How to Accurately Predict Sales Revenue6 Jun, 2007 By: Tom Callinan imageSource
How to Accurately Predict Sales Revenue
Wouldn’t it have been nice to know in April that you were going to have a
soft equipment revenue performance in June? Wouldn’t it be nice to know early
on that you might be poorly positioned to grow revenue in the next quarter? It
will not happen overnight but you can become a virtual clairvoyant with the
The first step of the process is to get a solid forecasting system in place.
What is the monthly variance of actual equipment results to forecast? Does your
sales force deliver within 10 percent or do they miss by 30 percent? Is the
variance consistent month to month or are there wide variances as you track it
across an extended period of time? Do you track the variance at all?
If your sales team cannot deliver a forecast you need to fix that
immediately. There are two behaviors to avoid in forecasting, lack of
objectivity, otherwise known as overly optimistic, and forecasting a number you
need or desire. The further away a rep, manager, and sometimes even the
principal of the dealership, get from their quota or business plan, the more
both of these behaviors begin to creep into forecasting.
Many times the rep will win the business; they simply have it forecasted in
the wrong month. That is a simple fix: Get it in the correct month. Make
certain that you have a litmus test that any transaction must pass in order to
get into the monthly forecast. Tie the forecast to the transactions and do a
post mortem each month to see who delivered the transactions they forecast. The
majority of the variance should come from changes in the value of forecasted
transaction and not from delivering different transactions. Keep a record of
each sales rep’s trend in forecast accuracy and work to get it consistently
within 10 percent.
I know some leaders that believe they should always give their sales team
super stretch goals. The sales manager forecasts $350,000 for the month and the
principal tells them it is not good enough and that they must deliver $500,000.
Armed with the proper information, you could make this type of change 60 days
forward. But unless something really significant has been missed, nobody can
deliver 40 percent more than they forecasted in less than four weeks. This
principal is simply stating that they are not interested in a quality forecast
process. I believe that is a mistake.
Once you get in place a solid forecasting process, you will want to extend
this process into a sales pipeline (funnel). There is one simple way to grow
your business: grow your pipeline of prospects! So are you tracking your 30 –
60 – 90 day pipeline? What was it three months back? Six months back? A year
back? Is it increasing, decreasing, or static? This is information you need to
have to run your business. You will also want to know your close ratio.
Usually you will find a 20 percent close ratio in the 30 day period. A great
test is to see if your forecast equals 20 percent of your 30 day pipeline. If
it hits the desired ratio (+/- 2% of that 20% mark) you are usually safe.
Nevertheless, you should track this for yourself to get your team’s ratio.
You also want to track your 60 and 90 day close ratios. This requires going
back one and two months to your previous pipeline report. Your revenue in June
was in your 90 day pipeline in April; what was your close ratio of March’s 90
day "bucket?" Over time you will know your 60 and 90 day pipeline close
ratios. Now you have the power to predict, and change, the future. So over a
nine month period you determine that your 60 day close ratio is 10 percent. In
other words, if in April you had $3,000,000 in your 60 day "bucket," you will
have done approximately $300,000 in equipment revenue in May. If you thought in
April that you needed to deliver $350,000 in May; you would have had a full
month to increase your pipeline and can then focus on the correct activities to
increase your prospects. Remember this formula of forecasting going forward,
That last sentence is critical. Let’s go back to the earlier scenario where
the dealer principal told the sales manager that he needed to deliver $500,000
when the forecast was $350,000. This manager, and the entire sales team, will
be chasing their tails looking for additional revenue to get above $350,000.
They probably will not have much luck—about the best outcome that can reasonably
be expected is that it puts tremendous pressure on them not to fall below their
$350,000 forecast—but it will laser focus them to the current month at the
expense of future periods. This lack of visibility into future periods and the
over emphasis on the current month has an ability to create an ugly but
repeating cycle of not building pipeline and not increasing revenue. If this
dealer principal would accept the current forecast of $350,000 and focus the
sales force on growing the 60 and 90 day pipeline, they could break the cycle
and get their business growth jump started.
Once you have mastered forecasting and the basic 30–60–90 day pipeline, it is
time to extend your visibility. You will want to move to three phases: Phase I
(P1) represents prospects that will buy from 91 days to 18 months out; Phase II
(P2) represents prospects that will buy from 31 to 90 days out; and Phase III
(P3) represents prospects that will buy in the next 30 days. It is important to
note that this is not a forecast. By placing a prospect in any pipeline phase
you are not inferring that they will buy from you, just that they will buy in
that period. You use the same approach to build a history of close ratios in
each of the three phases.
You can now track your pipeline growth and get visibility into future
periods. Remember, if your pipeline is not growing it is virtually impossible
to grow your business (the only alternative is to increase your close ratio, but
that is much more difficult than growing your pipeline). I recommend you set a
target for pipeline growth and track it at the rep level. Clearly, you will
want to use your CRM to accomplish this.
If your P1 close ratio is 5 percent and you need to average $400,000 per
month four to six months out, you need to have $8,000,000 in your P1 pipeline.
If you have $7,000,000, you have three months to add another $1,000,000, so be
sure you execute on the proper activities. Increase acc-ount reviews to 90
minutes per week per rep and add a one hour telemarketing blitz every Tuesday
morning. You now have the knowledge to change the future—you do not need to
live month-to-month—so get to it.