Sales Forecasting to Accurately Predict Revenue Every Quarter
At the end of every month, quarter, and year sales leaders are trying to figure out what is going to close and what is going to slip. Sales forecasting is a challenge for most sales teams, either because they don’t know how to do it or because their methods are imprecise.
According to Clari, 93% of companies can’t even forecast their sales within 5% in the last two weeks of the quarter. That’s a worrying statistic with dire consequences for everyone involved.
Just like a weather forecast will help you decide what to wear when you go out, a sales forecast will help you make decisions on how to lead your sales organization.
In this article, I’ll take a look at what sales forecasting is, how sales forecasting is done, some methods and strategies as well as some great tips to help you predict your revenue accurately. Finally, we’ll discuss ways to fill the sales pipeline thereby increasing the health of your sales forecast.Check out this critical stat. In this article, @clarihq says that 93% of companies can't #forecast their sales within 5% in the last two weeks of the quarter. #SalesLeaders, learn how to predict revenue accurately. Click To Tweet
What is Sales forecasting?
Sales forecasting is the process in which sellers estimate how much revenue, or deals, will close in future weeks, months, quarters or years. Sales leaders look at their open opportunities to predict the anticipated revenue.
Why is sales forecasting a challenge for sales leaders and managers? Here are a few reasons:
- Modern buyers are engaging with sellers later in the sales cycle, conducting independent research and making it hard to obtain buyer intent data.
- CRMs do not gather data from non-traditional touchpoints such as social media or live chat, but only from direct interactions between the seller and the prospect.
- The B2B customer journey is nonlinear, meaning that sales reps engage between 6 and 10 decision-makers during the span of several months.
- Most reps don’t know how to gather and interpret buyer intent data to predict future sales.
The solution to these problems lays in two things: adopting a modern sales approach and implementing virtual sales training programs for your sales team.
While the modern sales approach will help sellers engage with the modern buyer more effectively, a virtual sales training program implemented over the span of a few months will help them build the skills they need to understand their buyer’s journey and read buying intent signals.
Sales pipeline vs forecast
A sales forecast is derived from a sales pipeline.
The sales pipeline takes into account all the open opportunities a seller has, no matter the stage in the sales process.
The sales forecast, on the other hand, takes into account just a portion of the opportunities: those more likely to close by the end of the quarter (or whatever period you are forecasting for).
Sales Forecasting Methods
So how do you calculate sales forecasts? What is the best forecasting method for sales?
There are a few common sales forecasting methods, from simple to complex. Let’s look at them briefly.
1. Historical Forecasting
Look at a comparable period of time in the past and predict that you will have equal or greater sales in your current period. For example, if you want to predict the revenue for Q2 of the current year, look at the sales revenue of Q2 of the previous year and guess you will hit a similar number.
This forecasting method is not very accurate because it doesn’t take into account the current market conditions that may affect your sales forecast. For instance, if you had tried to do historical forecasting for Q2 of 2020, based on the revenue from Q2 2019, you would have probably missed the number because of the market changes in 2020 due to COVID-19.
2. Intuitive Forecasting
Ask your sales reps to estimate how likely they are to close the opportunities in their sales pipeline at the end of the quarter. Obviously, these are subjective guesses that do not follow a process, so this method is not reliable.
Asking a salesperson to intuitively predict their forecast is like asking explorers to find “The Heart of the Ocean”, the fictional piece of jewelry that fell into the ocean in the movie Titanic. Gut and intuition should be leveraged to a degree in sales forecasting, but they will never be accurate.
3. Length of Sales Cycle Forecasting
Look at the age of each opportunity and depending on how long it has been in the sales cycle, determine when it should be ready to close. This method takes into account the average sales cycle, but ignores the particular level of engagement of each opportunity.
4. Lead-Driven Forecasting
Analyze each lead source and assign a value or score based on what similar leads have done historically. Then forecast which sales leads will become customers.
5. Opportunity Stage Forecasting
Break down your sales pipeline into stages and estimate the likelihood of closing each deal depending on the stage it is in. This sales forecasting method doesn’t look at the age of the opportunity, which may result in inaccurate predictions.
6. Test-Market Analysis Forecasting
Are you launching a new product or service? Then do a soft launch with limited distribution and depending on the sales, you can forecast revenue when you do a full launch. The problem is that not all markets behave in the same way, so your predictions may not come true.
7. Multivariable Analysis Forecasting
Take all the factors mentioned here, such as stage, age, sales cycle length, and other variables, and apply predictive analytics to predict your revenue for the quarter. This method requires a sales forecasting tool.
What is the Best Sales Forecasting Method?
Now, which of the above sales forecasting methods is right for your organization will depend on whether you can afford analytical tools or not, whether you have enough historical data, and the processes you have in place to gather sales data.
