How to build a realistic sales forecast
And how to respond when your boss says the number needs to be higher
You’ve built your sales forecast and your VP/CEO/overlord says, “The number needs to be higher”. How do you respond?
Well, let’s start with how NOT to respond:
Don’t just raise the forecast to make them happy.
Don’t just say you’ll go back and look at it to see what you can do.
Don’t just tell your reps that management made you raise and we all just have to suck it up.
Doing any of these will just destroy your credibility in the short term and eventually cost you your job.
Instead, follow these 3 steps:
Ask clarifying questions
Show your work behind the forecast
Be clear about what you need to make the forecast higher
1. Ask clarifying questions
As with any objection question from your boss, the most important thing is to get to the “why” behind the ask:
Q: “How much bigger do you need it to be?”
A: “We need to it to be $1.2M” (They always have a number in mind)
Q: “That’s 20% higher than our current forecast. Can you show me the inputs you used to get there?”.
A: ……..
9 times out of 10, the input they used was a tops-down calculation that either achieves a revenue growth rate that makes investors happy or a burn rate that buys the company more runway to find growth.
While growing faster and reducing burn are very reasonable objectives, the actual numbers are typically far from reasonable and it so it inevitably falls on the head of sales to bring the conversation back to reality.
The way to accomplish this is by showing how you arrived at the forecast and asking how your assumptions compare to theirs. Doing so will flush out the fantasy optimism and get everyone aligned on the realities of the business.
2. Show your work behind the forecast
There are 3 pieces in the sales forecast pie.
Current weighted pipeline for the forecast period
Additional pipeline to be sourced from sales
Additional pipeline to be sourced from marketing
Here are step-by-step instructions to build each piece, how to present it and how to use it to bring the conversation back to reality.
Current weighted pipeline for the forecast period
This is the probability-weighted revenue from all deals that have an expected close date in the forecast period. Here’s how to calculate it.
Ensure every deal has a critical event that aligns with the close date. For example, if your customer has told you they need to be launched by mid October and onboarding takes a month, the close date should be no later than mid September. If there is no critical event on the deal, ask the rep how they determined the close date.
If you have limited operating history, multiply the sum of all deals by the historical win rate from your lowest stage. For example, if you have $100,000 of deals with a close date in Q3 and you’ve historically won 15% of deals once they are created, your weighted pipeline would be $15,000.
If you have a stable sales process, calculate the weighted pipeline by stage. For example, if you have $407,000 in your Discover stage, $311,000 in Prescribe, $225,000 in Propose and $110,000 in Trade and your historical win rate from each stage is 20%, 27%, 45% and 89% respectively, your weighted pipeline would be $407,000 * 20% + $311,000 * 27% + $225,000 * 45% + $110,000 * 89% = $365,059. It should look like this: