Start Improving Sales Forecast Accuracy Now

Sales Forecast Accuracy, alongside Sales Efficiency and Sales Productivity, provides the complete picture of go-to-market team performance.

Sales forecast accuracy a guessing game? Learn how to improve it.While you can read an overview of all three KPIs in our in-depth article on Enablement metrics, we are going to go deeper into sales forecasting in this article, covering:

  • What is a sales forecast?
  • What are the standard methods used for sales forecasting?
  • What is sales forecast accuracy?
  • How do you measure accuracy?
  • What is the Trust Enablement Forecast Accuracy Model?
  • How can you improve sales forecast accuracy with Enablement?

What is a sales forecast?

A sales forecast predicts the amount, in the relevant currency, of new sales at the end of a specified time — usually weekly, monthly, or quarterly.

What are the standard methods used for sales forecasting?

Hubspot created its guide to sales forecasting, and I want to refer to it and build upon it in this section. Here are the two pieces I like to refer to:

  • First, they note that “Although most salespeople spend 2.5 hours on sales forecasting each week, their predictions are typically less than 75% accurate.”
  • Second, they include a list of standard forecasting methods, which I want to expand upon further. For the sake of clarity, I will use the same name, which are:
    • Opportunity Stage Forecasting
    • Length of Sales Cycle Forecasting
    • Intuitive Forecasting
    • Historical Forecasting
    • Multivariable Analysis Forecasting
    • Pipeline Forecasting

I would urge readers to review the Hubspot article for its insights on these pieces and sales forecasting overall, as I will be building on the article’s insights with a specific Enablement focus.

However, there will be a minimal amount of overlap, as is to be expected.

Now that we have that out of the way let’s dig further into the standard sales forecast methods.

Opportunity Stage Forecasting

In opportunity stage forecasting, each deal stage is assigned a probability of reaching a closed-won deal.

For example, using an overly-simplified model:

  • Discovery call Scheduled: 5%
  • Demo Delivered: 40%
  • Paperwork to Procurement: 80%

We can use these probabilities across all open deals to forecast. Again, keeping it simple, take a look at a deal worth $100,000 where the current stage has reached Demo Delivered.

We would forecast the deal value as:

(100,000*0.4) = $40,000

Of course, there are tons of problems with this approach, but the most common to consider include:

  • It does not take into account average deal length from one stage to the deal-won point. For example, your average deal cycle from Demo Delivered to Closed Won is nine months, so you should not be forecasting this revenue in the current week/month/quarter.
  • The probabilities are often not infused with data-driven reality. At least yearly, review deals from the prior year (or two) to determine the actual chances and update your model.

Length of Sales Cycle Forecasting

The length of sales cycle forecasting is not much better than opportunity stage forecasting.

We look at the average deal cycle length in sales cycle forecasting and subtract each deal’s current amount of time in the funnel.

As a simple example, if your average deal length is ten months, and you have a hundred thousand dollar deal you have been working for ten months, you would give it a 50% forecast value.

(100,000*0.5) = $50,000.

Much like opportunity stage forecasting, this model falls short due to a lack of data-driven modeling. At least yearly, take a look at the probability of closing based upon the amount of time in the sales cycle.

You may learn that deals have a 70% chance of closing at the five-month mark, use these insights to improve your models.

Intuitive Forecasting

Intuitive forecasting is only appropriate when you have absolutely no historical data — it is pure guesswork and gut-feel from each seller.

Historical Forecasting

The historical forecasting model can work well for seasonable businesses, but it has its share of issues.

Historical forecasting considers your performance for the same time frame in the past year and uses this as your baseline. You then add your planned growth to that number to come up with your forecast.

For example, if you had sales totaling $1.5 million in Q3 of 2020, are seeing a growth of 5% year-over-year so far this year, you could forecast Q3 of 2021 as:

(1,500,000*1.05) = $1,575,000

This approach fails to consider the deals in the pipeline, blindly counting on past performance as a guide for current expectations.

Multivariable Analysis Forecasting

Multivariable analysis forecasting uses multiple data points for historical and current information and individual sales rep performance to provide an accurate forecast.

Consider this forecasting approach as the best of all previous methods rolled into one.

Pipeline Forecasting

For this article, we will largely ignore pipeline forecasting. It is data-intensive and requires powerful number-crunching forecasting tools.

Now that we understand common methods for forecasting, let’s continue on.

What is Sales Forecast Accuracy?

Sales forecast accuracy reflects your historical ability to predict the number of sales you will close over a given period.

Many businesses will forecast a quarter at a time, using weekly and monthly checkpoints to adjust the forecast as the quarter goes along.

How Do You Calculate Sales Forecast Accuracy

Great question. For this example, we will use a quarterly forecasting period and adjust if yours is different.

  • At the beginning of the quarter, provide your initial forecast (FORECAST)
  • At the end of the quarter, how close document the value of deals you won (FINAL).
  • Record the dollar value difference between FORECAST and FINAL (DIFF) at the end of the quarter.

The formula for sales forecast accuracy is:

((1-(DIFF/FORECAST))*100)

If we begin the quarter with a forecast of $100,000 and we close $105,000 in sales, our sales forecast accuracy is as:

((1-(5,000/100,000))*100) = 95%.

Note:  Sales forecast accuracy can not be a negative number. 

Easy, right?

The Trust Enablement Forecast Accuracy Model

Based upon the Hubspot article, we know that fewer than 75% of sales forecasts are accurate.

With this in mind, we have created a simple Sales Forecast Accuracy Maturity Model to guide your efforts to improve.

Based upon your forecast accuracy over the last four quarters, take the lowest level of accuracy to determine where you are on the maturity scale.

  • World-class is within 10%
  • Elite is within 20%
  • Average is within 30%
  • Poor is within 40%
  • Random is anything worse than 40%.

As you can see from our model, most companies are only at Average or below in the Maturity Index.

How do you get better?

How Can Enablement Help You Improve Sales Forecast Accuracy

I wasn’t sure you’d stick with me to this point; I’m proud of you.

Agree on the forecasting model

In far too many businesses, the sales forecast is not understood by many outside the sales leader. Ensure everyone in your go-to-market team is clear about the model used, how it works, what is expected of everyone to ensure accurate forecasting, and why a precise forecast matters.

Enablement and operations teams should train, reinforce, and document everything, so both veteran and rookie sellers are crystal clear.

Publicize the forecast

The forecast is not a state secret. Publish the current estimates and any adjustments made to it.

Analyze the forecast

Review the forecast for all managers and individual contributors. Based upon the model used, pinpoint opportunities for improvement.

How does the likelihood of reaching closed-won compare to the average for each rep, seller, and product?

For all of the following, consider:

  • What training is needed to reach average or above?
  • What coaching would help?
  • Content?
  • Are processes being followed and enforced?

Opportunity Stage Forecasting

If the probability at the Demo Delivered stage is 40%, do you have sellers, entire sales teams, or products much lower?

Length of Sales Cycle Forecasting

If the length of the average sale is nine months, do you have sellers, entire sales teams, or products much lower?

Intuitive Forecasting

Are some sellers and leaders better at reading the forecast tea leaves?

Historical Forecasting

Do some reps struggle more during different periods than others? Are their customers more season in nature?

Multivariable Analysis Forecasting and Pipeline Forecasting

Similar questions as above, depending on the variables used.

Get help

If you have never built sales forecasts, you may need outside help. Get it if necessary; your forecast is critical to business success.