Dynamic Sales Forecasting Method For Increased Accuracy

Bhushan Ekbote

Summary:

Forecasting is a necessary and efficient tool that can give a company plenty of competitive
advantage. Traditional methods of sales forecasting focused primarily on roll up of committed
sales deals display intrinsic weakness due to their monotony of strategy across agreed sales
period. This tends to produce inaccuracy in sales forecast, promotes sandbagging and
reduces sales motion. Enhanced models centered on identifying weighted revenue through
probabilities for opportunities by category also fail to recon in swing deals and ignores new
opportunities in the pipelines. In this paper, I propose a better, dynamic method based on
probabilities customized for each sales period.

This paper will cover the following:

1. What is sales forecasting?

• Definition
• Sources of sales forecasting
• Why is sales forecasting so important?
2. What are the challenges of sales forecasting?
• Internal Operational Challenges
• External Market Challenges
• Fast-Moving Deals
3. Sales process development as foundation of forecasting
• Step 1 – Business process definition/implementation.
• Forecast categories – definition
• What is sales funnel?
• Sales executives forecasting method
4. Quantitative Sales Forecasting
5. Trend Analysis
• Types of Patterns: Constant, Trend, Seasonal & Cycle
• Calculating the Trend – Mathematical Formulae Method
6. Mathematical Modeling – Traditional methods
• The Moving Average Method
• The Weighted Revenue Model
7. Mathematical Modeling – Dynamic models
• How this model works
• Accounting for swing deals
8. Conclusion

1. What is Sales forecasting?

• Definition

A sales forecast is an estimation of expected sales revenue and other metrics such as renewals,
new logos etc. to be delivered by the sales team for the given timeline (week, month, quarter or

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year) under a specific marketing plan. It is the estimation of type, quantity, and quality of future
sales [1.]

Medium and long-term corporate goals, plans and resource allocation are determined on the basis
of an efficient sales forecast. A sales forecast is usually submitted by the head of sales to
executive leadership on weekly basis.

William J. Stevenson [6] highlights a number of qualities that you will find in a good forecast:

1. Accurate — a high degree of accuracy should be established so that comparison can be

made with alternative forecasts.

2. Reliable — if the sales analyst is to establish a high degree of confidence in the forecast
method used, the method should consistently provide a good forecast.

3. Timely — the forecasting period must allow time for necessary changes, since a certain
amount of time is needed to verify the forecast.

4. Easy to use — the method should be easy to understand since users of the forecast must
have confidence in the report and be comfortable working with it. .

5. Cost-effective — the cost of making the forecast should not outweigh the expected benefits
obtainable from the forecast.

Generally, forecasting methods and techniques vary from simple to extremely complex. They are
usually classified as qualitative or quantitative methods.

• Sources of sales forecasting

i. Sales Executives run weekly cadence – Sales executives enter forecast for their list of
opportunities based on intuition and sales stage completions. These forecasts are then
adjusted by their managers and submitted to top executives.

ii. Sales Operations run data driven weekly cadence – Here mathematical modeling methods
are used to estimate future sales and revenue. Sales data are entered into a database and
consequently extrapolated for sales forecasting.

• Why is sales forecasting so important?

i. Resource Planning

Internal facing operations – revenue is any company’s bloodline. If the forecast predictions
are accurate, the company can be proactive in internal operations management such as
supporting sales function, workforce reduction/hiring and product development.

Inventory Planning - internal supply chain such as inventory management for ecommerce
business depends heavily on accurate forecasts.

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 External Facing Operations – making the right forecast projections will reduce external
facing friction with other teams such as customer support. An unreliable forecast will create
unexpected changes in the number of customers, leading to huge customer dissatisfaction
or high OpEx.

ii. Risk mitigation

Forecasting can show early warnings of big gaps in revenue versus plan numbers. Such
early warnings can help companies take proactive steps in running programs that may
increase sales such as limited time promotions or free additional product offering. These
early warnings can also direct mitigation on operational expenses, in turn maintaining the
company’s profit margins.

iii. Sales Commitment

The sales forecast serves to guide and commit the sales department to specific set of
actions required to achieve results. Along with the sales targets, it specifies the key
expected performance indicators of sales reps in the agreed period. The forecast provides
viable objective criteria for evaluation of targets and performance.

2. What are the challenges of sales forecasting?

i. Internal Operational Challenges

Weak sales pipeline management cadence – When pipeline management is poor or unreliable,
sales forecasting becomes mere wishful thinking.

Poor business process implementation – Poor business process and poor use of tools to
implement such business process creates incoherent understanding of forecasting by reps and
each of them follow different interpretations – stage changes are not defined properly. This issue
exacerbates when the forecasts move up at regional level to global level.

ii. External Market Challenges

Unexpected Competitor Action – A major competitor may take an unexpected action that throws
the market into confusing or conflict.

Unexpected Global Events – Like global pandemic, economic depression, natural disasters,
terrorist attacks, unexpected warfare, civil unrest, government policy changes, etc. can affect the
market positively or negatively.

Customer side leadership changes – When key accounts change their top management rebuilding
connections and networks may be difficult.

Brand perception changes – Public opinion may change at short notice due to negative and
potentially damaging information in social media, news media or unguided statements from
respective public figures.

iii. Fast Moving Deals

Fast moving deals are deals that come into the pipeline and close within a relatively short time.
How do you predict that such business will happen? Deals that are typically small in size and have
quick closing cycle are hard to predict. That creates a challenge in accurate forecasting.

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Small closure timelines creates gap in understanding total pipeline created – which impacts
forecasting these deals accurately.

3. Sales process development as foundation of forecasting

i. Step 1 – Business process definition/implementation. You cannot carry out any effective
forecasting - using traditional methods or otherwise - if your business processes are not
properly defined. Step 1 involves increasing the accuracy of sales forecast by defining the
right sales process for your organization from foundation.

You should have a distinct sales process that has:

• Properly defined and sliced your sales processes into multiple stages and
• Mapped these stages to the forecast categories.

Your organization may have few distinct flavors of sales process – for example one for Enterprise
sales, another for Commercial sales.

ii. Forecast Categories Definition

Pipeline refers to early stages of development. Except with very short sales cycles, there should
be few pipeline opportunities dated in the current forecast period.

Best-case means the sales process may complete by the close date, given an ideal set of
circumstances that the seller documents and shares during forecast meetings.

Commit means that, based on the seller’s best estimates, the sales process will complete by the
close date reflected.

Closed means the final order is processed (booked) or revenue is recognized.

iii. What is a sales funnel?

Sales funnel is clearly defined set of stages to identify progress of the sales motion from beginning
of its lifecycle (opportunity enters pipeline) to the end (closed business)

In order for the funnel to be efficient, defining exit criteria by each state is the key. Also, at every
stage you need to collect relevant sales progression information such as BANT, competition etc.

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Fig.1 - Example of a sales funnel

Sales Funnel

Forecast Categories

Understand Needs Pipeline

Define Solution
Best Case
Proposal

Verbal
Commit
Agreement

Won Won

Mapping Stages to forecast categories – Since you’ll be using forecast categories, find a
meaningful connection between stages and forecast categories. Alternatively, you may forecast
your business simply using sales stages.

4. Quantitative Sales Forecasting

Quantitative methods of sales forecasting are based on historical sales data extrapolated to
predict future revenue. They rely on sound mathematical equations rather than opinions or
judgment of sales people, management or experts [2].

The three of the most popular methods are:

Trend analysis: Where past sales data is used to predict future sales based on observed trends.
This can be by seasonality, random factor analysis or economic demand.

Exponential Smoothing: Where the analyst uses an exponential average of past sales to predict
future revenue. This is considered one of the most accurate and objective sales forecasting
process.

Simple Moving Average: Where the analyst extrapolate sales data from a “dynamic” set period of
time using a rolling window of two to six months.

Let’s look at the basics of trend analysis.

