Two essential components of revenue planning are sales forecasting and revenue projecting, and whilst often referred to interchangeably, they have distinctly different uses and approaches. They are however are worlds apart in terms of scope, accuracy, and complexity, and so by understanding these differences and deploying each appropriately, businesses can plan both more accurately and sustainably.
Sales Forecasting: Estimating Near Future Revenue
An already widely understood concept, Sales Pipeline Forecasting encompasses the process of predicting future sales revenue based on estimations of pipeline conversion.
Its primary purpose is to estimate the amount of revenue a business will generate in the near future, without making potentially incorrect assumptions about performance areas such as lead generation and closing, it's view is limited to the length of the sales cycle.
If a business has a 60 day average sales cycle, it's effectively saying that it takes someone to go from lead to closed won or closed lost within an average period of 60 days - Theoretically, this lead does not exist (on average) in a CRM any earlier than 60 days before the close date, which creates a bizarre paradox - Forecasting can't actually forecast.
If you want to know what is happening in 67 days time, you won't be able to predict it until (on average) next week, when the leads hit the business.
Essentially, using any traditional Sales Pipeline Forecasting techniques to provide expected revenue figures beyond the duration of your sales cycle is not actually possible, and other statistical methods (like regression analysis) are ironically too simplistic to be useful or effective.
Revenue Projection: Predicting Long-Term Trends
In contrast to sales forecasting, revenue projection (in Clevenue at least) focuses on long-term trends, live market conditions & business performance, as well as the inputs of you sales & hiring plans.
By combining these inputs into a model, it can work out to project the volumes of leads, conversions through funnel and eventual resulting revenue over time, far beyond that of your sales cycle.
By leveraging stable historical data and inputs (focussing only on data from closed deals), revenue projection models a representation of what should close purely based on past outcomes, doing away with subjectiveness and opinion that comes with many forecasts.
It does not consider the current pipeline but provides a stable and accurate understanding of revenue trends, making it ideal for longer-term growth planning and critical decision-making.
The Key Differences
To better understand the distinctions between sales forecasting and revenue projection, let's examine their main differences:
Focus and Validity of Output: Sales forecasting primarily focuses on short-term predictions, while revenue projection looks at long-term trends and closed sales performance. Sales forecasting provides valuable insights for sales pipeline management, while revenue projection delivers stability and accuracy for critical areas like planning.
Data Sources: Sales forecasting heavily relies on the input of a sales team, which may introduce bias and variability. In contrast, revenue projection utilizes fixed, naturally clean data, filtering out subjective opinions and uncertainties.
Complexity: Sales forecasting is less complex than revenue projection as it involves fewer variables and calculations. Revenue projection requires a more complex and technical approach, considering a wide range of factors that influence long-term revenue trends, which is typically not possible within a spreadsheet.
Accuracy and Calculation: Sales forecasting is often easier to quickly calculate an output due to its simplicity and reliance on current data. Revenue projection, with its complexity and long-term focus, requires comprehensive modelling and analysis to ensure accuracy, which in return requires extensive computing.
Business Planning: Revenue projection provides a stable and accurate method for building sales hiring and capacity plans. In contrast, sales forecasting is better suited for managing the sales pipeline and short-term revenue estimations & tactical plays.
Simplify Forecasting with a Statistical Approach
Forecasting has become overcomplicated with tools and platforms aiming to make it more accurate and reliable, but ultimately miss the mark in what is really needed - Long term revenue insights.
Instead, you should look to separate the two approaches, and they way that they are calculated - Forecasting should return to a more statistical approach, based on utilising the average % close win rate from each sales stage, and using that to create a weighted summary over time.
Whilst conversational intelligence and "AI" platforms can help contextualise if a deal is sat in the right stage, correct forecast comes from having defined and repeatable sales processes, with sales having a clear understanding of what qualifies an opportunity to sit in each stage.
In removing subjectivity, opinion and gut from forecasting, you can lean into native CRM forecasting, or revert back to simpler spreadsheet based templates. If a template sounds like what you need, we have it!
Embracing Revenue Projection for Sustainable Growth
As the tech industry strives for greater capital efficiency, accurate planning and sustainable sales hiring, revenue projection must become a critical priority alongside sales forecasting. Whilst accurate sales forecasting is essential for reporting purposes, revenue projection acts as a more comprehensive analysis tool, providing a deeper understanding of the business's health and direction.
The drive towards the need for constant scenario testing and planning means that for companies to anticipate future trends, identify gaps in their plans, and proactively address potential issues, they need to begin using revenue projection as their way of gaining a continuous view of business health & progress
Clevenue: Empowering Businesses with Revenue Projection
Sales forecasting and revenue projection are integral elements of financial planning for businesses and whilst sales forecasting focuses on short-term revenue estimation, revenue projection provides a long-term, stable, and accurate view of revenue trends. By embracing revenue projection alongside sales forecasting, businesses can unlock their growth potential, make data-driven decisions, and achieve sustainable success.
It's time to prioritize revenue projection as a critical tool for planning and decision-making, and with Clevenue's dedicated sales capacity & revenue projection platform, businesses can gain a deeper understanding of their future revenue, optimize their resources, and chart a path to long-term growth. Unleash the power of revenue forecasting and projection to unlock your business's true potential.