Revenue projections and sales forecasts are critical to all businesses, regardless of size or industry. Executive and management teams reference these projections when building marketing plans and making financial decisions related to hiring and budget planning, so their accuracy is integral to long-term success.
Anyone who's tried to build a forecast knows how challenging this process can be without the right reporting habits in place. So, we've detailed three habits that lead to more accurate sales forecasting to help you get started.
1. Track and Report on Your Business
Before attempting to predict the future of your business, you must first look into the past. You should have a complete understanding of how your business has performed, how it has grown, and how it has reacted to market conditions over time.
You should also begin to collect valuable data points, including the average amount of deals closed per month, the average value of deals closed per month and your average deal value (regardless of timeframe).
Understanding past performance allows you to do two things:
- Establish a baseline you can measure your success (or failure) against.
- Create a simple forecast by multiplying your performance in a given time period with your average growth rate during that time.
For example, if you found that you earned $5 million in revenue during Q1 last year and that your company’s typical growth rate is 15%, then you can forecast that you'll bring in $5.75 million in Q1 of the upcoming year.
Obviously, this very basic forecast doesn't take into account current circumstances or contingencies, like in-flight opportunities and marketing campaigns. We’ll dive into how to account for some of those factors below.
2. Manage Your Sales Pipeline
A sales pipeline is a snapshot of where your existing opportunities stand and how prospects are moving through your sales process. It can provide insight into how much business is expected to close in a given timeframe and how close you are to reaching your established goal.
In order to use your sales pipeline to build a forecast, you’ll need your sales team to scrupulously maintain contact records so that they accurately reflect the status of current opportunities.
Every member of your sales team wants to focus their time on closing business and meeting their individual sales quota. Oftentimes, keeping contact records clean and current can take a backseat. But diligent pipeline management can have significant long-term payoffs, making it an essential aspect of sales rep's daily responsibilities.
That being said, your sales pipeline is fairly limited to the final stage of the buyer’s journey, so it's not a viable tool to use when making projections that extend far beyond the immediate future. In order to look further ahead, you’ll need to analyze your marketing funnel and understand marketing's impact on your sales pipeline.
3. Understand Your Marketing Funnel
Your marketing funnel is a representation of the awareness and consideration stages of the buyer's journey. In these initial stages, a prospect recognizes that they have a problem or gap that needs to be addressed, they conduct research to identify possible solutions, and they educate themselves on what solutions exist that might meet their needs. Qualitatively, it encompasses the following sales metrics:
- Website Visitors
- Marketing Qualified Leads
- Sales Qualified Leads
You can use this qualitative information to project how many leads will enter your sales pipeline by determining your marketing funnel conversion rates and funnel velocity.
Conversion rates represent the percentage of prospects that move from one stage of your funnel to the next. For example, you can track the amount of Leads that become Marketing Qualified Leads (MQLs) or the amount of MQLs that become Sales Qualified Leads (SQLs).
Funnel velocity is how long it takes a prospect to move from one stage to the next. If it takes one day for someone to become a Lead, two days to become an MQL, seven days to become an SQL and four days to become an Opportunity, then your entire marketing funnel velocity (sum total) would be fourteen days.
When you use this information in tandem with your conversion rate, you can predict what percentage of your website visitors will become Opportunities and how long it will take them to reach each subsequent stage of the buyer's journey.
Putting it all Together
Weighing all of this information together will allow you to build a more accurate forecast. Once you’ve been tracking and reporting on your business for a reasonable length of time, you'll begin to recognize what your average deal value is and if there's seasonality or any market conditions that your business is susceptible to. You can use this insight to better manage your pipeline and predict when things are likely to close based on where they are in flight.
Generating a more accurate sales forecasts will help you make smarter long-term business decisions and allow you to direct your energy and focus to areas that will produce the most return.
Guido is Head of Product and Growth Strategy for New Breed. He specializes in running in-depth demand generation programs internally while assisting account managers in running them for our clients.