Forecasting: business management tool, or colossal time waster?

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As I consult with companies on forecasting and improving forecasting I am amazed by the complex formulas and difficulty that many organizations add into their forecasting methods. This led me to create a webinar series titled “4 ½ Keys to Improving Forecasting.

While this post will not completely restate what an hour-long webinar will, I am compelled to write it for those that want a quick glimpse into the world of forecasting. There are several types of forecasting (revenue forecasting, sales revenue forecasting, product forecasting, demand forecasting, etc.) and several methods of forecasting (annual client analysis, quota/sales target, quote extrapolation, opportunity pipeline, and historic); however, this article mainly deals with revenue and sales revenue forecasting. SalesVantage.com has a great article on the types of forecasting and the key to accurate sales forecasting.

Let me start by stating my three basic principles on forecasting:

Principle #1: Don’t let perfect get in the way of better.

    Since forecasting is not an exact science, there is not way to have a perfect forecast. The best you can hope for is a better forecast. The key is to constantly improve on your forecast. A great way to do this is to review your forecast data on a regular basis (I recommend monthly) and review areas where your forecast diverges from actual sales data.

    Keep in mind, improving forecasting does not happen overnight. A good forecasting methodology takes months of tweaking to stabilize, and will require a lifetime of tweaking as factors like industry trends, product mix, government regulation, and economy change.

Principle #2: Keep it simple.

    While no one forecasting methodology will work for all businesses, I recommend combining data from at least two sources. Since most companies have access to their historic sales, this should be one of the sources, but keep in mind historic sales do not take into account new products and services and how they will affect future sales. The other source I recommend is the sales opportunity pipeline. An enterprise CRM system like Sage SalesLogix or SugarCRM can be a big help in this area.

    However, whatever you choose, keep it simple! The forecasting process doesn’t have to be a hyper-complicated process that involves complex mathematical equations and hours of man-hours each month. Keep in mind that most business are not that sophisticated and don’t usually have statisticians on staff.

    Any professional sales person knows that their time is their most valuable asset and you don’t want to implement a process that requires hours a day to keep up-to-date. Your process to manage opportunities and forecasts should be simple and reproducible. You should expect to see similar results from all sales people and you should be able to repeat it over and over again.
    If the process is not unbelievably simple for the major contributors to the data, your forecast numbers will be suspect at best.

Principle #3: Numbers Lie

    Just because you have a system for tracking opportunities, whether a spreadsheet or a contact management system of some sort, and just because each opportunity has a sales potential number with a probability does not mean that you have a forecast.

    Without common definitions and without constant end-user education your forecast results will vary greatly from salesperson to salesperson. Everyone doing their own thing with different beliefs of what an opportunity is and what makes an opportunity have a 75% chance of closing will drive any forecaster insane! Without education, consistency of action and understanding of definitions across the organization you will end up with is a bunch of numbers, not a forecast.

    Even after you have perfected the process your numbers will be inexact. The trick is knowing where they are wrong and using the forecast to draw a picture of how your business is performing.

The biggest take-away I hope you would get from this post is that forecasting is not like a Ronco oven. You cannot set it and forget it. Maybe I should have made this the first principle, because it is that important: forecasting is NOT as set it and forget it strategy for businesses! Forecasting is the driving factor providing you with information to make intelligent business decisions. Without it businesses have difficulties in managing inventory, cash flow and planning for growth.

The good news is that this is an area in which CRM software implementation, along with a solid customer-centric business strategy can be of great use.

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