What is Sales Forecasting?

Executive Summary

• Sales forecasting is the signal given by individual salespeople to their management and that sales give to the rest of their company.
• We cover how sales forecasting works typically in companies and their pitfalls.

Introduction

Sales forecasting is the forecast created by salespeople and sales organizations. It seems cut and dried. However, it is close to impossible to find accurate information about how sales forecasts actually work.

Our References for This Article

If you want to see our references for this article and related Brightwork articles, visit this link.

False Information Around the Sales Forecast

Let us review some of the false and pollyanish information in some of the most popular articles on sales forecasting.

Quotes from Saleshacker on Sales Forecasting

A sales forecast is a prediction of future sales revenue. Sales forecasts are usually based on historical data, industry trends, and the status of the current sales pipeline. Businesses use the sales forecast to estimate weekly, monthly, quarterly, and annual sales totals.

Just like a weather forecast, your team should view your sales forecast as a plan to work from, not a firm prediction.

Sales forecasting is also different than sales goal-setting. While a sales goal describes what you want to happen, a sales forecast estimates what will happen, regardless of your goal. – Salehacker

The first paragraph is fine, and the second paragraph is a nice idea, but it is not realistic because sales forecasts are extremely inaccurate. And we have run into the same problem as a company. It is just tough to predict which customers will buy and which won’t. Our sales forecast (Brightwork Research & Analysis sells fact-checking and research services) accuracy is terrible.

It is so bad that we actually don’t put much effort into sales forecasting. This is a point that is often lost, which is that forecasting has to have a certain level of accuracy to make it worthwhile.

Let us move to the next quote.

Good data is the most important requirement for a good sales forecast. New businesses that don’t have much data about their own sales process may need to rely on industry averages or even educated guesses. On the other hand, more established companies can use their historical data to model future performance. – Salehacker

This is not correct.

Sales departments do not work off of historical data.

Other groups or departments in a company do, but it is not Sales. If one reviews all of the sales forecasting applications, they don’t even load historical data.

Working on many forecasting projects, I have run into no sales organizations that use historical data to produce a forecast. I can’t think of one. Sales teams are organized around accounts, and they forecast by customer/product or customer/service.

The quote continues…

There are several methods you can use to forecast sales. Many businesses use two or more methods together, to create a range of forecasts. That way, they have a best-case scenario and a worst-case scenario.

Many sales managers simply ask their reps: “when will this deal close, and how much will it close for?”

While this is a method you could use to try to create a sales forecast, it’s not recommended. Sales reps tend to overestimate sales forecasts, and there is no repeatable process to generate a consistent forecast with this method. Unfortunately, many businesses still rely on this method to estimate future sales. – Salehacker

While it may be true that it is not recommended, asking sales reps to enter what they think is, in fact, the dominant way Sales organizations forecast.

Articles Written by the Marketing Department?

Like many on the Internet, this article was written by someone who works out of the Marketing department of a company and does not appear to have injected reality into this article. They may have never had exposure to how sales forecasting works in companies.

One thing that came across from reading other of the most popular articles, according to Google, is how little reality was contained in the articles. The authors seem to be writing from the perspective of “what makes sense” rather than what is.

Ordinarily, you would not have so many people writing articles about things that they lack first-hand experience. Still, it has become commonplace for Marketing in companies to control the content on the website. Often, people in Marketing end up writing the articles as they are reticent to spend the money to hire those who have experience or a background in the subject matter.

Quotes from Copper CRM on Sales Forecasting

One article on sales forecasting where the claim can’t be made the author does not have sales experience is from Copper. Copper happens to be a CRM system that integrates with Gmail (we installed Copper as a plugin a few months ago but never got around to using it much more than creating a few opportunities in it).

The problem is that because Copper is trying to get people to sign up and use its CRM system, its coverage on sales forecasting is also inaccurate. Copper presents its CRM system as a silver bullet for sales forecast accuracy. However, we have done a lot more research into the topic (we think) than Copper and are a research entity, unlike Copper, which is a software vendor. We contend that CRM systems do not improve sales forecast accuracy, as we cover in the article Is Your CRM System Increasing Sales Forecast Error? After observing numerous CRM systems being used for sales forecasting, it isn’t easy to see how CRM systems will help sales forecasting accuracy.

Let us look at some of Copper’s quotations.

Say goodbye to spreadsheet wrangling. Think of Copper’s out-of-the-box forecasting reports as a roadmap to a reliable sales outcome. Copper’s forecasts are simple and intuitive so you can drill into each deal to see different deal stages and weighted forecasts. It’s never been easier to monitor the health of your business, plan ahead for future quarters, and manage the next steps for each opportunity. – Copper

This does not address the primary issues with sales forecasts, and the issues cannot be distilled down to “spreadsheet wrangling.”

These primary issues with sales forecasting are the following:

1. Most sales forecasts are incomplete
2. Sales organizations do not measure forecast accuracy and hence do not change the behavior of inaccurate salespeople.
3. Sales organizations tend to care about quota far more than forecast accuracy.
4. Many sales VPs and Directors are as bad as salespeople when it comes to rigging sales forecasts, as their jobs are as much dependent upon the story they tell the rest of the organization. VPs and Directors will, on many occasions, go into CRM systems and alter the forecast, not to be more accurate, but to further whatever narrative they intend to tell.

Overall, this quotation from Copper confuses data with an improved sales organization when it comes to being serious about accurate sales forecasting.

