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Sales Forecasting

The bane of existence for everyone involved in managing sales, including the CFO -- how do you know if the Company will achieve the revenue goals set out? It may be one of the two most important questions a Company can answer about itself, the other is whether or not the product is on time and on specification. There are many reasons why forecast accuracy is poor in most young companies and only a few reasons why it is accurate in any company -- a great understanding of the appropriate sales model combined with accurate and predictive data about the sales cycle.

When first starting a business, forecasting is often guesswork. A few hand-picked leads with a new, largely unevaluated product -- you know what you know through personal involvement in the accounts. Once the sales activity starts to scale, personal involvement can't scale with it, so a proper forecasting system with review of pipeline has to be instituted.

The best teams understand and are open about the details of the sales cycle -- they know how to walk away from bad deals and be honest about the stage of great deals. The best teams work many opportunities, enough to compensate for each other if a few delay past predicted dates. The best teams build confidence in their ability to sell and the method by which it works. The best teams regularly review and critique themselves. The best sales teams can sometimes overcome product issues, although not over the long term. The best teams operate with the best compensation systems which motivates them to succeed. You want to have the best team -- we'll explore approaches to how you can set one up and how forecasting and pipeline reviews plays a key role.

Pipeline

The Pipeline is often the warehouse for the collection of active leads that have had some level of follow-up qualification. A lead that just came in from the web site (e.g. someone who gave you an email) is not yet part of the pipeline until it is further qualified to assess its potential to convert to a workable opportunity.

The size of the pipeline (e.g. the total dollar value of all the qualified leads) is an important number to know as it helps tell you whether or not you are likely to converge on a future revenue target. A typical goal is to have a pipeline value that provides at least 3-times coverage of your next revenue goal. If you are suitably sophisticated in how you track leads, you would overlay a time line to your calculation so that you only count the leads projected to close within the next one or two revenue periods, versus all the qualified leads on hand. You may also want to discount a few very large leads from your pipeline measure, as they can skew the essence of what you are looking for -- a strong indicator business activity is at the levels needed to achieve goals.

As your business matures, suitable metrics emerge that help you further manage pipeline goals. As an example, if you are tracking the lead-to-opportunity conversion ratio, you can build more confidence in the value of the pipeline by working out the number of leads that need to be in place which, when converted according to the metric, would yield sufficient opportunity to achieve a revenue goal. In this case, you are measuring not just total dollar value of pipeline but the number of opportunities as well which are both excellent measures of business health.

Pipeline Management

Most sales management (CRM) systems provide features to enter and track the evolution of a pipeline. The challenge is to know how to use them effectively so that pipeline management becomes an essential part of business success. Depending on the pace of your business, you may want to run pipeline reports weekly to examine overall business health. When combined with revenue goals (by territory, rep, etc) you can develop your own at-a-glance snapshot for where business hot spots are occurring.

The first things to look for include insufficient pipeline coverage. Although you can examine this for the Company overall, it is more effective to examine coverage by each component of the revenue target. For example, you might have divided up a country such as the US into 4 regions, each with their own targets. In this case, your reports should focus on the pipeline coverage for each region, looking to maintain the desired multiple at all times.

There are three main outcomes of pipeline analysis:

  1. A region has insufficient pipeline coverage. This should trigger some targeted marketing activity (or cold calling, depending on sales model), to dig up more leads that can be qualified into opportunities for that region. Given you also have some data on how long it takes to close a typical lead, it is important not to fall too far behind on pipeline coverage or you will miss targets in that region. If sustained pipeline fall-off is occurring, you may need to readjust revenue targets, reduce number of resources working the area or examine other ways to reach market (e.g. engage partners, hold seminars, etc). There often is no quick fix, so you need to stay on top of this situation.
  2. A region has too much pipeline coverage. Although this sounds like a good situation, it is likely that some leads are aging more than they should because the team is not equipped to handle more leads than normal. Prospects may not want to wait to be pursued so they might look elsewhere for a more responsive company. You can take several actions including splitting the region (if this situation persists), adding more people to the region (don't over hire though) or rebalance the region with one that has less overall coverage. You don't want to change too frequently or you risk affecting sales momentum in the region.
  3. A region has the required coverage. On balance, this is the best situation, especially if it can be maintained. Business growth comes from focused efforts to add more leads to the region, scale up resources appropriately or define some incentives to improve productivity. It's generally true that a sales leader experiencing proper pipeline coverage across all regions is a happy executive (assuming the leads to convert into the proper amount of closed business).

