Source: CFO.com

Robert Sher is the founding principal of CEO to CEO, a consulting firm of former chief executives who improve the skills of mid-market company CEOs and C-level executives who are navigating major shifts in their business or marketplace.

Many chief sales officers are notorious for making pie-in-the-sky forecasts that can lead their company to overspend. CFOs who provide sales forecasting modeling — and train the sales leader on how to use it — can save their company from financial calamities. They can also save their chief executive officer from embarrassing meetings with the board.

The way many sales leaders forecast the next quarter’s sales reminds me of the movie Groundhog Day, in which Bill Murray finds himself repeating the same maddening day. For example, for several quarters the CFO of a $42 million software firm asked the vice president of sales for his projection for the upcoming quarter’s revenue. Over and over, the vice president provided a pleasing number. In the following quarter, sales missed again. But replacing the well-connected vice president was too high risk for the CEO, who had to frown and bear it.

Some firms with steady customers or recurring revenues can forecast quarterly sales pretty accurately by looking backward. But high-growth, fast-changing companies, or those with long sales cycles, cannot use history as their guide: they must rely more on predictive analysis. Commission-driven salespeople tend to be overly optimistic. They add up the new prospects in the pipeline, make a gut adjustment, and pass on a nice big number to the sales director, who then sends it to the CFO.

This can be disastrous. Take the case of a $16 million engineering-services firm that, based on the vice president of sales’s projections, decided to accelerate growth, adding six salespeople and launching a new campaign. The CFO and CEO built the business plan and budget, staffing up on the delivery side. Six months later, sales were only 45% of target. The business found itself drowning in red ink and was forced to fire people en masse. What a waste — of time, effort, money, and hope.

Many firms approach sales forecasting by ignoring what sales says it will do; they run the business on very conservative, historical estimates. While this avoids the trap the engineering-services firm fell into, it can also sentence a business to a very slow growth trajectory and leave real opportunities for growth underfunded. Installing salesforce-automation software only helps if adoption and use is disciplined (which is often difficult to achieve and then to manage), and if the software can be customized to collect the right data.  Other firms crank up the pressure on sales leadership to “do better,” changing sales leaders with the season, all to no avail.  When firing the sales leader isn’t an option, how can the CFO help?

CFOs need to throw themselves heart and soul into a partnership with sales, becoming an active participant in the forecasting process rather than a passive recipient of sales-department projections. The key to more accurate sales forecasts is examining the drivers of sales: the set of activities you know precedes results. CFOs should brush up on their pipeline-measurement skills, identify those drivers, and measure their results. That leads to a solid platform for planning future sales activities and accounting for the revenues they will produce tomorrow.

Bottom-Up Forecasting
The first step is for the CFO to change her approach to and involvement in the forecasting process. Stop demanding that your sales leader be a forecasting whiz. Count yourself fortunate if he or she knows how to sell and can motivate a sales team. Resolve to be a coach and partner, helping to build the forecast from the bottom up.

That means extending a helping hand to the sales leader, knowing this role will become a permanent part of your job. Explain your desire to help, and let the sales leader focus on selling, not on keeping you happy. And keep the CEO looped in. She will be delighted to see this new spirit of teamwork, not to mention the resolution of the sales-forecasting problem.

A primary sales-forecasting approach is measuring prospecting activities — e-mails, calls, customer visits, and proposals — that move prospects along the sales pipeline, or funnel.  More activity at the top of the funnel generates greater sales at the bottom. Once those activities are documented, they can be manipulated, which can increase one’s ability to forecast beyond the length of the pipeline. One $14 million software firm had a well-documented sales process in which the third step was a software demonstration (via screen sharing). Historically, 22% of the prospects making it through the demo became clients within 60 days. The company had a deep pool of potential prospects, all averaging about the same size. It figured if it added salespeople to deliver double the number of demonstrations, it could forecast a doubling of future sales. The company was right: sales jumped up, the cost of sales held nearly constant, and the contribution margin thickened.

Another method of forecasting is to assign probabilities to each close based on a pattern of prospect activity.  For example, you observe that when the buyer’s CFO comes to the table, 20% of those prospects buy within eight weeks. So to develop a sales-forecasting method, list all the prospects in the pipeline; note their most recent actions, and adjust each deal’s expected value based on its size and the likelihood of closing.

These build-up methods work best when the sales team has been using a tried-and-true sales process and has been measuring outcomes over the past few quarters. Start-up firms won’t have that experience, nor will firms that are reinventing their sales processes.  Even so, the sales team’s best-guess estimates of conversion and closing rates will yield better forecasts than a top-down guess.

Along with deriving a more accurate sales and revenue forecast, this approach focuses the sales team on activities that will generate sales in a more predictable manner. Better, the act of measuring and delineating sales drivers results in increased revenue. Best, these metrics are now in the hands of the CFO, who, in partnership with the sales director, can accelerate the behaviors that drive those sales revenues.

But forecasting isn’t only about the top line.

The CFO of one $14 million heating and cooling firm had been forecasting sales using these methods. In early 2012, his model indicated that sales would dip in six months because of eroding conversion rates. He put a hold on hiring. He pared down inventory in anticipation of the lull, which arrived on schedule in September. Consequently, the company maintained profitability and cash flow. By then, the sales team had fixed the conversion-rate problem (by targeting a different mix of prospects) and the firm began to scale up for the higher volumes they knew were coming.

The CFO can be a critical ally for the sales leader and lead the way in quantitative sales forecasting. With this partnership in place, the firm will be better able to hit its top-line forecasts and manage the business to plan.