Finance Doesn’t Believe The Sales Forecast. And Shouldn’t.
Here’s how the CFO and the VP Sales can get on the same page.
This is what most conversations with CFOs and VPs of finance sound like when I talk with them.
Me: “So last year you did $X top line, throwing off $Y in EBITDA…”
CFO: “Yes.”
Me: “Congrats. What does this year look like?”
CFO: “Well…”
Me: “What do you mean?”
CFO: “Well, we have booked 1/3 of $X, so that’s there. Sales tells us we’ve got $2X in the pipeline.”
Me: “And….?”
CFO: “Well, we’re not sure about it.”
Me: “What do you mean?”
CFO: “They’re … overly optimistic.”
Me: “So you don’t believe their numbers?”
CFO: “We just discount whatever they send us.”
Me: “By how much?”
CFO: “Never less than 40%.”
Me: “40%?”
CFO: “Conservatively.”
Me: “Why that much?”
CFO: “There’s always a great story, early on, about what’s going to happen, and then as we get close to year end, there’s a reason all these deals push or fall out. If they don’t push, we’re getting sales reps begging us for discounts to get it booked before year end.”
Me: “So the numbers are off either way, in terms of when they’re going to close, or the volume or margin at which they’re going to be booked?”
CFO: “Bingo. And so we have to discount their numbers.”
Me: “So their forecast isn’t worth a lot to you, is it?”
CFO: “You nailed it.”
Since I was a child, I’ve thought there needed to be a sequel to Top Gun. No one listened. Until recently.
In late 2019 (roughly), the hype began for Tom Cruise’s second act as Maverick.
But Covid happened. Movie theaters shut down. And movie studios worried about the distribution of a movie they had (and would continue) to pour money into.
So the movie pushed from June (or “Summer”) 2020 to December 23.
I’d waited 30+ years. I could wait a little longer.
And unlike a CFO, I wasn’t worried about investors, covenants, or payroll. But still.
If you’ve never sat in a pipeline review meeting, you won’t believe the below. If you have been in more than one pipeline meeting in your life, you’ll recognize the below as THE archetype for how one goes. This is actually how things go down there.
VP Sales looking at pipeline report or CRM on a projector with sales rep, John.
VP: “John, tell me about the ACME deal.”
John: “Oh. Looks good.”
VP: “Yeah?”
John: “Yeah. They really like us.”
VP: “What do you think on this one?”
John: “We should get it. I feel really good.”
VP: “What likelihood should we assign to this?”
John: “75%.”
You think I’m joking. That’s a level of detail you may get. And forecasts are being made on that basis.
But let’s be more generous, because the below is as common, and offers slightly more hope.
VP: “John, tell me about the ACME deal.”
John: “I met Rebecca, their head of marketing, at SuperCon early last year. She came by our booth, really liked what we had to say. We set up a follow up meeting, that went virtual because of Covid. She loved what we had to say, and she was really impressed with our demo.”
VP: “Okay. What else?”
John: “She had a few questions about product, that I shared with our team. We spent some time answering some functionality questions. Then she got us a meeting with several other people, and they loved our demo. They also had questions around ROI, pricing and use cases. They loved what we had to say.”
VP: “So where is it now?”
John: “So I went out there when things opened up a little – they’re in Florida and cool with us flying in – and we met with some of their team. We took them to dinner, and they told us this product is great, and they really see how it’s going to be big, and they look forward to being able to put it in.”
VP: “Okay. When should we get the order?”
John: “Rebecca, our champion, says her boss has been out, but she’ll meet with her soon to go over the details.”
VP: (Wondering what he just heard but should say, “So you don’t know, do you?”)
John: “Should be a big deal for us. Great logo. We may have to do some customization for them for free, but it’ll be a great use case.”
VP: “So how much should this deal be?”
John: “I mean, I’m thinking it’s easily pushing $100k.”
VP: (Should be asking if this has been discussed with anyone who can make a decision and controls budget.)
This is the sort of information that leads to projections with, get this, quantifiable likelihoods.
Is it any wonder forecasts are wildly off? (Because all numbers have a story. Some are just truer than others.)
Is it a surprise that reps don’t hit quota? Someone allows them to believe that the story they told about some deal with eventually close.
Before we get into what can make a real difference for CFOs, let’s trot out our usual suspects from the “experts” on what will fix the problem and deal with them.
- CRM. Yeah, right. A CRM is only as good as the info that goes in it. I’ve seen “deals” that were 600 days old, and I’ve seen large deals “close” the day they were created. Meaning it’s garbage in, garbage out. You need a CRM, but it needs to be clean and enforced, and have some good process around it.
- Lead gen. Yes, your funnel needs leads. Absolutely. They also need to be tracked. And followed up on (I’m still not sure why we have to remind people of this, but it’s a reality) diligently. But leads don’t necessarily equal a real pipeline, especially when speed to act is missing.
