What is sales forecasting and how to build a reliable and accurate sales forecasts?
For those that must analyze and forecast sales day in and day out, the phrase, “reliable and accurate sales forecasting” may very well sound like an oxymoron.
Despite appearances to the contrary, sales forecasts are often done with considerable guesswork, sent along to company management, and everyone crosses their fingers and silently prays that these forecasts are somewhere near correct.
It’s not that anybody intends to lie or be inaccurate; all parties involved are simply doing the best possible job they can with the tools they have. If two key issues were solved—accuracy being one of them—everyone from sales reps on up to the chairman of the board could sleep a lot better at night, having far more confidence in those sales forecasts.
What Is Sales Forecasting Anyway?
If sales forecasting could be defined, that definition might be, “the predicted ratio of opportunity versus risk with regard to sales.”
Obviously the better the weight on the side of opportunity, the more positive the outcome. The key question becomes: How can you accurately predict the opportunity versus risk of each individual potential sale, and then average out these opportunities to obtain an accurate view of future sales?
The problem with sales forecasting as it’s currently performed is that a large part of it is done based on sales rep intuition. A sales manager consults with each of his or her individual reps. The reps, having somewhat of an instinct for calculating the raw material in their sales pipelines versus what they can probably close, provide the sales manager with individual forecasts. The sales manager might modify each of these predictions somewhat to account for a margin of error, and then combine them into a single forecast for the month, quarter or year.
It becomes obvious that you can’t actually pin the problem of inaccurate sales forecasting on any one person. It’s really down to the basic data on which forecasting is done; the more accurate that data, the more accurate the forecasting. With forecasting based in a large part on hopeful guesswork, it’s a risky venture every time.
A Proper CRM Solution
The first barrier to sales forecasting, that of accuracy, can actually be solved with the right CRM solution. Traditional CRM applications do not allow for accurate forecasts, because factually they weren’t designed with that purpose in mind. Hence a sales rep is forced to rely on instinct.
A CRM solution should possess the functionality for a salesperson to view his or her entire pipeline. Ideally, that pipeline—and the CRM solution—are laid out in such a way as to mirror the company’s sales process. Each potential sale can be marked or located as regards the step of the sales process at which it currently resides. You should focus on developing a process that can be managed, reevaluated, and modified as conditions change.
But beyond that, much more can be done.
A robust CRM application allows for a total view of a sales rep’s activity, and automatically calculates that rep’s closing ratio (ratio of actual to failed closes). Each potential sale is rated as to its possible value. Along with the average time a rep takes to close a sale, and the amount of potential sales currently in the pipeline, an accurate forecast can then be derived.
Shift in Forecasters
Given a CRM solution that provides for accurate forecasts, we can then take up the second issue with regard to forecasting: who is doing the forecast.
As pointed out above, forecasting is generally done by the sales manager after lengthy consultation with sales reps. But armed with the right tools, who is in the best possible position to create a forecast? If you answered “the salesperson” you are dead on the money.
Imagine this if you can: A sales rep looks over his or her pipeline, and equipped with powerful yet simple analytics—and a more intimate understanding of his or her pipeline than anyone else in the company—arrives at a forecast that he or she can send along to the sales manager. If the CRM solution is competent, sales managers can easily combine forecasts from all of their sales reps into a single forecast to provide their management. The sales manager, to be on the safe side, might make the sales reps’ forecasts a bit more conservative if they so choose. But then it is a snap to create an overall forecast and send it on, and to stand behind that forecast with far more confidence than was previously possible.
Beyond the benefits to sales managers and others who must receive these forecasts, there is substantial benefit in this kind of operation for the sales reps themselves. For who has more of an investment in the success of a particular rep’s sales than that sales rep? With an accurate analysis, the rep can see that more leads are needed, or that there’s plenty in the pipeline and life is good. It’s an operating basis that puts the sales rep totally on top of his or her own sales—right where they should be.
Such a shift has many more positive ramifications throughout a company which we will take up in future articles in this series on sales forecasts, analytics and CRM solutions. Stay tuned!