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5. Trend Analysis

Well-established firms know the importance of analyzing historical sales data in determining future
sales patterns [1]. The following patterns can be observed:

i. Constant Pattern

ii. Trend Pattern – Demand for the company’s products remain constant throughout the
period.

iii. Seasonal Pattern – characterized by repetitions of demand fluctuations.

iv. Cycle Pattern – Where environmental influences swing the sales up and down
uncontrollably.

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Generally, a company may face a combination of all the patterns in its sales experience.

Calculating the Trend – Mathematical Formulae Method

Let’s use an example to illustrate this method

Example 1:
The weekly sales of a company are as follows:

Year Week 1 Week 2 Week 3 Week 4 Week 5

Sales ($) 45,000 56,000 78,000 46,000 75,000

Using the method of Least Squares, forecast the sales for week 6.

Year Sales (‘$1,000) Y Week X X2 XY

Week 1 45 1 1 45

Week 2 56 2 4 112

Week 3 78 3 9 234

Week 4 46 4 16 184

Week 5 75 5 25 375

n=5 Y = 300 X = 15 X2 = 55 XY = 950

Using the least square equation:

Y = n.a + bX (i)

XY = a X + bX2 (ii)

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And substituting the values from the table, in equations (i) and (ii), we have:

300 = 5a + 15b (iii)

950 = 15a + 55b (iv)

Solving for a and b in (iii) and (iv), we have a = 45, and b = 5.

Thus, our trend equation will now be: Y=45 + 5x.

Trend values (in $) will be: Y (Week 1) = 45 + 5(1) = 50,000

Y (Week 2) = 45 + 5(2) = 55,000

Y (Week 3) = 45 + 5(3) = 60,000

Y (Week 4) = 45 + 5(4) = 65,000

Y (Week 5) = 45 + 5(5) = 70,000

The forecast for Week 6 will be:

Y (Week) 6 = 45 + 5(6) = 75,000

Mathematical Modeling – Traditional methods

Sales Operations experts have traditionally used two techniques for modeling forecasting
mathematically. These are:

• The Moving Average Method

• The Weighted Revenue Model

i. Traditional methods 1 – Moving Average Method

In this method, the Sales Analyst draws an average of the sales of a number of months to predict
the sales of a coming period. The objective is to “smooth” out the fluctuations observed over time
and provide a close estimate of the forecasted sales.

The moving average of a sales period (extent) m is a series of successive averages of m values at
a time [5]. The data set used for calculating the average starts with first, second, third and etc. at a
time and m value taken at a time.

Thus, the first average is the mean of the first m terms. The second average is the mean of the m
terms starting from the second value up to (m + 1)th term. Similarly, the third average is the mean
of the m terms from the third value up to to (m + 2) th term and so on.

If the period, m is odd, that is, m is of the form (2k + 1), the moving average is placed against the
mid-value of the time interval it covers (t = k + 1). However, if m is even (m = 2k), it is placed
between the two middle values of the time interval it covers, i.e., t = k and t = k + 1.

In summary, there are two steps involved:

• Roll up all “Commit” deals using moving averages

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 • Use same strategy across 13 weeks

Let’s explain it with this simple illustration:

Period Sales
1 S1
2 S2
3 S3

The sales forecast for period 4 that follows will be:

S4 = (S1 + S2 + S3)/3

The following scenario would then play out:

Fig. 2 – Traditional Model 1

WEEK 1 WEEK 2 WEEK 3 …. WEEK 13

Forecast Opportunities Revenue

Commit 400 $30M

Best Case 100 $8M

Pipeline 100 $8M

Drawbacks of the Moving Average Method

Although this model is simple to apply, it has the following challenges:

1. Stable Market – This method works only when the market is stable for a considerable
period of time. The key assumptions for this model completely eliminate the inevitable
oscillatory fluctuations in sales.

2. Poor accuracy – Many opportunities drop from commit earlier in the selling process. Thus,
it does not give accurate forecast.

3. Promotes sandbagging – Since Commit drops will directly impact reported forecasts, Sales
Reps would resist moving Pipelines to Commit.

4. Lack of sales motion – Since most reps would care only about committing, there is
practically no adherence to agreed Best Case and Pipeline definitions.

ii. Traditional methods 2 – Weighted Revenue Method

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A weighted sales procedure acknowledges that not every opportunity would result in a sale [4].
This is a detailed sales forecasting method in which a value is assigned to each deal based on
where it is in the sales funnel.

