Tom Cruise as Jerry Maguire made movie magic shouting “Show me the money!” and that quote has been bantered about in the sales world ever since. You’ve probably said it once or twice to your sales reps and managers. It’s at the heart of sales forecasting: you need to see where the money’s going to come from and when.
To get that information, you need to have the right method for sales forecasting. Here are five techniques that will help you and your company to know where the money is.
1. Opportunity stages forecasting
The most basic approach for calculating the chances of a deal closing are to look at where it is in the pipeline. Most businesses can break their pipeline down into a general set of stages: prospecting, qualified, quote, closing, and ending at won or lost. The farther along this chain of stages a deal gets, the better it’s chances of making it all the way to won.
To adopt this forecasting technique, you’ll need to analyze and understand your sales team’s past performance. It requires extrapolating, so a solid grounding on the rates of success from each stage is necessary to get a good estimate on future results. If about half of your deals that reach the quote stage end up as won, then you know you’ve got a fifty-fifty shot for all the deals in that stage during a given quarter.
Although it does make a numbers-based prediction, forecasting based on opportunity stages is an imperfect calculation. It can’t account for the individual characteristics of a given deal, say a repeat client versus a new one. It also requires that the deal value and close date are accurate in your CRM. Without that first step, your predictions will never be on point.
2. Length of sales cycle
Forecasting by the length of your sales cycle is another numbers-centric approach. Rather than analyzing success rates based on stage, this approach makes assessments based on age of the deal. It requires your team to crunch how long your average sales cycle is.
Since it’s not tied to strictly defined categories, using the length of sales cycle approach can open up the option for creating algorithms based on different types of deals. So you could have a separate set of numbers for the average repeat customer, or the average lead who comes from a website query.
Like the opportunity stages approach, this method still requires that accurate data finds its way into your CRM. Especially if you have multiple equations in the works, you’ll need to make sure that deals are being tagged and categorized correctly so that the math gives you a reliable prediction.
3. Regression analysis
One of the most mathematically-focused choices for forecasting is regression analysis. Success with this method requires a good grasp on statistics as well as on the factors influencing your company’s sales performance. It involves calculating the relationships between variables that impact sales. This could be sales calls, or inquiries received, or demo meetings held.
While this approach can yield very accurate forecasts, for some companies, being able to account for many variables that go into a successful sale may require a PhD in mathematics.
4. Forecast stages
This approach relies on the insights and intuition of the sales reps rather than on a deal moving through pre-determined stages. With forecast stages, reps make a personal projection about the outcome of any given sales opportunity. For instance, they may be certain that a customer is ready and willing to make a purchase, or the opportunity may need several things to come together for success.
The exact terminology may vary from one business to another, but the key here is that the reps are making a judgement call on how likely each of their deals are to close. When this information comes at the beginning of a deal’s lifespan, it can help managers and execs to get a long-range view of results. The sooner they have that intel, the better their financial predictions will be.
The downside to this approach is that it’s not a hard science. It requires that your whole team of reps is able to make honest assessments of their potential clients and their own skills. If you don’t have confidence in your reps, then this approach will lead to lots of disappointment for your business.
5. Scenario writing
Our final technique is also dependent on a subjective understanding of business and sales. In this approach, the forecaster projects likely outcomes based on a specific set of assumptions. He or she will draft several different pictures that could unfold based on the different sets of assumptions, say best- and worst-case scenarios for the deals in progress.
As with forecast stages, this strategy involves at least one person having a keen eye for both business activity and psychology. Both of these subjective strategies are more an art than a strict science, so they’re best used as a complement to a more numbers-driven method. Combining the strengths of both approaches will be more likely to create a full picture of what the future holds for your company.
Want to learn more about sales forecasting? Are you ready to start producing powerful insights for your business?