Sales Forecasting Essentials - Get Your Definitions Right

There’s nothing more frustrating for a sales leader, a CEO or a Board of Directors than a continued inability to come up with a revenue forecast that consistently hits the target numbers. But - as anyone who has had the responsibility knows only too well, accurate forecasting is a tough task.

That’s particularly true in complex sales environments with multiple variables. And it’s a sad truth that there are no magic wands. But - as I hope to prove in this occasional series on the essentials of effective sales forecasting - there are some basic foundations that need to be laid.

At the most basic level, forecasters - and everyone they depend on for data - have to work off a common set of definitions about what exactly they mean by various forecast categories. It sounds like it ought to be simple, but I’ve been exposed to far too many sales environments where even this most basic objective has not been achieved...

So in this article I'd like to share a framework that has worked effectively for me and for a number of my clients. I’m going to focus on just two simple, basic elements: how you can establish your confidence level that any individual opportunity will close, and how you can establish a reliable overall revenue forecast from all the accumulated opportunities that could close in any given period.

Individual Opportunity Confidence Categories

Confidence categories relate to the probability that any individual opportunity will close at the time and value predicted. I have found the following category definitions useful with regard to these individual assessments:

Closed

The opportunity has already been closed in the current quarter, the order has been processed, and the value is already counted in the quarterly bookings number.

Commit (sometimes called Confident)

The projected close date is in the relevant quarter, the sales person is highly confident that the opportunity will close at the targeted value in the relevant quarter and they are implementing a credible and clearly-documented plan to achieve this. The close does not depend on any exceptional or out-of-the ordinary acts. Only an unpredictable and dramatic (as opposed to unpredicted) change in circumstances is going to stop the deal happening.

In any given period, on average at least 8/9 out of 10 committed opportunities should be expected to close as predicted, and of the remainder that do not, most should generally involve only a short and hard-to-predict delay rather than a loss or a decision to do nothing.

Probable (sometimes called Forecast)

The projected close date is in the relevant quarter, the sales person confidently expects this opportunity to close at the targeted value in the relevant quarter and they are implementing a credible and clearly-documented plan to achieve this. The close does not depend on any exceptional or out-of-the ordinary acts, but there is still work to do and some progress still needs to be made - but the remaining actions remain very do-able in the timeframe available.

In any given period, the majority of opportunities in this category should be expected to close in the quarter and at no less than the value predicted.

Possible (sometimes called Upside or Longshot)

The projected close date is in the relevant quarter, there is a realistic outside chance that this opportunity will close at the targeted value this quarter, and the sales person is implementing a credible plan to achieve this that does not depend on a miracle happening. This category can also occasionally be used for opportunities that have a most likely close date a quarter out, but where there is a credible chance (and a plan in place) to pull the deal forward.

In any given period, a minority of opportunities in this category are expected to close as planned - value and date. The opportunities in this category can act as a “reserve” for committed or probable deals that unexpectedly or unpredictably fail to close.

Pipeline

The projected close date is beyond the relevant quarter. There is no realistic possibility that this opportunity will close in that quarter.

Omitted

The opportunity is no longer live - either because it has been lost or lapsed.

Application Of Categories

You also need to clearly define which opportunities the various categories can be applied to. Closed and Commit should usually only be applied to late stage opportunities with a current quarter close date. Probable and Possible can be applied to late stage opportunities with a close date in this quarter or (assuming the forecast reporting system can handle it) next. All other deals must be in Pipeline - and the "Pipeline" status must not be applied to current quarter opportunities. 

Overall Revenue Forecast Categories

Now let's turn to the overall forecast. Overall revenue forecast categories refer to the aggregated revenue forecast for an individual sales person, any intermediate entity, or the sales organisation as a whole. The following category definitions might prove helpful with regard to these aggregated forecasts:

Worst Case

This is minimum revenue that can reasonably be expected to be generated. It is based on the accumulated Closed and Commit deal values. Auditable evidence-based adjustments based on the extrapolation of past performance can be made at every level (sales person, entity or total) but must be clearly documented and the original value should also be preserved.

Most Likely 

This is the most likely revenue that can reasonably be expected to be generated. It is based on the accumulated Closed, Commit and Probable deal values, with an evidence-based upwards or (more likely) downwards adjustment based on past performance.

Best Case 

This is the most optimistic revenue that can reasonably be expected to be generated if all or most opportunity closure plans are perfectly executed. It is based on the accumulated Closed, Commit, Probable and Possible deal values, with an evidence-based downwards adjustment.

Changes through the Quarter

It's to be expected that the accuracy of assessments - both at the individual opportunity level and for the forecast as a whole - will improve as the end of the quarter approaches. There is typically a pattern to this that can be used to adjust early-quarter projections.

Evidence-Based Adjustments

I’ve intentionally referred to evidence based adjustments - because you can’t afford to rely on gut feel. You need to analyse patterns of performance that, for example, predict how many opportunities of a given type have tended to close in the past, how accurate any given sales person has historically been in their forecasting, and how the typical relationship between forecast and actual values evolves over the course of the quarter.

It’s no wonder that sales analytics is one of the fastest growing areas of investment when it comes to sales performance improvement. Without the ability to analyze the underlying patterns of performance or extrapolate from them, any revenue forecast will simply have to rely on too much guesswork and gut feel. If you haven’t already, I strongly recommend that you invest in analytics now.

In Conclusion

Sales forecasting is part art, part science and part engineering. But without consistently applied definitions combined with evidence-based adjustments the results are likely to be patchy at best. So I hope that you find my suggested definitions useful. And now I’m interested to learn from your experiences. What definitions have you found most effective in your own sales forecasting? And what have proven to be your greatest sales forecasting challenges?