There are two steps involved:

• Identify probabilities for opportunities by category to determine weighted revenue

• Use same strategy across all the weeks

In the Weighted Revenue method, opportunities with higher likelihood of committing are given
more weight in the sales forecast. This helps in accounting for the fact that not all leads would
become customers.

The formula for calculating the value of a weighted pipeline is simple:

Probability of closing * Deal value (Revenue) = Weighted Revenue

This is illustrated in Fig. 3 below.

Fig. 3 – Traditional Model 2

This model is superior to the previous model - the Moving Average Method - in providing more
accurate results. It is easy to implement, and it gives clarity to definitions of different forecast
categories.

It is a model that is ideal for companies that have general steadiness of activities, consistency and
predictability month-after-month.

However, it has its short-comings.

Drawbacks of the Weighted Revenue Model

1. Insufficient Accuracy – probabilities are expected to change over a quarter. Having one
single probability value across all weeks would not provide an accurate forecast.

2. Ignores new opportunity pipeline – it does not incorporate fast moving deals that don’t exist
in the beginning of the quarter but will close before the quarter closes.

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 3. Swing deals – few deals that have high deal value (200%+ above average) are not
included in this model.

5. Mathematical Modeling – The Dynamic Model

The dynamic model is a more thorough pipeline-based modeling technique that takes a bottom-up
approach to forecasting by recognizing all the opportunities that exists in the sales pipeline
(current and future) and bringing in the individual chances of closure [8].

How this model works:

• Use probabilities customized for each week

• Include a modeled revenue number/opportunity count for those deals that are not in the
pipeline right now but will close by the end of the quarter
• Add the adjustment for swing deals

Fig. 4 – The Dynamic Model [Week 1]

This process would continue till Week 12.

Fig. 5 – The Dynamic Model - Week 12

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The custom probabilities would look like this:

Your CRM should have a data warehouse or Data Lake built in that is capturing daily /weekly
snapshot or you may have implemented snapshots in SalesForce on the individual opportunity
level.

For your Historical Cohort Analysis, do this: For past few quarters’ data, track each opportunity on
weekly basis (E.g. week 1 through week 13) for forecast category, amount and stage. Then, on the
per week basis compare that week’s Opportunity Stage against final state at the end of the
quarter. Finally, sum all the Opportunities and Revenue amounts by forecast category against the
same cohort to look at close won revenue and opportunity subset.

Thus, you will now have your quarter end totals x and y as:

𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑊𝑜𝑛 𝑂𝑝𝑝𝑜𝑟𝑡𝑖𝑛𝑖𝑡𝑖𝑒𝑠

𝑥=
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑂𝑝𝑝𝑜𝑟𝑡𝑖𝑛𝑖𝑡𝑖𝑒𝑠 𝑜𝑛 𝑊𝑒𝑒𝑘 1

𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑊𝑜𝑛 𝑅𝑒𝑣𝑒𝑛𝑢𝑒

𝑦=
𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝑜𝑛 𝑊𝑒𝑒𝑘 1

This is illustrated in Fig. 6.

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 Fig. 6 – Structuring weekly snapshot

Week 1 Week 2 …. Week 12 End of Quarter

Opportunity Forecast Amount Forecast Amount …. Forecast Amount Actual Amount

Best
Xerox product x $40k Won $60k …. Won $60k Won $60k
Case

Cisco product Best

Pipeline $30k $30k …. Commit $30k Won $20k
1,2 Case

Dell – product 1 Commit $50k Pipeline $50k …. Won $50k Won $50k

Apple – product Best Best

$72k $72k …. Pipeline $72k Lost $0k
1 Case Case

Google –
Commit $110k Commit $110k …. Commit $110k Commit $130k
product 5

…. …. …. …. …. …. …. …. …. ….

