How Accurate Is Your Sales Forecast

How do you forecast sales? What’s the value of your sales pipeline? How do you track progress?

No sale is worth a can of beans until the order is signed, the product/service delivered and the invoice paid – because it can always go wrong.  It may not close at all, a competitor might pull a fast one, or the scope could change.  Everybody understands deals can go bad on us.

Nevertheless we all get involved in sales forecasting. We need to plan resources, keep an eye on our cash, and be able to sleep nights. – That’s just the entrepreneur.

The guys working in bigger businesses have a different problem, with managers chasing targets, commission riders, and if they’re really unlucky, the dreaded conference call when the smart Alec accountants insist on simple answers to complex questions.

Do you have a “weighted pipeline?”  Most sales managers will use this method ( which was part of the IBM way). This is how it works:

We estimate a sale to “Widgets Inc.” at a value of $1,000, to be closed in the third quarter.  Then we estimate how likely we are to win the deal – it’s %probability, and apply that to the estimated value.  So if we’re 60% on the Widgets deal we write $600 into the column for the third quarter.

The big risk is the %probability.  A deal that comes in 10% lower in value, or a month later, won’t hurt us too much.  On the other hand a deal we estimate at 70% when it should be 30% will kill us, especially if it’s a high number.

Where does the 60% come from and how accurate is it?

Some businesses will have a set of rules which guide the way probability is calculated.  They figure their business in numbers e.g. 100 cold calls delivers 25 proposals which drives 10 demonstrations which delivers 1 sale.

Less aware businesses will just ask the sales guy “how likely are we to win this?”

Neither way of calculating %probability works. One assumes selling is a numbers game – and it isn’t.  The other relies on the sales guy’s subjective appraisal – which is subject to all sorts of outside influence.

Getting it wrong too often has taught me closing deals is a “process”.  Measuring probability should be a matter of facts, not numbers, and not emotions.

Once we’ve worked out a process that works in our business, we can set milestones – is this deal qualified, have we agreed a process to close, are we the preferred solution, have we agreed proforma contracts?

Over time we can refine that process, and the %probability values we assign to each milestone, until we have something that we know repeats.  Then we can start believing the weighted forecast, because we know why the value is right.

The method is infinitely flexible – we can set the right milestones to suit each individual deal and we can measure progress towards contract by those we’ve passed.

For forecasting we can calculate the %probability by number of milestones completed.  For example if we set five milestone, the %probability increases by 20% for each milestone passed.

So the forecast looks like this:

Prospect  Widgets Inc.
Estimated close value $1,000
Estimated close date  9/30/2009
Probability – 60% or $600

• Qualified – Yes – 20%
• Process agreed – Yes – 20%
• Proposal delivered – Yes 20%
• Selected as Preferred – No – 0%
• Contract signed – No – 0%

A side benefit of this technique is it drives good practice.  Raising the numbers in the forecast requires us to do the right things.

A prospect isn’t 80% because we want him/her to buy.  He’s 20% because we didn’t deliver the proposal yet.

To all the sales managers out there, please be aware this thinking will not make you popular with the troops.

On the other hand it will equip you to make better forecasts, and explain to the bean counters the way the world goes around.

Why doesn’t the traditional approach to selling and sales management work so well any more? What can the modern sales professional do to stay relevant in today’s customer driven markets?  Check out our eBook Reengineering Sales Management for ideas on how to embrace the new order of customer driven buyer/seller relationships.

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• Managing a Sales Funnel (frontofficebox.com)

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Tagged as: Business, Probability, Sales, sales forecast, sales funnel, sales pipeline, weighted pipeline value