Why Sales Forecasting Matters, Even for Small Teams

Research & Sources / Sales & Revenue Growth

Before a long mountain hike, sensible people check the weather. Not because the forecast is always right, but because being surprised by a storm halfway up is dangerous. They might change the route, start earlier or pack an extra jacket. A sales forecast is the business version of checking the weather.

“We’re too small for forecasting”

Many small companies think forecasting is something for big corporations with sales departments and complicated software. Small companies, they feel, just sell as much as they can and see what happens.

But small companies are often the ones most exposed to surprises. One big client leaving, one slow quarter, one hire made too early or too late can hurt a lot. A simple forecast helps you see these storms coming while there is still time to change the route.

What a forecast is good for

• Hiring decisions. Can we afford a new person in three months?
• Cash planning. Will money come in before the big bills go out?
• Marketing timing. Do we need more leads now to fill the gap in four months?
• Calm. Knowing roughly what is coming removes a lot of background worry.

Why forecasts are usually too optimistic

Psychologists Roger Buehler, Dale Griffin and Michael Ross showed that people consistently underestimate how long tasks will take, even when they know similar tasks took longer in the past. They called this the planning fallacy.¹ Sales forecasts fall into the same trap: deals are expected to close sooner and bigger than they do.

The fix is not to stop forecasting. It is to base the forecast on what actually happened in the past, not on hope.

A simple forecast in three steps

1. Use clear stages. Every opportunity sits in a stage defined by what the buyer has done, for example “problem confirmed” or “proposal requested”. Research by Jordan and Kelly found that a clearly defined sales process goes together with stronger revenue growth.²

2. Learn your own rates. Look back over the last year. What share of opportunities at each stage eventually closed? How long did it take?

3. Multiply. For each open opportunity, multiply its value by the closing rate of its stage. Add them up by month. That is your forecast. It will not be exact, but it will be honest.

Compare and learn

The real value of a forecast comes at the end of each month, when you compare what you expected with what actually happened. Did deals close later than expected? Smaller? Did a certain type of client always slip? Each comparison makes the next forecast better.

What this means for you this week

• Put every open opportunity on one list with value, stage and expected month.
• Calculate last year’s closing rate for your two most important stages.
• Build a three-month forecast using those rates.
• Set a monthly reminder to compare forecast and reality.

The weather will still surprise you sometimes. But far less often, and never without a jacket.

Sources

1. Buehler, R., Griffin, D. & Ross, M. (1994). Exploring the “planning fallacy”. Journal of Personality and Social Psychology, 67(3), 366-381. doi.orgPeople consistently underestimate how long tasks will take, even when past experience says otherwise.
2. Jordan, J. & Kelly, R. (2015). Companies with a Formal Sales Process Generate More Revenue. Harvard Business Review, January 2015. hbr.orgA defined sales process, regular pipeline reviews and clear stage rules go together with faster revenue growth.