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© 2008 EMASYS Corporation Page 1 of 11
Business Intelligence White Paper
Sales Forecasting: It’s a Risky Business
How to reduce your sales forecast risk through forecast simulation
Sales forecasts – they are the bottom line for
sales organizations, and the driver of many
downstream business decisions. Their
importance is unquestioned – why then is it
that 60% of companies are unhappy with their
sales forecasting results Because of lousy
sales execution Perhaps. Or poor forecast
judgment by sales reps and managers
But a major culprit is the process by which the
forecasts are generated.
Managing a sales pipeline is similar to managing an investment portfolio; cultivating opportunities (or
investments) that appear promising, and cutting losses on those that don’t. In both cases the goal is to
maximize revenue/return, while minimizing risk. However, any reputable portfolio manager isn’t going
to commit to a certain return on a particular security, or even guarantee that the security will increase
or decrease in value. So why do sales reps and managers feel the necessity to commit that a particular
opportunity will close successfully, even when there is a significant probability that the deal will fall
through Because it’s the only way they know how to come up with a sales forecast. In fact, even
though 50% of opportunities don’t close as forecasted, many sales teams continue to stick with this
manual, “commit / best case” sales forecast methodology.
Some organizations prefer to use an “expected revenue” methodology to generate sales forecasts – deal
values are multiplied by the probability of closing the deal, and the resulting products are summed to
produce the forecast. This method creates forecasts that often are not even achievable based on the
values of the opportunities in the pipeline, since the entire deal value is either won or lost, not some
percentage of the deal value. Also, expected revenue forecasts must usually be judged down because
they are naturally optimistic (more on that later).
There has to be a better way to come up with a sales forecast than these traditional methods. Is there
an alternative that companies should explore Yes – sales forecast simulation.
Ability to Accurately Forecast Business
©2007 CSO Insights