Forecast time again? Ugh.
Sales forecasts can be a chore. A hassle. An exercise in pulling teeth. But done right, they’re also a way to keep competitive — to work smarter, not harder.
“They are extremely important in effectively planning any business,” said Mark Moon, a professor of marketing and supply-chain management at the University of Tennessee in Knoxville.
“It drives the supply chain. It drives all kinds of staffing decisions in a service-oriented business,” he said. “It drives financial projections. That estimate of what demand is likely to be in the future is an absolutely critical element.”
To paraphrase Mickey Rourke’s character in Body Heat, there are 50 ways to screw up a sales forecast. If you can think of 25, you’re a genius — and you’re no genius.
Fortunately, at Pipedrive, we’re here to help. So here’s a quick list of pitfalls to avoid, putting you well on the way to unlocking that genius status.
1. The future ain’t what it used to be
Companies often go into a forecast assuming “that the future is going to look like the past,” said Moon, who co-authored a book on forecasting.
But a good forecast starts with a realistic assumption about what customers are likely to buy, not what they purchased last year.
“You’re looking for patterns in demand that happened in the past, and there are elaborate statistical models that will help to identify those patterns and project them into the future,” he said. “But the big assumption there is the future is going to look like the past, and that’s not always the case. Even if you have a mathematical model or a statistical approach that really, clearly points out patterns in history, will that be the case in the future?”
A better approach is to forecast demand, not sales, he said. A sales-based forecast can be manipulated to make goals easier. But trying to anticipate demand gives a company a clearer picture of its needs in terms of people, products or services.
2. It’s a projection, not a promise
Done right, a sales forecast can inform executives and guide their decision-making. Done wrong, it can become a millstone around their necks, said Scott Edinger, a business consultant and expert on leadership for revenue growth.
“Those projections immediately become promises, whether it’s to the sales manager or to Wall Street,” Edinger said.
A better way to approach forecasting is to treat it as an exercise in understanding your business and its customers.
“If you use your forecast that way, then it can become a useful tool that you can look at on a near-daily basis to understand where you should focus your efforts and your energy, where you need to follow-up and where you need additional resources . . . instead of being an exercise where I’m going to get raked over the coals by my manager because something changed,” Edinger said.
And sales managers shouldn’t confuse what’s likely to happen in their market with the targets they set for their teams. When they do, the teams often respond by low-balling their estimates, giving them an easier mark to hit.
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3. Don’t leave money on the table
A sales forecast can go wrong from the beginning if it’s too narrow. For instance, a company that just adds expected growth rate to its most recent sales figures not only risks missing that target, it might be overlooking potential opportunities.
“You’ve got to look farther and wider,” said Deb Calvert, president of People First Productivity Solutions. “If all you’re doing is looking at your own numbers, you’re limiting your potential.”
Instead of letting a budget drive behavior, the marketplace needs to drive the budget, Calvert said.
“If you look at the marketplace, you might find out that not only could your percentages be higher, but maybe you need additional team members to go out and maximize all that potential,” Calvert said.
Or a company might fail to spot a weakening market, leaving it struggling to make up the gaps — or driving off salespeople who can’t reach unrealistic goals.
4. You can’t depend on a simple remedy
Moon said companies often delude themselves into thinking that new technology — a better software platform, a more precise mathematical model — will solve their forecasting problems.
But building a forecast is one that’s strongly influenced by a company’s culture.
“I’m not saying that technology or statistical forecasting models are not useful. They most certainly are,” Moon said. “But it is, at the end of the day, a people activity, and the culture that drives collaboration and consensus and supports dispassionate assessment of the marketplace is far more important than any particular piece of software.”
5. You’ve just scratched the surface
Knowing how your customers buy is almost as important as knowing what they want, Edinger said.
“I’m a management consultant. I know for a fact that CEOs do not hire management consultants through cold calling. They just don’t. So I’ll never pursue that strategy,” he said. But other companies do, “and the worst thing that happens is every now and then a blind squirrel finds a nut, and they hold that up as the reason to spend lots of time, effort, energy and resources doing it.”
Where does a potential customer find out about your product? Whose recommendations do they trust? What are their internal decision making processes?
“If you start to have that conversation with a lot of your customers, you start to see common threads emerge from that,” Edinger said.
6. Brace yourself: You’re going to be wrong anyway
“We don’t have a crystal ball, so we don’t know exactly what’s going to happen three months, six months, nine months, or 12 months from now,” Moon said.
So every forecast is going to be wrong — but don’t let that stop you.
He said a careful estimation of future demand can make a “huge impact” by reducing costs, reducing inventory, and improving customer service.
“A more accurate forecast, a more credible and useful forecast is critical for the planning that needs to take place in a global supply chain context,” Moon said.