Sales forecasting is a necessary -- but sometimes painful -- part of preparing for the upcoming fiscal year and managing sales goals along the way. Since leaders can’t use a crystal ball to predict the future, they are left analyzing quantitative, and sometimes qualitative, data to anticipate future sales. This sales forecasting process becomes problematic when sales teams and executives confuse “optimistic goals” and “accurate forecasting.”
Instead of looking at historical data and making forecasts based on previous trends and realistic parameters, salespeople (who are optimistic by nature) tend to create forecast numbers weighted toward the best hopes of the sales team and C-suite.
Ironically, excessive optimism in the sales forecast often creates unnecessary negativity and disappointment among team members down the road. It’s better to identify a realistic target based on solid data, and then exceed those expectations, than set up your sales team for disappointment.
Let’s look at four simple strategies that sales teams and executives can use to create better forecasting models for their business.
1) Use historical data
Most large companies have historical data they can use to determine realistic sales forecasts. If your company hasn’t implemented analytics and other forms of tracking methods that can be tied to goals and conversion rates, do so now. You need to know where you’ve been so you can accurately forecast where you’re going.
It’s true past sales are not always accurate predictors of future performance; this year you might release new products, expand into new markets, face an increase in competition, etc.
But historical data is a solid foundation on which you can stand as you weigh additional, unpredictable factors that could increase or decrease sales in the upcoming year. These are scenarios you can weave into your presentation of firm numbers for your final forecast.
2) Implement a sales pipeline action plan
For life and sales leads, quality is more important than quantity. While a lead’s quality can certainly affect its conversion potential, increased quantity of leads typically increases the number of closed deals.
That’s why you should build an action plan for getting the minimum number of necessary leads. For example, if you know your reps close 25% of their deals from well-qualified leads, you may aim to generate twice as many well-qualified leads next quarter. Ideally, your reps will close 30-50% more deals.
No matter what your numbers need to look like on the closing side, put the same level of focus in forecasting and generating leads. Understand your conversion rates at each stage of your sales funnel, then plan accordingly.
For example, ask your sales team:
“What does it take to move a prospect through your sales process from the first inquiry to the final deal closing?”
“How many steps are there in your sales process, and what percentage of your leads (approximately) converts at each step of the process?”
“What is the definition of a ‘well-qualified’ lead? Is it someone who has gone through an online demo, someone who has filled out an intake questionnaire …?”
“Based on the conversion rates at each stage of your sales process, how many leads do you need to generate in order to achieve an expected number of sales?” (Do the math by working backwards through your sales process. For example: If you want to close 100 deals this year, and your sales people close 10% of deals with leads who have already watched an online demo of your solution, and 10% of new inbound sales leads agree to sign up for an online demo, you need to generate 10,000 new inbound sales leads to make 100 sales: 10,000 x 10% x 10% = 100 sales.)
The conversion rates and correct numbers for your pipeline will differ depending on your business and average deal velocity. This information lets you build an accurate sales forecast based on stage-by-stage conversion rates.
3) Hope for the best, prepare for the worst
Few people enjoy thinking about worst-case scenarios, whether you’re talking sales forecasts or sports predictions. As much as you want to hit massive sales numbers every quarter, you also know the chances of your favorite team winning the Super Bowl. (Sorry, Cleveland.)
That’s why our sales forecasts should always consider the worst that could happen: What if you lose your top three reps to a competitor, the product you’re selling faces an embarrassing recall, or something goes wrong that forces you to re-evaluate your sales process? You don’t have to spend too much time dreaming up the most horrific events your company could face, but you need to leave some cushion in your forecast that accounts for potential setbacks.
Scrutinize last year’s numbers -- what went exceptionally “right” last year that might not happen again? What strokes of good luck did you have that might have made your numbers look better than reality? Don’t assume every bit of good fortune is going to happen for you every year. The reality of sales numbers often lands somewhere between “the sky’s the limit” and “the sky is falling.”
4) Incorporate “what ifs” and qualitative data
Many companies fail to plan for new sets of data to track and overlook qualitative data. Instead of constantly looking at the same numbers and making bold predictions, companies should ask “what if” questions that can be answered once more data is collected.
Looking at your business from different angles gives you new insights. For instance, if you are trying to boost sales for multiple products on your ecommerce site, why not track how many customers purchase a top-selling product from two different categories? Understanding where customers gravitate to for certain items and which items pair well together could give you inspiration for new product promotions and special offers.
Qualitative questions paired with quantitative tracking can help you better understand your business and make smarter decisions. This is how you can integrate forecasting into other business objectives, such as remodeling a store or testing advertising campaigns.
Keep in mind that sales forecasting is not a one-time “start of the new year” activity -- it’s an ongoing process that affects every aspect of your sales pipeline. And sales forecasts are not set in stone. They are “living documents” that help the sales team stay on target throughout each quarter.
With a data-guided process and plenty of open communication and collaboration, you can create more accurate sales forecasts and maximize your sales team’s potential.