How to Build an Accurate Sales Forecast

I gave my two cents earlier this week on why sales and earnings forecasts fail.   They fail because of lack culture NOT because of lack of smarts.

Chris Waldron called out culture in his comment on the post.  I think Chris is right.

There are only 3 things needed to build an accurate forecast; data, interpretation and culture.  That’s it.

If building an accurate forecast is important to your business, start with building a culture of reality.  Reality is at the core.  An organization that confronts reality accepts what the information is telling them and plans accordingly.  There is no King James bible interpretation going on.  Their is no discarding of the data because someone doesn’t like it. It is what it is.  If the data is telling you business is going to slide, accept it, build an accurate forecast around it, figure out away to minimize and move on.

If forecasting is an exercise to support a predetermined number, it’s not forecasting and a culture of reality doesn’t exist.  Don’t waste anyones time, just give out the numbers and move on.

A culture of reality is critical to accurate forecasting.  Allowing the organization to accurately interpret the data to arrive at the most accurate representation of future revenue is key.

That brings us to the data.  I’m a gut guy, so this is hard for me.  However, I accept it and dig in.  An accurate forecast needs data.  It needs:

  1. Historical information
  2. Editorial dialog
  3. Customer data
  4. Competitive data
  5. Trend analysis
  6. Industry analysis
  7. Company data:
    1. Support analysis
    2. resource availability
    3. Product availability
    4. New product development
    5. New product availability
    6. Marketing plans
    7. Customer satisfaction
    8. etc
  8. Expected Macro Economic Data
    1. Consumer Spending
    2. GDP Growth
    3. Consumer Confidence
    4. Interest Rates
    5. Inflation
    6. Housing prices
    7. Government regulations/intervention
    8. etc

All of this info and more can influence the numbers.  Building a forecast without all the data, internal and external, marco and micro is a hollow effort.

Use the data, it’s the foundation.

If the culture is there and the data is there, interpretation is the special sauce.  It’s what differentiates the professionals from the amateurs.  Interpreting the data to create an accurate forecast is an art.  There is no science to it.  The best people I’ve ever seen can look at the data and with an amazing accuracy determine the impact to the forecast from the data.   It’s a little bit experience, it’s good data, it’s knowledge of their world and it’s a little bit gut.

I purposely chose not to be perscriptive in this post, because I don’t think forecasting is all that hard.  It’s only hard when the culture allowing for good ones doesn’t exist.  Build a culture of reality, get good data and learn to interpret it.  The forecast will come out fine — and by that I mean ACCURATE!

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