In a volatile market, what are the best ways for revenue leaders to approach forecasting with more accuracy? How often should a forecast be updated? Who is responsible for creating revenue anyway?
To help founders and revenue leaders at GGV’s portfolio companies better navigate the forecasting process, we partnered with Pavilion—a community-powered learning platform for go-to-market leaders—for the latest best practices from:
Read on for their take on quantitative and qualitative perspectives, top methodologies for revenue forecasting, executive accountability, and more:
According to Stephanie, a revenue forecast—or the portion of a company’s annual budget that predicts top-line revenue—is best created as a blend of art and science.
As a key part of your annual planning process, forecasting helps you decide “what you think you're going to do in revenue. But the annual planning process has a whole lot more: What direction are we rowing in? What are our goals for the year?”
To achieve business outcomes, you need a map and “forecasts are a true guide to how you’re going to be successful,” Stephanie says.
Based on her experience, Stephanie recommends a 50/50 split of quantitative and qualitative inputs.
Quantitative perspectives include:
Qualitative perspectives include:
What many revenue leaders often forget to account for is what Stephanie describes as a “gut review.”
Remember: If you suspect that a forecast looks “off,” it’s your responsibility as a revenue leader to speak up before signing off.
A common question that revenue leaders face is: “How much headcount do you need to reach $X million?”
This is also one of the top reasons why revenue forecasting goes wrong. “Headcount does not equal revenue,” Stephanie says.
No matter what type your business is, Stephanie recommends first separating your revenue channels into new business versus recurring or existing business.
For forecasting new business, Stephanie explains how two methodologies can be used in tandem to get a more complete picture: sales capacity forecasting and waterfall forecasting.
Many startups default to sales capacity forecasting, where:
But for early-stage startups in particular, shifting from founder-led sales can lead to wildly inaccurate expectations “since no one sells like the founder does … When the founder and first salesperson crush it, the founder often says: ‘I’m going to hire five more people and still do $2 million per head.’ It doesn’t happen,” Stephanie says.
The bottom line: Even when done thoughtfully, “a sales capacity forecast isn’t optimal because people don’t equal revenue,” Stephanie says. However, a sales capacity model can help supplement another approach—waterfall forecasting.
If your startup has any data about marketing qualified leads (MQLs) or sales qualified leads, waterfall forecasting is a way of “taking actual data and letting it feed my hiring and budget decisions,” Stephanie says.
With a waterfall forecasting model, you may be able to more accurately answer questions like:
Pro tip: “Deal velocity is often missed,” Stephanie says. “How long does it actually take from Stage 1 to Stage 4 to close a deal? You want to measure this and make sure that you're putting that information into this model.”
The bottom line: A waterfall forecasting model can help you more accurately assess your org’s needs versus “putting the headcount in and saying what does the headcount need to do to produce this? I'm letting data tell me what I need instead of people putting them against an actual quota or expectation,” Stephanie says.
If your startup has a two-month process of creating a top-line forecast, you may have to revisit it in a mid-year reforecast (usually July).
“What a revenue forecast shouldn't be is month to month you're making tweaks and changes,” Stephanie says. “That's allowing yourself to continue to move the ball that you've already given the board … That's not a business plan. That's not a map. It's like you're constantly changing direction.”
As tempting as it might be to lump five seemingly similar verticals together, ask yourself:
If the answer is no, “you’re going to have to create five forecasts,” Stephanie says. “Anything that's a different lead source and different conversion metrics, you really do have to separate them out.”
Pro tip: Does each forecast factor in seasonality and cyclicality?
At many companies, the CRO or VP of sales may end up on the chopping block when targets are missed. Another approach, according to Stephanie, is to invite your peers from the C-suite to participate throughout the forecasting—and accountability—process.
For example, if your company is counting on a new line of business, what does that executive conversation with the CMO, CFO, COO, etc… look like at the 90-day mark?
Consider aligning on questions like:
As Stephanie has seen, “that’s the executive accountability and management side that’s often missing.”
To increase accuracy in your startup’s revenue forecasting, keep these do’s and don’ts in mind:
The bottom line: Revenue is created by the entire executive team—and everyone is responsible for revenue.