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GTM Leaders Need to Manage Three Forecasts – Not One

When forecasting is discussed, most instinctively think, “That is something that our sales leader does.” To be successful, companies must understand, agree upon, and manage three types of forecasts: Bookings, Sales, and the Financial (or Revenue) Forecast. Understanding the difference between and the importance of each is crucial, as is understanding who is responsible and accountable for each forecast type.

A distinction must be made before evaluating each of the three forecast types. In the context of forecasting, many sales leaders use the words ‘bookings’ and ‘revenue’ interchangeably. For example, it is common to hear a sales leader say, “I generated $1M in revenue last month.” In reality, the leader likely generated $1M in bookings, not revenue. The conversion of an order from booking to revenue is a Finance decision, not a Sales decision. While some may consider this distinction nitpicky, understanding the difference is foundational to getting forecasting right.

The distinction will become more apparent as we examine the three types of forecasts. All members of the Executive Leadership Team (ELT) need to use each term consistently and properly and educate their teams on the differences. Failure to do so can create confusion, especially when forecasting is concerned.

Bookings Forecast

The Bookings Forecast is first developed during the annual planning process, likely during the last three months of the fiscal year. The basis of the forecast includes historical data in the form of a bottoms-up build coupled with top-down target assignments. Many stakeholders are involved in developing this forecast, including Sales, Marketing, Account Management, RevOps, Finance, and Human Resources. Once created, the Bookings Forecast represents estimated monthly bookings in the subsequent fiscal year. Key components of the Bookings Forecast include:

  • Seen Pipeline: This pipeline exists in an organization’s CRM system, typically as Opportunities. Opportunities have the following data points, at a minimum: Amount, Stage, Probability, and Close Date.
  • Unseen Pipeline: This is where historical data becomes essential. Using historical data and trends, coupled with planned investments, companies must algorithmically determine what is “Unseen” but likely to close outside the “Seen” Pipeline. Getting this right is often the most challenging part of the process.
  • Strategic Bets: Once the value of Seen and Unseen future monthly bookings are predicted, organizations must determine which strategic bets they want to place. Examples include sales capacity adjustments, events, new partnerships, new product launches, etc.

A critical forecasting mistake is to “set and forget” the Bookings Forecast. All stakeholders must work to keep the Bookings Forecast “living” and continuously updated if Finance is to do its job effectively. More to come on this.

Sales Forecast

The Sales Forecast and the Bookings Forecast are often intertwined, and many fail to manage them separately, a foundational mistake. The Sales Leader owns the Sales Forecast and is likely supported by a RevOps team. The Sales Forecast is opportunity-driven and almost always a roll-up of information collected from the seller and first-line sales leader. Because the Sales Forecast is opportunity-driven, it is short-term, typically in the current month and quarter. The broader team has a limited ability to impact the Sales Forecast. For example, on a timeline less than 90 days:

  • Human Resources: Human Resources cannot impact bookings by adding capacity. Companies cannot quickly find, recruit, hire, and train candidates to affect the current quarter.
  • Marketing: In a mid-size or enterprise company, it is difficult for Marketing to efficiently create new events, programs, or campaigns that impact bookings in the current month or quarter.
  • Sales: The sales team can take action to close deals quickly, but often via discounting and concessions. These actions may help hit the Sales Forecast, but at what cost?

The Sales Forecast is critically important, but its role needs to be clearly understood. It estimates Sales Bookings on a short-term horizon, and is driven by Opportunities that have largely matured.

Financial (or Revenue) Forecast

The Financial Forecast is the domain of the CFO and the Finance Team. It is typically updated monthly as part of the “close” process. This forecast reflects the entire financial year and represents the whole financial view of the business; it is a superset of the Bookings and Sales Forecasts.

An accurate Financial Forecast is heavily dependent upon the quality of the Bookings and Sales Forecasts, with the Bookings Forecast being of greater importance.

Where Forecasting Breaks Down

“Everyone has a plan 'till they get punched in the mouth.” -Mike Tyson

Unfortunately, the Bookings Forecast, developed initially by the cross-functional leadership team, tends to fall apart quickly once the new fiscal year commences. Plans change, problems arise, and unexpected positive and negative variances occur. Once in the ring with punches flying, businesses mistakenly orient around the Sales Forecast and shift a “make every month cadence.” The thoughtful, cross-functional, algorithmic analysis of Seen and Unseen disappears in favor of chasing deals.

This puts the CEO and CFO in a difficult position. Decisions with long-term cost implications are being made daily, but the Bookings Forecast slowly loses relevance. Rather than being a living thing that follows its own monthly close cadence, the original Bookings Forecast becomes a point of reference when problem-solving midyear. This behavior must change.

Forecasting RACI

We recommend a Forecasting RACI spanning the three forecasting types. In the example below, Accountability begins with the sales leader. They must develop and keep the Bookings Forecast alive, including cross-functional inputs. The sales leader is also responsible for the Sales Forecast. Finance assumes accountability for the Revenue Forecast. Specific categorizations may be debatable, but accountability is not.

TYPESALESMARKETINGCUSTOMER SUCCESSREVOPSFINANCEHUMAN RESOURCES
BOOKINGSA, RRRCCC
SALESA, RCCCCI
REVENUERRRCAC

Responsible (R) This team member does the work to complete the task. Every task needs at least one Responsible party, but assigning more is okay.
Accountable (A) This person delegates work and is the last to review the task or deliverable before completion. The Responsible party may also serve as the Accountable on some tasks.
Consulted (C) Consulted parties typically provide input based on how it will impact their future project work or their domain of expertise on the deliverable itself.‍
Informed (I) Informed stakeholders simply need to be kept in the loop on project progress rather than roped into the details of every deliverable.

Properly managing the three forecast types is critical to your business's long-term success. Want to discuss forecast types, algorithmic management, unseen pipeline, and more? We’d love to speak with you about this and more!