Improve Your Forecast - Improve Your Business
Updated: Feb 21, 2020
Notice I didn’t say anything about increasing your forecast, while that is always a great idea. I am talking about improving the QUALITY of your forecasting; the ACCURACY of your forecast. I don’t care how large your forecast happens to be; it’s only as good as what you actually bring in. Can your business leaders take your forecast to the bank or do they have to do some type of mathematical gymnastics to get to a forecast they believe?
Forecasting is one of the most critical deliverables for any sales leader because so much is riding on it within the rest of the organization. Will your business hit your top-line revenue number? Will you have positive growth quarter-by-quarter or year-over-year? Will you be profitable? How much inventory do you need? Will you experience product shortages? Can you afford your new product development plans? Do you need to re-scale your business? Any of this sound familiar?
The answers to all of these questions lie within two more important questions. 1. Is your forecasting process hurting your business? 2. If you miss a forecast, do you know why and more importantly, how to fix the problem?
Accurate forecasting requires common language and common rules built into your sales process. Everyone must understand the forecasting process, their accountability (ownership of their forecast) and the impact of their forecast on the organization. It is so much more than simply hitting a yearly sales quota. Every Rep, Manager, Director and VP must understand how they are going to hit their number and be willing to own the timelines (monthly and quarterly as well as annually) to help the business run efficiently and profitably.
The alternative to generating an accurate forecast, based on expected sales performance, is forecasting “historically”. Which is simply forecasting what you did in previous years with some type of growth factor. This is like driving forward looking only in the rearview mirror. Going straight is difficult but doable, but as soon as the market or a major customer turns left or right, it becomes impossible. Now it is more of a guessing game; likely causing problems throughout your business.
Examples of Forecasting Problems: (Some are obvious – some are not.)
· Consistently missing quota Forecasting is probably only part of the problem here. There are likely other problems with the sales team or sales leadership as well.
· Sales team hitting quota but organization missing revenue target
· Missed product mix/margin targets
· Operating expenses out-of-line or over-budget
· Excessive inventory levels
· Product shortages
There are many other symptoms of poor forecasting, but the end results are missed objectives, unhappy business leaders and in many cases dissatisfied customers.
There is no way we can explore all of the possible solutions right now, but I would suggest two possible areas to start focusing on.
1. Evaluate your Sales Process. Is it repeatable and predictable? Is the entire team (Reps, Managers and Leaders) using the same tools, and does it provide the necessary metrics to actually generate an accurate forecast? Is it a proven process, or guess work?
2. Do your Compensation Plans promote the behavior you need to routinely generate an accurate forecast, promoting ownership and accountability?
I addressed potential Sales Process issues in a previous blog: “Do You Know Your Sales Process” back in November. You can go back and review that if needed. For now, I would like to address the compensation solution.
Salespeople are unique animals and I say that affectionately! They will do what you TELL them to do, most of the time, as long as they understand the WIIFM factor. On the other hand, they will do what you PAY them to do all the time! Therefore, their comp plans need to drive more than just hitting a top-line quota number. Most larger sales organizations understand this and manage the behaviors of their sales teams with routine (quarterly) Goals and Objectives. Unfortunately, many SMBs don’t take advantage of this. The size of the business or sales team doesn’t matter. Am I really suggesting that you pay your people to forecast accurately? In the correct way, absolutely!
The good news is that the use of Quarterly Goals and Objectives can drive many other behaviors beyond just forecast improvement, which can significantly help your sales performance in other ways. We will save that discussion for another day. In addition to paying the customary sales commissions, adding a quarterly bonus can drive the sales behavior you need to help run your business, including an accurate forecast. The components for that bonus could be hitting incremental quotas, forecasting accurately, managing margin targets, reducing discounts, maintaining timely business metrics etc. You simply design Goals and Objectives around the behaviors you need so if they hit their objectives, you hit yours.
There is no way that I can end a discussion on forecasting without asking one last very important question. Is your CRM killing your forecast accuracy?
I am a firm proponent of using a good CRM program, but you must use it correctly for your specific business situation. Making something easy or convenient doesn’t necessarily make it good. Unfortunately, many CRMs don’t effectively account for risk in your forecast. For them it is simply a math equation: FORECAST equals opportunity value times close probability (For all opportunities in any given time period). The obvious problem with this is that you don’t close 50% or 75% of a deal. You either get all of it or none of it. A more transactional business or a larger pipeline, can make this method more accurate…or better said, less inaccurate. Size can decrease your timing risk, but on the other hand, larger markets can greatly increase your competitive risk.
Common forecasting difficulties: 1. Accounting for risk: The risk for your forecast is not a single measurement, it is made up of multiple factors such as - Competitive risk:
Is the customer going to buy your product or the competition? - Timing risk:
You are ready to sell but is your customer ready to buy? How long is their decision process and what steps are involved? - Salesperson bias:
Some salespeople are too pessimistic – they are scared to commit. Others are overly optimistic – telling you what you want to hear. Note: The “sales” activities required for mitigating each of these risks are different.
2. Lack of consistency in process: Is the process repeatable and predictable? Note: this question never goes away, until you solve it! - Is everyone using the same process (language and rules) to eliminate the mistakes of misinterpretation or the need for leadership manipulation? - If you are accurate or inaccurate, do the metrics tell you why?
3. Accounting for the unexpected: “IT HAPPENS” - Are your sales teams accountable for their forecast (are excuses acceptable)? - Do you, and your sales teams, understand the concept of Upside Business? Upside Business are the opportunities that you might be able to pull forward if something falls out of your forecast so you can still make your number…your commitment! Note: Understanding your Upside Business is key to forecasting accurately.
In closing, your sales teams must understand the importance of accurate forecasting and how under forecasting is just as bad as over forecasting. In addition, help them understand the potential effects of poor forecasting from a business operations perspective: lack of product, lack of support, reduced marketing promotions, potential reduction in force etc.
As a Sales Leader, accurate forecasting makes your job much easier!