5 ways to improve your New Business Sales & Revenue Forecasting
Regularly we see budgeting and forecasting focused heavily on costs and indeed cost reduction. While this is of course an important element of overall profit, an arguably more important element is the top line revenue figure. There are of course many ways to forecast revenue, and new business is only one component of that, however it can often lead to quite a wide variation between forecasted and actual revenue for the year.
New business forecasting is notoriously difficult, and there is no magic wand to solve the problem. However, there are some techniques which can be applied to improve accuracy and in turn provide increased confidence in the numbers.
Define the language of forecasting very clearly so that expectations are clear. If we take the example of a SaaS software business, I see four components of a sales forecast and their audiences can often be completely different and they are quite often misunderstood across the verticals within an organisation.
Annual fee – the single Annual Fee of a new contract. Normally what sales people are targeted on.
Revenue Recognition – how the revenue from that contract will be recognised in the companies accounts. Often equal over the life of the contract.
Invoicing – When and how that contract is invoiced to the customer.
Cash collection – how those invoices are collected.
Sales people will always focus on number one but are unlikely to be overly concerned with the remaining three, however the finance department will be particularly interested in the final three. Ultimately the fourth one is a vital component of any company’s long term success and liquidity.
The confusion arises where Sales targets are set on an Annual Fee basis but financial forecasting at management level focuses on Revenue Recognition (as defined in yearend accounts). The relationship between the two needs to be clearly understood by all participants. Take the example of a sales person who hits his entire yearly target in the final month of the year. He/she congratulates themselves heartily and enjoys a well-deserved bonus for hitting target. However, poor FD is pulling his hair out because he hasn’t hit his Revenue forecast for the year because none of the revenue will be recognised until the contracts commence, 2 months after signature. And to exacerbate the problem, in order to get the deals done, kind salesperson has agreed payment annually in arrears with 90 days payment terms.
Educating all parties on the various components of a sale will improve awareness of the importance of their relationship, and using a tool which can accurately model that relationship will greatly improve accuracy of the forecast. The majority of sales forecasting tools will be focused heavily on the Fee and less so on the knock impact of that and this can often be a big weakness in how new business sales revenue is forecast.
Use a tool which involves all sales team members easily and can also be used by the finance community.
Often, sales teams will be keeping spreadsheets to forecast their yearly sales and, separately, Finance will be creating new business forecasts on a revenue recognition basis, using a complicated formula based on some combination of last year’s revenue and gut feel.
To improve accuracy, there should be a single forecast informing both departments, maintained by sales people and simply reviewed and reported on by Finance. In reality, the sales people are the closest to the customer and to the opportunities. They’ll know which deals are coming when and what terms they’ll be on (with the caveat in point 5!) Educating them on point 1 above and empowering them to forecast the Rev Rec, Invoicing and Cash Collections from a defined list of profiles can drive a really accurate sales forecast. But maybe give it a few months before relying on it completely!
Too often sales forecasting is seen as a troublesome exercise for sales people. They see little value in it other than to track them against target and its accompanying bonus, however sitting down and reviewing what they are forecasting is an important component of the process.
If you have taken the pain to promote points 1 & 2, then the timeliness of reviewing the forecast is the next key thing. Deals move constantly, dates move forward and back, potential discounts increase and decrease and reviewing these moves is vital to an accurate forecast. Ideally, your sales people will have real time access to modify their sales forecasts on the go, but finance can take a “cut” or “copy” of the data at a certain point, review this with the sales team or Sales Director and use it as the basis of their re-forecasts. The ability to real time update (but at the same time freeze or copy the data for a review without impacting the effectiveness of the salesforce) is a key component.
Four: Compare & Analyse
Sales people will often be blinkered towards their end of year target which is of course understandable.
However, it’s important to promote accurate forecasting as a culture, and not just towards end of year targets. Month on month comparisons vs Actuals and vs Budgets promote that culture.
Having the ability to look at a single month and review how each re-forecast compared against Actuals worked out is an invaluable exercise. Often sales forecast can be seen as a point in time, meaning that there is very little attention paid to previous versions. So what did we say we would do in December last month, versus what we’re now saying we’ll do in December this month is often very difficult to achieve. And of course comparing both of those to what we actually did in December is a key component of the education towards more accurate forecasting.
Five: Don’t let sales people be sales people!
Sales people by their very nature can often be difficult to get an accurate forecast from. They may want to keep deals “off system” until they’re sure of success or to smooth out their performance. They may under or overestimate deal sizes, or be over optimistic about their timescales. If we have taken time to implement points 1 - 4 it will limit the opportunity for this type of gamesmanship.
Rewarding accuracy of forecasting is almost never considered as a component of sales person remuneration but when you think of the knock on impacts of poor forecasting it would make sense to monetize it’s accuracy. I guarantee that over a period of twelve months, having introduced a bonus for accurate forecasting, you will be amazed at how accurate those sales forecasts suddenly become!