Why do we forecast? So that a VP of Sales can yell at his team to produce more?
Actually, no.
Well, some VP of Sales may think so, but there are good reasons why a business needs a sales forecast. The operations teams need to know when certain products are needed by specific customers so they can procure components and build the products “just-in-time.” Finance teams need a sales forecast so they can plan for headcount or building expansions. Executives need a sales forecast so they can drive the business and provide revenue guidance to investors and employees.
What is unique about these sales forecasting requirements? They require a bookings forecast and revenue forecast. Many folks commonly misunderstand the sales forecast to be the revenue forecast; however, most often it is a bookings forecast. What’s the difference?
If I close a deal on Dec. 15, 2009 to sell 1000 widgets to Jim’s Electronics over the next year, that booking may be recognized in December, 2009. However, the revenue associated with that contract cannot be recognized until the widgets are delivered to Jim’s electronics in 2010. Also, the factory doesn’t need to build or ship those widgets until 2010 either. There is a big difference between a bookings forecast (December 2009) and revenue forecast (over 2010) to operations, finance and executives.
Let’s take a true story: A major software provider closed their quarter with bookings exceeding their quarterly targets. The executive team sat around the table at the end of the quarter high-fiving and celebrating their accomplishments.
A few days later, the finance team informed them that a large portion of those bookings could not be recognized as revenue in that quarter. That large public software manufacturer had to pre-announce missed earnings and revenue targets. More than $2B dollars of market cap was lost after the announcement. YES – there is a VERY big difference between a booking forecast and revenue forecast.
The obvious question you should be asking yourself now is: Is my team creating a bookings forecast? A revenue forecast? Or both? How do I know? And what do I need?
If your business typically signs contracts and ships products or delivers service over a period of time, you will need both. Come back next week for part 2 of this 3 part series: creating a bookings forecast and revenue forecast.
Tags: bookings forecast, forecast, forecasting, revenue forecasting, revenue performance management, sales forecasting