- Sales enablement/video tools/call recording/email campaigns/something else new. Just scrap that. It’s a distraction FOR NOW.
- Some newfangled technology that runs regression analysis on your deals. See your CRM note above.
- Sales training. More than likely, your team needs this. However, your team needs a manager to hold them accountable, ensure that training isn’t just there to make people feel good, and that the company is buying into what the trainers are teaching.
- A new manager. Maybe that is it. If the manager runs a better pipeline meeting than the above. But it’s not even a basic standard to run a decent pipeline review, which is one of the reasons people like me exist. Simple entropy.
- A new comp or incentive plan. Look, drugs are a problem in prison. Why? Because people have time to think about how to get them. Comp plans are the same. Give someone motivated enough time to figure out how to game it, and they will. A new comp plan won’t give you a clearer forecast.
Let’s look at what does work. And yes, it looks, feels and sounds like blunt force trauma.
Here’s what a pipeline review will certainly sound like early on, and what it should sound like after a few months.
First 2-3 times you try this:
VP: “John, let’s talk about the ACME deal.”
John: “Okay.”
VP: “You have this scheduled to close in 30 days.”
John: “Yes.”
VP: “Why?”
John: “They said it looked really good, and we had already done the demo, so obviously we are going to propose next week.”
VP: “But have they said they want to work with us?”
John: “I mean, I feel really good about this?”
VP: “Yes, but did they say they want to work with us?”
John: “It’s complicated. The director really likes us and says she feels good about our product.”
VP: “Okay, so you don’t know. Let me ask you this. Is there a compelling reason why they need our product?”
John: “I mean, of course. They wouldn’t have had the meetings they have had if there weren’t a need.”
VP: “Do you know what that need is?”
John: “I mean, everyone who meets with us loves our tech, the user interface, and everyone wants to grow, which we help them do.”
VP: “So you don’t really know what their key issues are, who is impacted by them, or a timeline, do you?”
John: “Look, I’m out in the field. It’s not that simple.”
VP: “Actually, it is. Let me ask you this. What is the highest level person you’ve met with?”
John: “Our champion, Sarah, is a director.”
VP: “Have you met with anyone at the VP level?”
John: “Her boss was on a call a month ago, but dropped off early.”
VP: “Have you had any conversations with that boss?”
John: “Just that one.”
VP: “We’re kicking this deal back to 90 days. You’re nowhere near closing it. You need to find a compelling issue they are committed to solving, you need buy-in from multiple levels, and you need to get a conceptual agreement around our solution and price point. Then we can talk.”
That usually doesn’t happen. But if it does enough – that sort of tough love – then the below can happen.
VP: “John, let’s talk about the ACME deal.”
John: “Okay.”
VP: “You have this scheduled to close in 30 days.”
John: “Yes.”
VP: “You found it via cold outreach by your SDR, Damon.”
John: “Yes, Damon uncovered some surface issues ACME’s been having, and got me a meeting with their director of martech. We met, confirmed this needed to involve the VP, and they confirmed what we learned in our meeting with the director. We started this process 2.5 months ago, and they need a solution in place before quarter end. We’ve discussed money, it’s there, and the people who need to be involved have been.”
VP: “So budget discussion?”
John: “Yes, with their head of finance. They know the solution will be roughly 167k and they’re good with that.”
VP: “Got it. Why do they need this? What’s so important?”
John: “They’ve been losing ground to a key competitor, and it’s impacting their ability to raise their next round of funding. The solutions they’ve tried have not worked, and they are planning to start raising their B round in 9 months. This should give them time to get our product in, show some traction to investors, and allay concerns. It’s a big initiative, and their CFO and CEO have been involved in discussions. They’ve said, ‘We need this to work.’”
VP: “Competition?”
John: “They looked at XYZ, who can do this, but don’t feel they have the domain expertise we do. They have said explicitly they want to work with us. They can’t afford for this to not work.”
VP: “So what’s the next step?”
John: “We meet a week from Friday to go over the scope of work to ensure we are both on the same page. Finance and martech will be there. After that meeting, we go into contracting.”
That’s the kind of information worthy of a quantifiable forecast. Finance can use that sort of material.
And frankly, finance should be in these meetings asking tough questions.
This is the sort of work that needs to be done every month in B2B companies. These sorts of pipeline reviews develop reps, build trust between sales and finance, and give the rest of the company a clear picture of what’s really going to hit.
Finance should sit in, and frankly, this should be open to others in the company who have a stake in the outcome. Clarity is too important.
This isn’t a place for people to get their needs met. It’s not a place for them to tell us how hard they’re working, how tough it is out there, or what they did last period. This is a place for truth, good, bad, or ugly.
And when we have that, everyone can adjust our expectations accordingly.
Like the release date. The Top Gun: Maverick movie poster release date should read, “Finally.”
Want to know more about getting sales and the forecast on track?
Email me at adam@thenorthwoodgrp.com to get clarity on your pipeline, process and people management.
