Sales Forecasting-a blend of art and science

I was quite frustrated recently when one of my portfolio companies presented the board with a 2004 revenue forecast which was not based on reality. While I am not a sales expert or spreadsheet jockey, there are 2 important factors to consider when building a sales forecast-ground it in reality and use a handful of simple assumptions so you can manage your key resources, people and cash, appropriately. Yes, there is always a mysterious aura about forecasting sales, and it is alot of art, but to the extent you can bring some science and process into it, the better off you are. Many companies subscribe to certain methodologies to better quantify a sales pipeline such as Solution Selling or Targeted Account Selling. What I do not like are percentage closing numbers randomly assigned to prospects where a number like 80% probability of closing has no defined criteria and differs deal by deal based on feel. Here are a few simple assumptions I like to see that drive the sales forecast:

1. Number of sales people
2. Quota per sales person (usually overassign 10-15%)
3. Average Selling Price (ASP)-in today's market, you may see a small pilot deal followed 3 months later with a much larger sale (model this appropriately). If you take 2/3, you get an approximate # of deals you expect each sales person to close annually
4. Sales cycle-how long does it take to close a deal
5. Time for a sales person to be productive (usually around 4-6 months depending on maturity of product and market)
6. Lead generation-how many new leads per month and what % becomes qualified leads

Too many assumptions and drivers in a model make it too complicated and too hard to use as a management tool. It should be easy for you to add a sales person, change the ASP, etc. and see how it impacts your sales. To ground it in reality, I like to take a step back from the bottom-up approach listed above and take a top-down view. For example, does this company have the resources to go from $1m to $4mm of revenue or from $5mm to $10mm? Is the market ready for this? Where will it get the leads? Is a $2mm quota for a missionary sale and market realistic based on past history, looking at other markets, and using public company comparables?

One experienced VP of Sales told me that he likes to have a 3-4:1 coverage in his pipeline of 80% and above deals going into a quarter. Of course, the definition of 80% depends on what sales methodology you use, but the point is you should have quantifiable criteria where 80% could be defined as deals where you have had multiple meetings, identified a real pain and a decision maker and a budget, defined a decision making process, and feel a strong probability of closing by the end of the quarter. That way, if a potential customer delays a purchase for whatever reason, you have 2-3 others that could potentially replace it. In addition, you have some good visibility for the next quarter. While many early stage companies rarely achieve pipeline coverage like that, the important point is to run the numbers and ground them in reality. Also, be realistic and harsh about your pipeline. Throw out the garbage, the deals that have just hung around for a long time and have no momentum.

More often than not, management teams tend to put an overoptimistic pipeline in front of the board thinking a larger pipeline is better. I would rather have a higher quality, filtered pipeline that is well scrubbed than a larger pipeline with no meaningful criteria to move deals along in the sales process. With the former, we all have a real tool that can help us better manage our resources.

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This post was written by who has written 358 posts on BeyondVC.

2 Responses to “Sales Forecasting-a blend of art and science”

  1. brent Jan 21, 2004 at 1:51 pm #

    Ed,

    I agree with your thoughts on this. Depending on the VP of Sales and the personality of the reps, the term “pipeline” can vary greatly. After working with some of the most successful (using the big W2 definition) sales people in the enterprise software space, I’ve concluded that many have an optimistic attitude towards new business which allows them “go after” and close deals that a CTO or strategy person might rule out as a viable prospect. This is the same thing that can inflate a pipeline and make it hard to know exactly what will close each quarter.

    On the other hand, I know many reps and VP’s that feel they were sold a story and unrealistic goals by the management team and VC. While the first deals are the toughest for a new company, they are usually in the works for a long time and have close ties to the VC, board, and management team. Landing deals 4-10 (based on an ASP and sales cycle that is somewhat arbitrary) is an uphill battle.

    When I speak with a sales person who is successfully closing deals for a young company or new market, I’m quick to ask “how?”
    These are some common answers.

    1. I qualify harder than ever before. If I don’t ask the hard questions, I’m fooling myself and wasting everyone’s time.
    2. I’m detailed and thorough on these qualified accounts. If I loose a deal, it’s most likely for reasons outside my control or influence.
    3. I get in before the term RFP is mentioned. In the boom times, many reps closed huge deals by having enough irons in the fire and working the numbers. However, in today’s climate, I’m not selling to buyers. I find the pain, collaboratively define and present the solution and close the deal. If it goes to an RFP, I’m helping them write the specs so it gives me a competitive advantage.

    I’ve drifted into the execution of the plan. However, the execution and strategy is a part of developing an accurate forecast.

  2. Ed Sim Jan 23, 2004 at 11:11 pm #

    Agree on your comments on how to drive early stage sales. Getting in first and helping write the specs and RFP is definitely a bonus.

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