Seven deadly sins of sales forecasting

We’re rapidly approaching the end of the second quarter. So pull out those sales forecast you put together at the beginning of the year and take a look. How are you doing?

If you’re on target, give yourself a pat on the back. But don’t break your arm. Could be you’re good at predicting the future. Or maybe you just got lucky. As they say, a stopped clock is right twice a day.

If you’re forecasts are off, you’ve got a lot of company. Forecasting is a tricky business — just ask any economist, bookie or political pollster. And it can be especially tricky in sales because there are so many competing interests. Here are seven deadly sins of sales forecasting that may be throwing your forecasts out of whack:

1. Coming up with “a” number. “How many deals are you going to close? How big will they be?” Trying to predict “a” number is like trying to hit a hole-in-one. Nate Silver, writer for The New York Times‘ FiveThirtyEight blog, suggests a more useful approach: Setting a range of forecasts with probabilities attached. Instead of saying, “We’ll hit $2 million this year,” it’s often more useful for planning and decision-making to say, “There’s an 80% chance that our revenue will be between $1.8 and $2.1 million this year.”

2. Failure to revise. Silver also makes that point that predictions should evolve. As new information comes in, they can become more accurate. Often we stick with outdated forecasts too long because we don’t want to admit we were wrong, or because we think changing our minds makes us look wishy washy.

3. Counting the dead. Research suggests that sales forecasts tend to keep dead deals on the docket too long. It happens all the time: A deal you’d forecast at a 50% probability of closing goes dark. But they haven’t said no, so you revise the closing probability down to, say, 25%. That seems like a reasonable compromise, but if you look at your past history, you might find that similar deals actually closed only about 5% of the time.

4. Underestimating the close date. Research also shows that salespeople also tend to be too optimistic about how quickly a deal closes. “I forecast that my deal would close this month, but approvals are taking longer than expected. But it’s not a big problem – it’ll come in sooner or later.” It IS a big problem; forecasts are about time AND money. Eventually some of those deals are going to be pushed into next year or go away.

5. Failure to have a process. Forecasts are often based on some combination of gut and experience. But when the process isn’t explicit, we can easily be fooled. If we predict that eight out of ten of the deals in our pipeline will close, is that consistent with past history? Or is there some element of wishful thinking involved? Good forecasts begin with an understanding of what’s happened in the past.

6. Using forecasts as a performance management tool. The boss asks, “What’s your forecast?” Salespeople ask themselves, “What does it have to be? If I set it too low, I’m in trouble today. If I set it too high, I’ll be in trouble later.” If salespeople know that their forecast will become a performance metric, they’re going to set it low so they can be a hero when they beat it. Sales managers know the game, so they revise the forecasts upward accordingly, or, for reasons of their own, pass the low numbers up the chain of command. In any case, the forecast isn’t based on what buyers are likely to do, but on what best serves the interests of the forecaster.

7. Forecasting what you need. The good news is that when those self-serving numbers go up to senior management, they’re pretty much ignored. The bad news is what comes back instead: a number based on what the company, or investors, or the bank, needs: “You’re forecasting $2 million, but to hit our financial goals we need you to find $2.5 million.” This revised “forecast” makes it way back down the food chain. Except nobody remembers to tell customers that they have to spend more with you.

There’s no flawless method for sales forecasting. No matter what, unforeseen circumstances can affect your predictions. But knowing how to craft reasonable, informed sales forecasts can save you countless headaches.