Shouldn’t Sales Forecasting be Easy? What about Accuracy?

Posted on November 12, 2019 Updated on November 29, 2023

I’m sure that everyone has read articles that state some “facts” for managing your “sales pipeline” or “sales funnel.” Things like needing 10x-30x of your goal at the start of the process, down to needing 2x-3x coverage at the start of a quarter to help increase your odds of achieving your goal. Now, if it was only that easy…

First, what are you measuring? The answer to this question is something that anyone with a sales quota should be able to succinctly answer. For example, are you measuring?

• Bookings – Finalized Sales Orders
  • What happens when Sales Operations, Finance, or Legal push back on a deal? You have a PO, but has the deal really been closed?
• Billings – Invoicing Completed
  • This includes dependencies that have the potential to introduce delays that may be unexpected and/or outside of your control.
• Revenue – An in-depth understanding of Revenue Recognition rules is key.
  • How much revenue is recognized and when it is recognized varies based on a variety of factors, such as:
    • Is revenue Accrued or Deferred? This is especially key for multi-year prepaid deals.
    • Is revenue recognized all at once – such as for the sale of Perpetual Software Licenses? (even this is not always black and white)
    • Is revenue recognized over time – such as with annual subscriptions that are ratable on a monthly basis?
    • Is revenue based on work completed / percentage of completion? This is more common with Services and Construction. Combining contracts, such as selling custom consulting services with a new product license, can complicate this.
    • Are there clauses in a non-standard agreement that will negatively affect revenue recognition? This is where your Legal team becomes an invaluable contributor to your success.
  • Cash Flow – Is this really Sales forecasting?
    • The answer is ‘no’ in terms of Accounting rules and guidance.
    • But, if you have a start-up or small business, this can be key to “keeping the lights on,” in which case the types of deals and their structure will be biased towards cash flow enhancement and/or goals.

My advice is to work closely with your CFO, Finance Team, Sales Operations Team, and Legal team to understand the goals and guidelines and then take that one step further to create policies that are approved by those stakeholders and are then shared with the Sales team to avoid any ambiguity around process and expectations.

So, now the hard part is over, right?

It could be that easy if you only have one well-established product, a stable install base, and no real competitive threats, where the rate of growth or decline is on a steady and predictable path and where pricing and average deal sizes are consistent. I have not seen a business like that yet, but I would have to believe that at least a few exist.

Next, what are you building into your model to maximize accuracy? Every product or service offered may be driven by independent factors, so a flat model that evenly distributes sales over time (monthly or quarterly) is just begging to be inaccurate. For example:

• One product line that sells perpetual licenses may depend on release cycles every 18-36 months.
• A second product line may be driven mainly by renewals and expansion on fairly stable timelines and billings.
• A third product line may be new with no track record and in a competitive space – meaning that even the best projections will be speculative.
• Finally, services could be associated with each product line and driven by more dependent and independent factors (new implementations, upgrades, implementing new features, platform changes and modernization, routine engagements, training, etc.)

Historical trends are one important factor to consider, especially because they tend to be the things you have the greatest control over. This starts with high-level sales conversion rates and goes down to average sales cycle, seasonal trends, organic growth rates, churn rates, and more. Having accurate data over time that can be accurately correlated is extremely helpful. But factors such as Product SKU changes, licensing model changes, new product bundles, etc., increase the complexity of that effort and potentially decrease the accuracy of your results.

Correlating those trends to external factors, such as overall growth of the market, relative growth of competitors, economic indicators, corporate indicators (profits, earns per share, distributions, various ratios, ratings, etc.), commodity and futures prices (especially if you install base tends to skew towards something like the Petroleum Industry), specific events, and so forth can be a great sanity check.

The best case is that those correlations increase your forecasting accuracy for the entire year. In all likelihood, they provide valuable inputs that allow you to dynamically adjust sales plans as needed to ensure overall success. But, making those changes should not be done in a vacuum, and communicating the potential need for changes like that should be done at the earliest point where you have a fair degree of confidence that change is needed.

There will always be unexpected events that negatively impact your plans. Changes to staffing or the competitive landscape, reputational changes, economic changes, etc., can all occur quickly and with “little notice.” That is especially true if you are not actively looking for those subtle indicators (leading and trailing) and nuances that place a spotlight on potential problems and give you time to do as much as possible to proactively address them. Be prepared and have a contingency plan!

Forecasting accuracy drives confidence, which leads to the ability to do things like getting funding for new campaigns or initiatives. Surprises, even positive ones, are generally disliked simply because the results are different than the expectations, which begins to fuel other doubts and concerns.

Confidence comes from understanding, good planning, helping everyone with a quota, and the teams supporting them to do what is needed when it is needed to optimize the process and then to have an effective approach to determine whether deals really are on track or not so that you can provide guidance and assistance before it is too late.

It may not be easy, but it is the thing that helps drive companies to the next level on a sustainable growth trajectory. In the end, that matters the most to the stakeholders of any business.

As an aside, myriad rules, regulations, and guidance statements are provided by various sources that apply to each business scenario. I am neither an Accountant nor an Attorney, so consult with the appropriate people within your organization or industry as part of your routine due diligence.