Pipeline vs. forecast: What's the difference?

Is there a difference between the pipeline and the sales forecast? Yes, there is a difference, and yes, it does matter. Sales people sometimes use these words interchangeably without giving it a lot of thought, or they may have worked for other organizations that had differing definitions of these terms.  Regardless, understanding what both mean and using them correctly is important for a number of reasons. Sales forecasting, in the general sense of predicting future revenues, can be divided into three types of process structures:

The Pipeline
The sales pipeline is the “meat and potatoes” of the process and consists of all opportunities at all stages in the sales cycle. The pipeline captures opportunities in the early phases, up to formal contract negotiation and proposal.

Though all future sales begin as leads from some source (cold calling, referrals, etc.), no unqualified or uncontacted lead should be in the sales pipeline. All unclosed sales, however, belong in the sales pipeline.

The phrase “pipeline management” refers to the salesperson's ability to manage all of his or her prospects in differing points in the sales cycle. “Balancing” the sales pipeline refers to his or her ability to cold call, follow-up on existing leads and close sales simultaneously so that the salesperson has a continuous flow of opportunities and will not have huge period-to-period swings in closed sales. As conversion ratios from various points in the pipeline are tracked, accurate data regarding selling cycles and close ratios is compiled.

Warning : A full pipeline is not a strong sales forecast. Low closing ratios and long selling cycles can and will impact the accuracy of what is forecasted as future sales.

The Sales Forecast
So, how much of your pipeline can or should be forecasted? Forecasts are short-term visibility of up-and-coming closed deals with certainty declining the further out the time frame is. As a result, the longer your sales cycle, the more difficult it is to accurately predict or assess which opportunities may go through to close.

The forecast is the salesperson's prediction of which sales will close in a given time frame. Companies may use 30-, 60-, 90-day forecasts: opportunities more than 90 days into the future are less reliable and should not be forecast.

The main difference between the pipeline and the sales forecast is the prospect must have a need that the organization can address within budget and timeframe considerations to qualify for the sales forecast. There also must be a clear understanding and agreement about the “next step.” (e.g.: the proposal is to be reviewed with the decision maker; the budget process is clearly understood; the prospect has made a verbal commitment to buy.)

Prospects/opportunities in the sales forecast are not at various points in the sales cycle; they have passed a certain pre-defined point in the sales process, and they are nearing the end of it.

Another significant difference between the two is the sales forecast is used to estimate a company's short-term revenue and cash flow.   In other words, sales forecasts help a company determine whether it can pay its bills. Pipelines do not!

Warning: We can have a strong forecast, and still have a weak pipeline. By focusing all of our energy on closing the deals in the pipeline, we can neglect the prospecting activities that replenish it.

The Long-Range Sales Forecast
Prospects in the long range forecast have told the sales representative they are budgeted for and will be purchasing a product or service at some point in the future. The prospect might be putting the purchase off into the future because of an expiring contract or the purchase needs to go through a formal annual budgeting process. Sales representatives use the long-range forecast to keep track of prospects who will be buying anywhere from four months to two years from the time of their initial contact with them.

Once a prospect is categorized as a longer-term opportunity, the salesperson maintains contact and tracks the status of their needs and any changes.

Warning: A strong pipeline and strong sales forecast can cause us to miss opportunities that are outside our normal selling cycle. Long-range forecasting should not be used to justify a prospect's need to “think it over.”

To help bring clarity to your planning, separate your pipeline discussions from your forecast discussions. By doing so you will focus attention on the need to be prospecting to put new opportunities into the pipeline while also emphasizing the need to manage the sales process effectively and predict future sales accurately.

Jamie Kane is a Lakewood Ranch resident and the owner of Sandler Training in Sarasota. Sandler Training offers sales, management, and leadership training, coaching and consulting. Contact Kane
at [email protected].