Forecasting in sales
You cannot run a business without knowing how many deals you will close. Forecasting sales and predicting revenues is not easy. Depending on how many deals you have in your system there are 2 types of forecasting that work:
– the weighting system
– the commit system.
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There are two ways of forecasting when you have a pipeline. Number one is when you apply a weighting system. This only works with large pipelines where all of your sales stages are properly defined. Here is an example of the standard stages found in most pipelines: qualification, presentation, proposal (the quote), validation, negotiation, and won. Each stage in the pipeline represents a % of success. For instance, qualification is at 10% meaning your chance of closing the deal at that stage is 10%. Once you move down the pipeline this chance gets higher. The quote stage is another example: your chances there are a lot higher – at 50 percent – since you have built a more solid relationship with your customers and you know what they need for their business. As this is a statistical method this can only work for large pipelines that have many deals.
But what if you have fewer deals like most people or most companies I deal with?Imagine you have three deals in there: one is a million, one is 100 000 and one is 50000. If you start to weigh, it’s gonna be a mess. It’s never going to work. So you need to apply another system. You need to make a judgment call. For example: “I have a deal that is in commit or upside.” What does that mean? That means that I have sent my clients a quote and I still have six weeks to go to the end of the quarter, I am confident, I am putting my hand in the fire that the deal is going to come in. That is a commit.
Imagine another deal that is sitting at the same spot (proposal at 50%) in my pipeline and you know that if your clients sign today, their internal process is going to take 8 weeks, I am never going to get the deal before the end of the quarter. This is an example of an upside: it is on its way, but it will not come within the forecast period. So, it is important to build a working set of 10 deals in commit and 5 deals in upside. You will know, as a sales manager, that one or two of these deals in commit will move to the next quarter or next month. But you also know, that, if you work hard, some of these deals in upside, you might be able to pull them into commit. And that is what I call your working set. So you build a working set of deals of commit and deals in upside. And that is how you build a forecast with fewer deals. If you follow that system, you will see that your pipeline will be very visible and you will know what to do next.