How forecasting works

- Forecasting is the core responsibility of a sales operation's function. Accurate forecasts help business leaders to get a better understanding of their business' performance trends and they also provides visibility for planning guidance. An inaccurate forecast can cause wrong decisions and unwanted surprises so you don't want that. Now, a sales forecast is a financial model. It's calculated over periods of time, and it estimates the dollar amount that a sales team will be able to bring into a business. There are three things that you need to know in order to be able to do a forecast. First, you need to know your opportunity amount. Let me break down what opportunity amount actually means. A deal that you want to close in the future is called an opportunity. And the amount of that opportunity is called the opportunity amount. And all of the opportunity amounts summed up together are called pipeline. Second, you need to know the date by which the opportunity will close. We call this the close date. And lastly, we need to know the likelihood the opportunity will close by the close date. We call this the forecast probability. The opportunity amount times the forecast probability equals the forecasted amount. That's your forecast. Generally, there are two types of forecasting methodologies. The first one is called the bottoms-up approach. And it's typically conducted by sales reps and sales managers. Basically, it's the sum of all the forecasted amounts of all the sales reps, and then the sales managers modify this forecast based on their own judgment, either up or down. The difference between the sales manager forecast and the sales rep forecast is called the buffer. The buffer captures, in the manager's view, the amount the business will over-perform or under-perform on the amount projected in the original forecast. So one question that comes up a lot is, well, what if I don't have enough pipeline at the beginning of the forecast period? For example, what if I believe that my team will close 10 million dollars by the close date, but on day one, the opening bell of the forecast period, I only have seven million dollars of forecasted amount pipeline? In this situation, managers will create a positive buffer. Sometimes we call this a plug, which they can then reduce or increase over time until the close date. This bottoms-up approach provides managers with the opportunity to dive into deal level strategy and review. So that they can provide the coaching and the guidance on how to approach a customer and a specific deal. And these forecasts can also provide customer-driven and market trends that managers can pass upwards towards senior leadership. The other type of approach is a top-down model, and usually it's built and run by the sales operations team. And it looks at historic trends to predict an outcome. Sales operations' models will look at all the pipeline and apply a pacing approach based on previous forecast periods. Let me give you an example. If historically a team closes 50% of its total pipeline at the mid-point in a forecast period, one can assume that the same could be true for the mid-point of the current quarter. Now you may be wondering, do I really need to do both of these? The answer is yes. Using these two approaches together, helps the organization to get a more detailed, accurate, and comprehensive view on how the business is performing. This allows your team to spot trends and determine which factors contribute to either the negative, positive, or stable performance of your forecast. As I said before, forecasting is a big deal, and it's a core component of your SOPS org. Make sure that you invest the time to master forecasting on your way to building an amazing sales team.