of your sales process, the documented sales process lets you define the required milestones and specify the available collaterals.

Create validation rules for advancing opportunities from one pipeline stage to the next. It is recommended that validation rules be used sparingly for really important requirements, such as contractual documentation or compliance procedures.

Involve the organization in the sales forecasting process in order to gather the collective intelligence and experience of the group. Create discipline and transparency in the process to ensure that critical customer data is entered, that the sales representatives and senior sales managers truly understand their customers early on in the sales cycle, and that a collaborative environment is created where setbacks and delays are promptly communicated.

For more information, please contact Intraway at info@intraway.com


References

Allen, Scott. 2011. “How to Improve Sales Forecast Accuracy with a PERT Formula.” OPEN

Forum. N.p. Web. 18 July 2015.

 

Apollo, Bob. 2012. “Why Is Accurate Sales Forecasting Such a Challenge?” Why Is Accurate

Sales Forecasting Such a Challenge? Inflexion-Point Strategy Partners. Web. 18 July

2015.

 

Heinz, Matt. 2011. “Improve Sales Forecast Accuracy with These 7 Steps – Heinz

Marketing.” Heinz Marketing. N.p. Web. 18 July 2015.

 

Heinz, Matt. 2013. “2014 Marketing Planning Guide.” 2014 Marketing Planning Guide. N.p.

Web. 18 July 2015.

 

Ostrow, Peter. 2011. “Sales Forecasting: How Top Performers Leverage the Past, Visualize the

Present, and Improve Their Future Revenue.” Aberdeen Group. N.p. Web. 18 July 2015.

 

Sexton, Don. 2010. “Sales Promotion.” In Trump University Marketing 101: How to Use the

Most Powerful Ideas in Marketing to Get More Customers and Keep Them, 205-14. New

Jersey: John Wiley & Sons. Web.

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