In addition, the larger the sales organization you have the larger your problem becomes too. You must factor in the error rate in sales forecasting by individual sellers.
If your company deals with a fairly stable market in a defined product category, you may predict revenue with basic historical data and simple analyses. But if you are in a complex industry with many product categories, you might need to perform predictive sales forecasting with advanced tech tools or sales forecasting software.
Sales Forecasting Tools
If you are still using Excel spreadsheets to forecast your revenue, it’s time to upgrade to better tools. Let’s look at some of them.
The most basic sales forecasting tool is your CRM. The CRM will allow you to aggregate data from your sales team into one place. The problem is that you must rely on each sales rep to manually enter the data (which many times they don’t).
Sales Tracking Software
Instead of manual entries to the CRM, you can use individual apps to automatically track the sales activities of your team and identify healthy deals.
For example, you can use Outreach to track the number of emails your sellers send as well as open rates and click-through rates, or Gong to gather intelligence from sales conversations over the phone.
However, using many individual apps may be a problem, as you would have to collect and analyze data from multiple sources.
Predictive Analytics Software
New AI technologies, such as Clari, not only track sales activity automatically but also synthesize data for quick analysis, provide predictions based on historical data and recommend how much pipeline your sellers need to build to hit their quota.
Advanced sales forecasting software can be expensive and sometimes complex to use, but given the importance of an accurate sales forecast both for you as a sales leader and your organization as a whole, it may be worth the investment.
What is the Most Accurate Sales Forecasting Method?
Which forecasting method is most accurate?
Traditional B2B sales forecasting methods are often inaccurate and lead to missing sales targets. That’s why many sales AI-based predictive analytics tools are now available to help sales organizations obtain predictive revenue.
Unfortunately, according to a Gartner report, “by 2025, over 90% of B2B enterprise sales organizations will continue to rely on intuition instead of advanced data analytics, resulting in inaccurate forecasts, sales pipelines and quota attainment.”I think #B2B #sellers need to read this article and understand the importance of DATA in their strategies if they want to forecast, increase sales pipeline, and achieve quota. Don't be that 90% by 2025 relying on intuition. Click To Tweet
Predictive sales forecasting
AI-based forecasting methods are the most accurate. These new machine learning models analyze large volumes of data to come up with two important elements: predictive opportunity health scores and predictive forecasting.
- Predictive opportunity health scores: AI assigns a score between 0 and 100 to each open opportunity, representing the probability that the deal will close within the quarter or by the close date entered by the salesperson. The score is reached through predictive analytics of complex data, including engagement between the seller and the prospect, stage and historical sales data, and even the client’s social media activity.
- Predictive forecasting: Machine learning models calculate how much revenue the company will obtain in the next period, adding the amounts of all open deals from a seller and estimating revenue in any categories previously selected by the rep.
The impact of accurate sales forecasting
So, how critical is it to have accuracy in your sales forecast? What is the impact if you don’t?
This is a topic I discussed with Kevin Knieriem, CRO at Clari, in a recent episode of the Modern Selling podcast.
Kevin made a great point when he said that the ability to forecast is the most important number for a company. Why? Because when a sales leader knows that his team will overachieve their goals, he can make some investment decisions to accelerate the business as in additional sales prospecting tools.
On the other hand, if the sales leader can estimate that they won’t reach the goal, then he can hold back some investments, recalibrate the sales plan and try to hit the quota in some other ways.
When forecasting, sales managers must recognize the risks and know how to act on opportunities in real-time in order to lead a sales team to success.
Other areas that are impacted by sales forecasting are:
Hiring. When a sales leader can predict revenue with accuracy, she can make better hiring decisions, preparing in advance for increased business or loss of business.
Sales coaching. Understanding the signals of a healthy deal will help you focus on the right coaching that will lead to success.
Trust. A sales leader who constantly misses the mark in his forecasts will lose credibility with the C-suite and the board of directors. On a broader level, investors may lose confidence in the company if revenue predictions are inaccurate quarter after quarter.If you are a #SalesLeader check this out! Don't miss the mark in your forecasts and win credibility from your team and investors. I learned a lot about #SalesForecasting to predict #revenue in this fantastic article! Click To Tweet
Sales Forecasting Strategies
The formula for a great sales forecast is Visibility, Productivity and Predictability (VPP).
Visibility: You need transparency and consistency so you can have the right data coming in.
Productivity: If you do forecasting right, you’ll spend more time on the right deals and less time on the wrong deals. As a sales leader, you will be able to coach to success, instead of wasting time collecting data.
Predictability: You need confidence in your forecasts so you can act with confidence and gain the trust of your team.
Your sales forecasting strategy must begin with an established process to gather and measure data.
