How to Improve Sales Forecasting

Sales forecasting has changed with the popularity of sales force automation and with CRM moving to a software-as-a-service delivery model. Sales forecasts are often erroneously based on the opinions of individual sales reps, who rarely know without a doubt whether a particular deal will close in the designated time frame.

Fans of the Fox television series "House," a medical drama starring cynical but effective Dr. Gregory House, will recognize his catchphrase, "Everybody lies." Like other good one-liners, it rings true beyond its original context. One area where it has particular resonance for me is in sales forecasting.

Sales forecasting is serious business. Financial markets expect public companies to deliver a smooth revenue ramp. A missed sales forecast carries dire consequences. Wall Street will punish "your miss" by hammering your company's stock. Of course, enterprises need to get their sales forecasts right for their own reasons. If done well, a sales forecast helps assure that there is sufficient capacity to process orders and ship products on time. Get that wrong and you're saddled with either expensive inventory or lost sales.

Forecasting remains more of an art than a science. Even in large companies, sales forecasts are often based on the opinions of individual sales reps. Therein lies a problem. Only rarely do reps know without a doubt whether a particular deal will close in the designated time frame. There is a great deal of unpredictability that accompanies the purchase of consumer goods, and it's worse in sales to businesses. Most business-to-business transactions involve multiple influential decision makers and a decision process in which group dynamics play an important part. Under those circumstances, a sales rep's capacity to predict an outcome is often not much better than relying on the law of averages.

A good substitute for individual deal forecasting is extrapolation. Something like, "Last quarter, I had $1 million worth of opportunities and $500,000 came in. This quarter, I have $1.2 million worth of opportunities so, hmm, let's say $600,000 will be the forecast."

Hopefully, if you have 100 sales reps, the statistics all come out in the wash. But the sad fact is, statistics are only as good as the data on which they are based. Follow them blindly and the result will be no better than a simple guess.

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