The age of leads is also important to pay attention to. Many companies get ahead of themselves in terms of lead generation without being able to properly qualify and work the volume into valid opportunities. When this happens, the age of the lead tends to diminish its value as a real business opportunity. If nothing else, the source of the lead has likely moved on with their project needs (or the pain points have passed) and is now looking at a competitor. The team needs to be responsive to qualify leads in a timely fashion and properly prune leads that are no longer of value. This requires diligence which can be a performance measure if the team is not up to par on the goals set out.

Marketing plays a key role in pipeline management as lead generation campaigns are what often brings in the new business opportunities to pursue. For this to work effectively, marketing needs to work hand in hand with sales leadership to look at the data at hand, plot out where product marketing investments are going to be made and to track their overall effectiveness through the whole sales cycle. It is also important to make sure marketing does not generate more leads than the team can handle -- as mentioned above, it becomes a waste of resources which should be deployed elsewhere.

Once you develop confidence in the business trends and the metrics they generate you can credibly scale-up with far less risk than you might otherwise take on. As an example, if you knew that for every 20 raw leads marketing generates, you can convert 4 into closed business at an average selling price of $25K, you have identified a base set of metrics to scale the sales model.

Forecasting

Sometimes thought of as fortune telling, sales forecasting often guides the behavior of the Company overall. Being able to forecast accurately is a great skill, one that all investors will prize above most others in a company. Decisions to grow or shrink ride on how effective sales forecasting is - as does the jobs held by the sales team itself.

There are many factors that go into effective forecasting. Some of the key ones to consider include:

Forecasting should not be a fortune telling exercise. If a sales rep provides a list at the start of a month of N accounts that will close and closes N different accounts at the end of the month, this is not a success. It says a lot about how little is known about the opportunities. Sometimes last minute purchasing does occur, but not often enough to count on.

Sales reps should be rewarded for forecasting accuracy using a variety of measures beyond just the total amount of bookings. Some possible measures include:

It's worth spending time on a proper forecasting system and making sure reps understand the value of accuracy, even if it does not show well on their potential sales for the quarter.

Forecast Reviews

Sales leaders often have unique and individual styles when it comes to reviewing a forecast. Some like to go through every opportunity while others focus on the top 10 for the revenue period. No matter how it is done, reviewing the forecast regularly is a key part of overall business management. A common model may be to have an in-depth review at the start of each month of a revenue period switching to weekly during the last month and even daily during the last week. It's a necessary time and detail burden on everyone involved, so it must be a crisp event focusing on the actions that can be taken to advance towards the goals set out.

Some key things to look for include:

The Company relies on the forecast to predict revenue achievement. Accurate forecasting reduces the risk of expense growth as you build a business. Given the best form of investment is revenue, the more you can accurately rely on revenue achievement to fund growth of the Company, the less you will need expensive investment dollars. If you get to the end of a revenue period and find that the team has only achieved 75% of the forecast, the bank account has to make up for the missing revenue. Encourage and reward forecast accuracy, manage out people who are unable to develop the right relationships with their customers or partners such that they can predict accurately and consistently how much they will sell.

Metrics

Metrics is an important theme mentioned often within InsideSpin. They provide measurable indicators that can be used to gauge overall business health. As long as you avoid the analysis-paralysis scenario, using metrics to help manage the business is encouraged. Some key metrics that come up as part of sales forecasting include:

The more you model success, the more you can manage the team towards it.

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