Ask the Expert: A sales forecast and pipeline review can help you guide your business

Ask the Expert, Startup Initiatives |

This article first appeared in the Union Leader in August 2021

JUST LIKE a weather forecast, a sales forecast is a prediction of future events, and as with a weather forecast, sales forecasting uses historical occurrences to create a guess of an actual outcome.

Like the weather, future revenue can be unpredictable, but with some basic analysis your business can benefit from the regular practice of sales forecasting. In addition to historical performance, a sales forecast should also consider industry-specific and economic trends.

Sales forecasting is important for businesses of all sizes. If you are a one-person operation, forecasting future revenue will help keep you focused on your goals, and for larger organizations a sales forecast creates accountability for those responsible for generating revenue and can assist with predicting future cash flow. Among other financial planning benefits, having an idea of future cash flow can help support operational decisions such as staffing up — or down — and can assist with planning for capital expenditures.

The most common form of sales forecasting is based on past performance over a period of time. As an example, forecasting Q4 revenue for 2021 might traditionally be based on looking at Q4 revenue from 2020. Considering how the COVID-19 pandemic might have impacted a business in 2020, if the business has been in operation for several years, a better projection of 2021 revenue might now be based on looking at 2019 revenue.

Sales forecasting should always take into considerations nonrecurring anomalies that might have created an upward or downward variation in a previous time period, such as a large project that might have happened last fall that will not happen again this fall.

When creating a sales forecast it is important to collect information from all internal revenue generating contributing parties, most typically over a 12-month period. Depending on organizational structure, this information could come in the form of sitting down with each account representative to review past sales activity or alternatively can be assessed by reviewing past receivable information.

Reviewing past opportunities is a common gauge for future performance, but, as mentioned, consideration of anomalies is required. Once this analysis is complete — and normalized for anomalies — a decision can be made on projecting future opportunities. In predicting opportunities, consideration should also be given to potential larger future projects, such as a large bid response that might be pending.

Once a full analysis of what made up the past 12 months revenue is complete, and having measured potential future known events, you are now ready to document a prediction for the next 12 months with either a measured increase or decrease in revenue based on this analysis.

Sales pipeline review

The terms “sales forecast” and “sales pipeline” are sometimes used interchangeably, when in fact there are very important differences between the two. For example, while the purpose of the sales forecast is to assist in predicting future revenue contributions during a given period of time, a sales pipeline is the analysis of the customers or opportunities that will contribute to the sales forecast.

The sales pipeline is designed to track the progress of customers throughout the sales process. Oftentimes, sales pipelines are visual representations of this progress and have associated metrics that “weight” the potential of these customers eventually contributing revenue.

In order to better understand the sales pipeline for a specific business, a map of the purchasing journey by the customer must be created. The flow of this map is also known as the sales process. Here is a simplified example: You may classify potential customers as leads, prospects and customers. A lead shows some level of interest in your product or service, a prospect asks more in-depth questions and requests a quote, and a customer issues a purchase order for your product or service.

This map of the sales process can help you to qualify potential future revenue. Be careful to recognize in the above example even the classification of “customer” has not yet generated receivables for your business. It is common practice to assign a weighted probability to potential customers, following along with the above example a weighted pipeline might look like this: lead = 10%, prospect = 40%, and a customer might equal 90%, meaning that a $10,000 future opportunity would carry the weighted pipeline amount of, lead = $1,000, prospect = $4,000, and customer = $9,000. The only true measure of 100% probability of revenue is payment received in full.

It is up to the business owner to decide what method to use in creation of a sales forecast and to what extent they may want to employ the sales pipeline method. While mapping the sales process is important to understand, the percentage of probability of a dollar amount may not be the most accurate way to calculate potential future revenue.

New businesses will have the toughest time deciding how to forecast future revenue, with no historical data reliance on industry trends and market analysis will guide their projections. A business with years of historical data can create a very accurate forecast.

Both new and established businesses can benefit from sales forecasting and should take the time to create and understand the sales process map that defines their customer’s journey in order to measure that potential contribution to their sales pipeline.

Ed Miles is a business adviser for the New Hampshire Small Business Development Center and an adjunct faculty member at the University of New Hampshire. The New Hampshire Small Business Development Center offers individualized business advising at no charge.