Sales forecasting is a notoriously difficult problem and start-ups generally learn the hard way that sales meetings, prospect interest, and apparent momentum do not translate into purchase orders in any where near the time and speed one would hope.
Professional sales management forecasting techniques can help eliminate emotion and excitement ("We had such a good meeting, I know they are going to buy!") out of the process.
Missing a sales forecast really hurts no matter what size company you are. However, given that most start-ups are not profitable, missing a top line revenue number can have disastrous impacts on cash burn, employee morale ("we are working so hard and getting nowhere"), and shareholder confidence.
While there are many different models out there, I will share one with you that works well for the companies that I work with in conjunction with an investment in a CRM system, like Salesforce.
As a first time CEO or manager, a managing a sales pipeline by sales stage can improve forecast accuracy.
A key, however, is that the whole sales team buy into the process and be religious wrt its application. Top leaders must constantly evaluate where an opportunity is relative to the key sales milestones and if sales reps are realistically categorizing various opportunities.
Sample Pipeline by Sales Stage
- Prospect New (10% probability - telemarketing lead or tradeshow follow-up)
- Prospect Engaged (20% probability - webex, phone contact, early requirements discovery)
- Technical Evaluation (30% probability - demo/presentation completed, NDA executed)
- Budget Qualification (40% probability - major discovery requirements phase)
- Proposal Submitted (50% probability - confirm budget, test commitment)
- Technically Selected (60% probability - building ROI analysis with customer)
- Contract Negotiations (70% probability - reviewing proposals, technically selected)
- Getting Final Signatures (80% probability - selected, budget confirmed)
- In Purchasing (90% probability - waiting for fax to ring!)
- Closed (100% - purchase order in house!)
When forecasting revenue, try to match each sales engagement against the milestones/stages listed above. The forecast is then equal to the sum of the dollar weighted opportunities by stage.
Another key question is what is the required sales pipeline coverage ratio - ie divide the pipeline by the target and you get the coverage ratio...a typical rule of thumb is that you want $3-4 of pipeline for every $1 of targeted revenue.
The coverage ratio, sales cycle, conversion ratio of prospect to closed...all will help identify the required investment in lead generation/marketing necessary to hit the number.
If the coverage ratio is ~1, one can be sure the target will not be hit. Missed targets kill cash as gross and net burn become one in the same. It truly pays to forecast revenue in a disciplined and realistic manner, especially given the high cost of start-up capital.
While a rigorous process is not sufficient to hit the number, I believe it is a necessary condition to doing so in a predictable and repeatable manner.