In most sales organizations, sales forecasting is conducted from data on a spreadsheet that the sales manager gathers from conversations with sales representatives.
This strategy assumes that sales reps are able to analyze their opportunities and interpret the data in the CRM correctly. We know, however, that this is not the case.
As a sales leader, you must train your sellers to identify what a healthy opportunity looks like as it goes through the sales funnel.#SalesReps, after reading this article, I give you my advice: Interpret the DATA in the CRM correctly to identify what a healthy opportunity looks like as it goes through the sales funnel. Great article! Click To Tweet
It is not enough to have a prospect in the CRM to know that a deal is moving forward. The prospect must be actually engaging with the rep, opening documents, replying to emails, and picking up the phone.
So, the right sales forecasting strategy will focus on sales engagement activities rather than sales pipeline stages or historical data.
The first question you must ask is, what does a good deal look like and what does a bad deal look like? The answer to this question will let you know if it’s worth pursuing a deal or not.
Questions to Assess Each Deal in the Sales Forecast
Here are 10 questions sales managers and sales reps must ask themselves to evaluate the health of an opportunity in the forecast:
- Is the executive buyer engaged in the sales process?
- Are other decision-makers participating and supporting the purchase?
- Is the budget approved?
- Has there been any paperwork done so far?
- Is the deal in the sales stage and does it meet all the requirements to be there? How long has it been there?
- How do you compare to any competitors also in the contest?
- Are buyers responding to the seller’s emails?
- Are there meetings scheduled with the executive buyer?
- Is paperwork moving back and forth with legal and other departments?
- Are the buyers engaging with content on your website?
If you can answer yes to most or all of the above, then you can say that you have a healthy opportunity and it should be in the sales forecast. But if all you get is silence after sending emails and paperwork, and everything looks the same after a couple of weeks, then that deal went cold.
Use these questions to establish some KPIs and to ask during 1:1’s with your sales team. With this data in hand, your sellers will know where they are and what they need to do to close each deal, making it easier for you to predict revenue for the end of the quarter. This will allow you to invest your time and coaching efforts in the right deals.
Sales Opportunity Stage Forecasting
In my history as a sales leader, I have seen organizations with many sales opportunity stages with each one carrying a percent to close status. In fact, many leaders have said they will only consider deals over XX% and everything else won’t be included. Inevitably, that creates a situation where sellers “fly under the radar” by placing most of their deals below the leadership threshold.
Here at Vengreso, we have simplified our sales opportunity stage and the associated forecasting to close percentage. We have created a sales forecasting template that I encourage you to consider adopting within your own organization. It’s simple and clean.
We have just 7 stages each with a percentage of close probability and they look like this:
- Quality – 10%
- Assess – 20%
- Pursue – 50%
- Propose – 75%
- Contract – 90%
- Closed Won – 100%
- Closed Lost – 0%
Without a doubt, as a sales leader, our RVP’s are working at levels 1 and 2. However, as a Sr. leader reviewing the sales forecast daily and weekly, deals that fall into stage 3 and above now hit my radar screen.
Understanding what you will review and what you will not, will help with driving better accuracy of what really will close at the end of each month, quarter, or year.
This sales forecasting process has improved our efforts as leaders. Take a look too at the Sales Opportunity Stage Forecasting infographic below.
How to Forecast Sales
Let’s turn our attention now to the forecasting process, translating the strategy above into four actionable steps.
1. Gather data for your sales forecast
Start by looking at the data in your CRM and other non-CRM systems (emails, calendars) for current quarter opportunities and identify those that look healthy and those that don’t.
2. Decide what opportunities to let go
The data will tell you which opportunities are not worth pursuing and investing your time on. Perhaps there will be some great opportunities you’d want to close but that would be better to let them slip into the next quarter.
Then you can create an action plan for the following quarter. For instance, if the deal is slipping because there is no budget, you can develop a plan to engage the client’s CFO to seek funding alternatives.
Remember that forecasting starts the quarter before, not two weeks before the end of the quarter. You should be able to forecast the quota of Q2 while still in Q1.WOW, I didn't know that forecasting starts the quarter before, not two weeks before the end of the quarter. This is very helpful because now I can forecast the quota of Q2 while still in Q1. Awesome article! Click To Tweet
3. Decide what opportunities to pursue
Once you identify healthy opportunities, pursue them with all your available resources, coaching your sellers on the steps to take to close the deal. Review if your sales reps are building the pipeline they need to reach the forecast.
That’s why it’s vital to have data in real-time, while you still can take action. If engagement data is not available until the end of the quarter, there is nothing you can do.
4. Identify renewal business opportunities
A quick win may come from customers who are due for renewals. So collect data on these customers and pursue those deals to help you hit your target.