How to accurately forecast sales based on a sales process

If you manage sales people or own a business with a sales team you should be forecasting your sales. The longer the sales cycle the more intense is the need for forecasting. Most basic forecasts are just spreadsheets with a gross sales number and possibly an expected close time. This leads to huge forecasts when in reality, no business closes everything in their pipeline or forecast. This eHow is about how to more accurately forecast sales for the next month or the next year based on probablity to close and the stages in a sales cycle. Please also see my article on mapping the sales process or cycle prior to diving in on this one. You will probably be lost otherwise.

Instructions

Difficulty: Moderately Challenging

Things You’ll Need:

• A previously established sales process or sales map
• A standard spreadsheet to capture and track forecast or pipeline movement.
• WRITTEN rules as to how items are forecasted
• A training session to roll out and implement the new system
• Unwavering committment to live by and get your sales team to live by the rules or standards

1. The first step is to develop a spreadsheet to record the forecast information. Note: each week should have its own spreadsheet to track results over time and to make it more useable.
   
   Suggested fields for your spreadsheet
   
   * Account/Opportunity Name
   * Sales rep in charge of the account/opportunity
   * Products or services that make the opportunity
   * Stage in the Sales Cycle-more on this to follow
   * Probability weight for where in the sales cycle the opportunity is-again more on this to follow
   * Probability to close based on the sales persons "gut"
   * Amount of money in play-forecasted gross revenue
   * Net present value of the opportunity based on probability weighting and probability to close-details to follow
   * Notes on the last contact
   * Next steps for the next contact, management interventions needed
   * Expected close date
2. Most of the columns listed above are self explanatory and these are the ones where text is entered into the spreadsheet. The real value comes in applying your sales process map and calculations tied to that.
   
   Start by looking at your sales process. There are several decision points, gates and go/no go points. Moving through these gates increases your likelihood of closing the business. Some are small steps forward others are large.
   
   Each gate should have an ever increasing probability assigned to it. That is, a first meeting should have a 10% probability, most likely. This means for every 10 accounts you have a first meeting with you are expecting to close one of them. Easy enough. Roughly half way through your process you should be at 50% or better on your probability to close. Gates should have ranges of probabilities. The demo stage or site visit could have a 30%-50% range based on instinct.
   
   The second probability is the sales person's valuation. This can be useful because you will have accounts that look promising early on or look pessimistic, so you should allow for factoring that into your analysis.
3. Here's an example of a calculation of a basic opportunity:
   
   $100,000 opportunity in Stage 3 or 30% probability, with the sales person's opinion that there's a 60% chance to close it equals the following net present value
   
   100,000 X .3 = 30,000, 30,000 x .6 = $18,000.
   
   So at this stage this has a net present value of $18,000 in the forecast.
   
   Another example:
   
   $100,000 in the second to last gate has a probability of 85% closing and the sales person is 90% sure it's a done deal.
   
   $100,000 X .85 = $85,000, $85000 X .9 = $76,500
   
   This opportunity now has a $76,500 dollar value in your pipeline.
4. The first goal here is to lessen the reliance on gross numbers to run the business. The second goal is to make it less painful to be straight forward on the numbers. Lastly, it's also to psychologically get sales people's attention that a $10 million pipeline isn't really a $10 million pipeline when you factor in the long process of closing business. This will help curtail "happy ears" and get them to push harder to put more in the pipeline.

Tips & Warnings

• Do allow sales people to have input in the weighting systems, both on the gates and their instincts or gut
• Have a written policy about how the spreadsheet is run and manage consistently to that spreadsheet.
• Version the spreadsheet by week or reporting period.
• Enforce accuracy in the forecast with regard to the opportunity amounts (they frequently change), expected close dates, comments and next steps.
• Compare this week's forecast to the past 2-4 to look for trends and to manage consistency.
• Consider an incentive for your sales people for accuracy in their forecasts. Give them a reason to shoot straight with the numbers.
• Email me if you would like to see a version I have used in the past or would like help putting one together.
• The data in the forecast is only as good as the data entered and the person entering it.
• Consistency is critical to managing over time
• The numbers change as the sales cycle progresses, but so might the opportunity amounts too. Make sure you capture that.
• QUICKLY review the entire pipeline of reps that leave or are asked to leave. Frequently there is a lot of fiction in them, so you're going to have to move fast to change, correct or eliminate things.
• Doing this without a sales process map is little better than guessing.