Sales Forecasts For Early Stage Companies

Thundercloud

I wrote this a number of years ago but the advice still holds up.

When thinking about forecasting, you should ask yourself three questions:
1. What audiences is this forecast for?
2. How can I keep my forecasting process simple?
3. How do I ensure that my forecasts credible?

What Audiences is This Forecast For?

Forecasts you generate have several audiences, each of which has different needs and expectations to manage, which are sometimes aligned and sometimes at odds with one another. In fact, your forecasts are the prism through which these parties understand your organization and where it is headed.

Investor will be your most demanding audience, but the easiest to satisfy: they want to see sales grow rapidly and the faster the better. They often do not have a good understanding of the challenges of operating a company but think more in terms of financial modelling, so to them, the numbers on the page are abstract and can easily be tweaked to show more (and more) growth.

Your senior team see a forecast and view it as a measure both of what they have to accomplish and a reflection on your realism/optimism. It is critical to get the balance of these last factors: too much optimism and your team will begin to dual track things in their mind (“What I can actually get done and what I have to pay lip service too.”); too much realism and your team will not be motivated to stretch to make the (almost) impossible happen.

Your sales team will see the forecast as something they are obligated to sign up for, a measure of their success and their compensation. They will do the math in their head, thinking deals in the pipeline and pretty quickly figure out whether or not the forecast is achievable. Now, like your senior team, you need to balance realism and optimism with your sales team, while keeping in mind that sales folks, when it comes to commitments to what they can actually sell, salespeople are natural pessimists.

How Can I Keep My Sales Forecasts Simple?

Or, simple enough. As your company grows, you will spend a lot of time agonizing over your sales projection, calling whether or not particular deals are likely to close and deciding what sort of production you can expect from your sales team.  You can simplify things by focusing on what you know or what you can know more about – typically the immediate and next couple of quarters.  Bracket the figures you generate for these quarters with both a top down and bottom’s up (dealy by deal) analysis, relying on the latter more heavily.  Four the out quarters, rely on a top down analysis, hewing to metrics about deal size, flow closing rates that you and your team have agreed upon.

How do I Ensure That My Forecasts are Credible

As noted above, balancing the optimism and realism driving your forecasts is critical to keeping your team motivated and on track. Forecasting is most difficult when starting out – you have no deal history to model sales on and will be “painting with numbers” As you close some deals, you can use a bottom’s up process to look forward several quarters in your pipeline and make estimates about what deals are likely to close.

Then, when you have some momentum, you can develop forecasts looking forward one year that you update quarterly. . You will likely end up updating the immediate quarter’s figures on a weekly basis, this so you can keep your team and investors apprised of short term sales activity.

Early on, forecasts more than one year out are highly speculative, particularly if you still are working out your pricing and product models. These figures should be provided to your investors and board with large caveats.

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