As it gets towards the start of 2018, it’s important for organizations to look at the objectives of both the sales teams and finance department as they put together their forecast for the year ahead. This will often be the most important forecast of the year as it validates the targets that have been set for the year. This blog discusses how the forecasting requirements of both sales and finance can be met with a single forecast.
Let’s start with sales.
Sales: Focus on the Current Quarter for Forecast Analysis
There is a pattern of sales forecasting that we frequently see. Often the forecast cadence is quarterly, especially if the company reports quarterly. The first few days of the first quarter in 2018 are often spent tidying up transactions that were completed in the prior quarter and going through business reviews. It’s important to understand what happened in the quarter that just closed, in this case Q4 in 2017, and apply any new “learnings” or “information” to the new quarter.
As a result, the first forecast in 2018 will often take place one week into the new quarter. This first forecast of the quarter will generally last for about a month. At the start of February, a new forecast will be produced. Opportunities will have been won, lost and deferred, some new opportunities might have been created, and strategies for closing in on the target will have been formulated. A further forecast evolution takes place at the start of March, and this is the final forecast that will be executed on as the quarter closes out. In this succession of forecasts, the portion of won business in the forecast will increase and pipeline will reduce.
At the beginning of 2018, there will be plenty of pipeline in place, although the precise build of the pipeline will depend on the typical sales cycle length. The forecast looks at the pipeline, anticipates what might be added to the pipeline, and figures out a forecast. If the forecast differs materially from the target for the quarter then management will need to consider weaknesses in the pipeline in detail. The analysis would look at areas where new pipeline can be added, pipeline conversion can be increased, or where further out pipeline can be brought into the quarter. Understanding pipeline analysis will be the subject of a future blog.
There are a couple of points about the sales forecast that are worth exploring. The first is that sales forecasting activity is generally focused on the current quarter. Sales forecasts do not generally go too far out into the future. It is of course possible to produce longer-term forecasts, but then you run the risk of making broad assumptions about pipeline that has yet to be created. Pipeline analysis of future quarters is important because you want to know if there is a large and growing pipeline so that the targets for future quarters can be delivered. It’s just that the forecast encapsulates a strategy to convert current pipeline in the current period and works with the pipeline that you actually have.
The second point is that the sales teams are mainly focused on getting contracts signed, i.e. closing the deal. The terms of the contract will dictate how and when invoices will be raised. This could be based on milestones, e.g. physical delivery of product, or some other basis, e.g. contracted monthly payments. This information is captured as a revenue schedule. While the revenue schedule is important, it is closing the deal that is generally the focus of sales. The flow of revenue and the collection of the revenue is usually managed elsewhere, probably in the finance department.
Let’s move on to finance.
Finance: Forecasting for the Entire Year
Finance have a number of reasons to care deeply about forecasts. At the highest level, they manage communications with senior management, the board and investors. They balance the need to be informative with the need to be cautious and realistic. This means they need to have absolute confidence in the forecast. Finance also use the revenue forecast to plan expenditure. Many expenses are fixed, or at least entirely predictable. In addition, there are project or discretionary costs that can be timed. Since this expenditure has an expected return, it makes sense to move the projects forward as quickly as possible, within the constraints of funding.
Finance will usually forecast the entire year and will update the forecast throughout the year. This is similar to the sales team, but with a longer horizon. Just like sales, each forecast is informed by deals that have closed and deals that are expected to close. The cashflow forecast is a little more complex as it forecasts when revenue will actually flow, as opposed to when a deal is signed. This information comes from the revenue schedule that is attached to each deal in Salesforce.
Let’s us an example, suppose we sell year-long subscriptions that are billed quarterly. The first quarterly amount is billed as soon as the deal closes. If we close a $12k deal in Q1 of 2018 then I forecast a deal value of $12k, I would expect $4k/quarter for every quarter of the year. If a deal closed in Q4 2018 for $12k, only $4k would be billed in the current year with the remaining collections being out in 2019. If I had closed a deal in 2017 Q2, then the final quarter of collection would fall into 2018. For any quarter of 2018, if I want to know what the billings are going to be, then I need to know what subscriptions became effective in that quarter and in any of the prior 3 quarters.
The picture below shows this diagrammatically. Each row shows the four quarters in which revenue for a deal is collected. Red indicates that the collection is outside the year of interest (2018). Blues shows that it is in, and therefore part of the forecast.
In conclusion, the sales team tend to have a short horizon in mind, i.e. the next quarter, and finance generally care about the full year, and also need to know when revenue will actually be collected.
Vortini allows any forecast to cover any amount of time into the future. We present the revenue schedule view of the forecast as required. The objective is to minimize the time spent on agreeing and committing a forecast. Doing just one forecast is a step in the right direction.
To learn more about forecasting for sales and finance, contact us for a demo today.
David is the CEO of Vortini and is an experienced executive with extensive software and startup experience. He has over 30 years’ experience in various roles all in the enterprise software industry. Now his focus is sales forecasting and analytics.