Why so many sales forecasts are fiction dressed up as data
You might have heard the expression: People make decisions based on emotion and then justify them with logic.
Understanding of the psychology behind this is still evolving, but the principle holds true. Humans are not as rational as we like to think we are.
If you want statistics on this, no better place to go than one of our favourite books, Thinking Fast and Slow, by Daniel Kahneman.
If you apply this principle to the process of constructing your sales forecast then you start to see why in so many businesses it’s a flaky predictor and a source of relentless frustration.
Why does accurate sales forecasting matter?
We once worked with a CEO who insisted accurate sales forecasting was the most important job his sales people did.
Most people will say that actually selling stuff is more important than this.
But if you take an umbrella perspective on the business you can see why someone might put it in the top three sales KPIs.
If you can’t predict your revenue stream then you can’t give a compelling story to investors. That leads to more expensive funding.
If you’re manufacturing, then production becomes more lumpy as you jump to fulfil last minute demand. Meanwhile last month’s forecast inventory sits in the warehouse, costing you space and money.
Even recruitment is influenced by accurate forecasting. Too often we’ve seen businesses recruit entire teams of sales people, only to fire them within a year when the executive team’s inaccurate revenue forecast was exposed.
Jobs lost. People’s lives and careers turned upside down.
What makes sales forecasts unreliable?
It’s an inescapable truth that sales people are optimistic. When it comes to selling this is a good thing, of course.
But when it comes to forecasting it carries some risk. This is amplified if your team are called into a forecasting meeting. No sales person wants to be the one who looks like they are reporting bad news.
Pressure from management ramps this up further.
Sales managers don’t want to be the ones presenting forecast variances to the board, so very often they will push back harder on their team when they don’t like the number.
You might imagine this is more likely to afflict inexperienced business owners rather than enterprises. But we’ve seen management hierarchies in global organisations who have built very rigid forecasting processes to ensure they are not the ones who appear to be caught out.
However big your job it’s quite hard to tell HQ in Basel or Munich that the UK is the reason the company’s EU team is missing budget this month.
At a lower level of detail, problems also occur through dirty data and weak processes. Dirty data can show up in deals in your CRM that remain open – even when the potential buyer lost interest months ago.
Likewise, it’s quite common for organisations to buy Hubspot or Salesforce and keep the factory settings on gate stages.
The global average for converting Prospects to Quote might be 50%, but it’s highly unlikely your business will be the same. Keeping these figures in your pipeline means any financial forecast of pipeline health is wonky from the start.
On the other hand you’d be surprised how many smaller businesses have no gate stages and no deal history at all. It’s hard to improve your metrics when you can’t point to first base.
In summary, sales forecasts go wrong both for cultural and technical reasons, often both. The source of your frustration can take some untangling.
What good sales forecasting looks like
- Be consistent. The key to good sales forecasting is consistency. It’s almost inevitable some sales people will find this process boring, but it pays to have a regular forecast meeting (say, monthly) where you review the status of pipeline opportunities. The language and terminology used in these meetings needs to be consistent too. Which leads us to…
- Clear pipeline criteria. It’s essential your definition of each gate stage is clear and what you expect to be fulfilled before an opportunity moves up the pipeline. What exactly needs to happen before a new client moves from Suspect to Prospect? Clue: It’s not just your sales person being offered a biscuit and having a friendly chat. (Read more here about pipeline stages)
- Balance lagging and leading measures. If you’re reporting sales to HQ or your accountant then the number and size of deals is crucial. As is the value of your outstanding pipeline, your conversion rate and so on. These are all measures of things that have happened in the past: Lagging measures.
But if you’re forecasting ahead then you also want some lead indicators. How fast are deals moving through your pipeline…and is it better or worse than last year? How many of your Prospects have all decision makers in agreement to the proposed deal?
It’s these leading indicators that will tell you soonest whether your pipeline is growing or shrinking.
In summary: A sales forecast is only as good as the sales leadership, operational discipline and culture that sits behind it. The good news is that it’s possible to shift these things, replacing optimism with a more scientific approach. That’s a load off the shoulders of most business owners.