If ten CEOs were asked if they had confidence in the sales forecast that their sales leader gives them, nine of them would say no. This is seen time and time again. So why does this have to be so hard? Here is how to create more accurate sales forecasts.
Sales leaders often lack confidence in their sales forecasts, as well as their expertise to improve them. According to Intangent, “55% of sales leaders do not have high confidence in their forecasting accuracy.” There are three different types of salespeople forecasters.
Some sales leaders provide a list of all of the opportunities in the system with dollar amounts and close dates associated. Let’s call this the “opportunity dump.” It typically has everything from “I talked to someone there” to “I should get the PO next week.” The sales leader expects the CEO to interpret this report and decide what is real and what is not. That’s never going to happen, and that forecast is useless.
Next, you see the “Weighted Forecast.” The salesperson takes all of the opportunities and multiplies the deal amounts by some probability factor, either defined by stage or by the salesperson’s opinion, and then adds up all of those amounts. However, these forecasts are often unreliable because a $500,000 deal at 25% does not mean you should forecast $125,000. If something is really at 25% probability, the forecast should be $0.
Then there is the approach where sales leaders say, “I am only going to forecast deals that are in stage x or later.” Maybe they even take these later-stage opportunities and apply a weight factor. This is better because you filter out all the noise from the early-stage deals that won’t close and discount some, but these forecasts still include deals that the salesperson doesn’t feel great about.
All of these approaches miss some fundamental elements that CEOs want to see:
So what’s the answer? There is a simple approach that many companies and CEOs love. The basic concept is segmentation. By segmenting your forecasts into the following groups, you’ll be able to get more accurate numbers.
The groups are:
Segmenting these deals can be easy. If you use a CRM, create a “Forecast Status” field or something similar. If you are on spreadsheets, create a column.
Here is what a segmented forecast might look like:
Now the CEO can count on the possible upside and can plan accordingly. They will know the timing of revenue, which can help them manage other areas like inventory and operations costs. Just as importantly, they will also know that the sales leader is taking a realistic look at the business and not just counting everything.
An accurate sales forecast shouldn’t demotivate or discourage you. However, there are many reasons why sales forecasts are inaccurate. This is a different way of looking at sales forecasts, but it can make a huge difference in how CEOs and sales leaders communicate.