J&J – product 1 Pipeline $25k Pipeline $25k …. Pipeline $25k Lost -

Fig. 7 – Week 1 Probabilities

Week 1 Quarter End Week 1 probabilities

# of # of Won Quarter End By

Amount By Amount
Opportunities Opportunities Won Amount Opportunities

Commit 300 $15M 100 $6M 33% 40%

Best
500 $20M 50 $2M 10% 10%
Case

Pipeline 1000 $40M 10 $1M 1% 3%

For Week 1 probabilities formula we assign for each forecast category our variable x and y as
previously derived.

The key point to remember here is, the quarter-end totals are only the subset of total quarter-end
totals, referring to the cohort of opportunities tracked from Week 1 (See Fig. 7).

The above method is repeated for the rest of the weeks.

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Revenue Forecast from Opportunities not in the pipeline

This is derived by doing a 6 quarter analysis of revenue where the opportunity was created after
the week of the quarter in focus (See Fig. 8).

Fig. 8 - Week 3 Forecast

Past 6 Qtrs’ Data Revenue

You may use $5M adjustment for this
Revenue coming from opportunities
Week 3 – Week 13 $50M not in the pipeline or the 10%
Revenue forecast contribution of the revenue.
Revenue from $5M Beware, when you use 10% in cases
Opportunities where the revenue forecast is high,
created after Week 3 when the to make sure that you
Ratio of the 10% have justifications on why you think
contribution this number is going to rise. This
needs to be supported by leading
indicators

Accounting for swing deals

What are swing deals? Swing deals are the deals that are large enough to “swing” the
entire forecast if they do or don’t come in.

How to get swing deal adjustment

• Calculate the forecast based upon variable probabilities and opportunity pipeline as
of that week – Exclude swing deals from that forecast
• Identify another set of probabilities that drive swing deals in the past
• Apply those for the adjustment.

Advantages of the Dynamic Model

1. Unlike the traditional model, in the dynamic model, variances in the sales pipelines are
accounted for. In any valid historical based forecast, the week-after-week upward trajectory will
project the next week’s performance, even if sales suffer an unforeseen drop in pipeline. If
there is not much consistency week-to-week in terms of how much pipeline sales generate,
this sales forecasting method will account for that.

2. This method is more objective, as it is based on true historical data and benchmarks. It also
considers data and probabilities that are unique to your company. Instead of relying on
software resources for standard opportunity stages and probabilities, one can apply his own
variables to his own opportunities and forecast.

The only downside of this method is that it relies on data that is clean and complete. This is typical
of any worthy data-backed analysis. This method would pressure Sales Reps and Sales
Operations staff to always enter accurate data into their CRM, especially on fields such as close
date and opportunity value [8].

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6. Conclusion

An effective sales forecasting method should not be based on mere intuition. Neither should it
necessarily require advanced or complex algorithms. The right sales forecasting method should
see historical performance as well as the sales pipeline, providing objective criteria for reaching
conclusions. An accurate sales forecast is critical to helping you manage your sales team and
meet expectations.

References

1 Nikhila C. “Sales Forecasting: Meaning, Importance and Methods.”

https://www.businessmanagementideas.com/sales/forecasting-sales/sales-forecasting-meaning-importance-
and-methods/7122

2 “Sales Forecasting Process: A Step by Step Guide.”

https://www.forcemanager.com/blog/sales-forecasting-process/

3 John T. Mentzer and Mark A. Moon (2005), “Sales forecasting management: A demand management approach”
(2nd edition), Sage Publications, Thousand Oaks, London
4 Emily Bauer “The Weighted Sales Pipeline: How It Works and How to Create One for Your Company”
https://www.propellercrm.com/blog/weighted-sales-pipeline

5 “Calculation of Trend by Moving Average Method”

https://www.toppr.com/guides/business-mathematics-and-statistics/time-series-analysis/moving-average-
method/#:~:text=Drawbacks%20of%20Moving%20Average,values%20for%20all%20the%20terms
6 William J. Stevenson, Operations Management 13th Edition,
Saunders College of Business, Rochester Institute of Technology

7 InsightSquared The Best Sales Forecasting Methods

https://www.insightsquared.com/blog/the-best-sales-forecasting-methods-for-you/

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