This is a common inaccuracy provided by software vendors.

The quote continues…

Need to check how closely a rep’s forecast aligns with their final bookings? Copper’s built in sales forecasting allows you to see individual deals by stage, amount, and win probability right from the reports. Not only does it help hold sales reps accountable, it also lets you see their progress in real time and improve their accuracy over time. Know which reps are on track to beat their targets and which aren’t, so you can help them hit quota. – Copper

There is absolutely no guarantee that visibility will translate to accountability.

Again, Sales are measured on sales, not accuracy.

This is a critical point.

Sales organizations’ expectations are normally set such that a high percentage of salespeople do not meet their quota. There is little support for any other focus by Sales organizations other than making the quota.

In the IT services field, where I have worked with many salespeople, there is little interest and ability not to sell these services based upon false claims.

Accuracy in sales forecasting is a benefit delivered to the rest of the organization, but the internal sales incentives typically trump this concern.

While doing the background research, the articles I read invariably presented the Sales department as an honest broker that merely seeks to provide an accurate forecast to the rest of the organization. This is the perspective of someone who has either no experience in a Sales organization or is gaslighting the reader for some personal gain.

For those who enjoy reading fiction in what purports to be factual articles or who prefer being lied to as a general rule, the available articles on sales forecasting providers many examples. Some of them are written by some Marketing department employees, and others by those with a system to sell who prefer if their buyers purchase based on false claims. 

Quotes from Salesforce on Sales Forecasting

Salesforce is another CRM vendor. As we have routinely noticed, most articles from software vendors are not reliable. Whatever the problem is, the articles are typically centered around telling the reader that their product solves that issue. And this means trying to oversimplify the issue so that it seems like it is just logical and straightforward to fix. All that is required is the right system!

This quotation explains the typical pollyanish take on sales forecasting without addressing its real issues.

The act of planning is always one of the best ways to ensure adaptability to your business’ ever-changing ecosystem. It reduces uncertainty and leads you to increased responsiveness and improved services.

There are certain changes within a period that happen in regularity or those that are already sure to happen (like the seasons and occasions, for example). These events will almost always affect your number of sales.

Sales forecasts allow business owners to plan out their much-needed requirements such as their raw materials, workforce, budget, and other logistics-related needs.

When using a sales forecast as a planning tool, you are not only able to prepare your resources, but you can also stay consistent with supplying your goods in the market. Elements like these can maximize your sales since you won’t have to turn down a single customer/client due to your lack of inventory.

As you can probably imagine, having your goods ready and available in the market at the right time (or when demand is estimated to be high) can spell the difference between you getting hundreds of thousands of sales, or you not getting anything at all. – Salesforce

As one can see, this author’s take is…

“sales forecasts are important, here are the benefits of sales forecasts.”

What Happens to the Sales Forecasts

In the vast majority of cases, the only forecast with its accuracy measured is the operational forecast. And they are aggressively held accountable for this forecast.

However, the inputs from sales and that none of the articles we profiled admitted was that forecast accuracy is not measured in most cases.

What an odd and important thing to cover up.

Furthermore, companies generally have no way of measuring the forecast error of the forecast inputs from Sales. The articles above entirely left out the issue that sales create forecasts at an aggregated level. In addition to entering sales forecasts into the CRM system, salespeople must enter their forecasts in the operational forecasting system, a working overhead that salespeople traditionally routinely complain about. Entering a sales forecast in CRM does not magically correlate it to the operational forecasting system. In the very best case scenario, one can measure forecast accuracy in the CRM system. However, CRM vendors don’t see beyond the CRM system. For them, the entire sales forecast process takes place in their CRM system.

In the vast majority of cases, this lack of forecast error measurement sales getaway “Scott free.” This is because the Sales organization does not measure the forecast error. The operational side of the business is also very limited in its ability to measure sales forecast input.

What Should Operations Do with the Sales Forecast?

Up to this point, we have been discussing the problems with Sales forecasts. I hope I have been able to make the case that Sales forecasts are problematic if you did know this already.

But what can be done about it? 

This has been a conclusion of the Brightwork Research & Analysis approach to forecasting improvement to measure sales forecast accuracy. This is something Sales will never do (for the reasons given above), and therefore, it must be done by operations or the supply chain forecasting group. While Sales talks about measuring forecast accuracy, in reality, this is the only group that is traditionally held accountable for forecast accuracy. They are also held accountable for the poor quality of forecasts provided by Sales. This is an important thing to consider

Let us review how the system of Sales forecast input currently works at most companies.

Forecast Error Measurement of the Multiple Inputs

When companies talk about their forecast error, they almost invariably are quoting the final forecast. Even the idea of thinking of separate forecast errors depending upon the input is an alien concept. It may be possible that Sales should get zero input into the Final forecast, or it should receive input and be the primary input, but only for three product categories. Which multiple stream forecast error measurement, no one knows.

A Better Approach

Observing the same thing at so many companies, we developed the Brightwork Explorer, too, in part, have a purpose-built application that can measure any forecast. This includes, of course, the Sales forecast. The application has a very straightforward file format where your company’s data can be entered, and the forecast error calculation is exceptionally straightforward. The Sales forecast can be measured against the statistical forecast — and then the product location combinations can be sorted to show which product locations lost or gain forecast accuracy from the Sales forecast.

This is the fastest and most accurate way of measuring multiple forecasts that we have seen.