Accurately created and executed sales forecast can make your business grow, even in lousy market condition. Being prepared can make up for many unfortunate circumstances.
However, despite the advantages, for many sales leaders, sales forecasting is a dreaded task. More notably since according to Aberdeen research 43% of sales leader compensation can depend on the accuracy of their sales forecast.
It doesn’t have to be a bane. Let me outline the basics of sales forecast for you. In the following chapters, I’m going to talk about the basics of sales forecasting. Later, let me show you easy to use methods and techniques.
After reading this article, you will be able to create an accurate sales forecast for your company.
What is the sales forecast?
A sales forecast is a prediction of how much your business will sell in a selected period. It lets you know where your company sales are as compared to your expectations.
More than that, sales forecasting allows you to plan your budget and sales strategies efficiently. As you develop the skill of sales forecasting, you’ll be able to create more realistic goals for future development and growth of your business.
Here’s where you should start when you want to create a sales forecast for your business. In the following chapters, I will introduce you to the basics of sales forecasting. Also, the methods and techniques to get you started on your own sales forecast.
In a nutshell, a sales forecast is a projection of your achievable revenue. It’s how much you plan to sell, how much it will cost you and how much you will eventually earn from those sales. Sales forecasting is the process of creating this prediction.
Why is Sales Forecast so Important?
Imagine running a business without a sales forecast. It will be problematic, even for a small, local grocery store. How much profit can you expect? In a month? Yearly? Without the ability to predict future sales, you are left in the dark – you can’t manage your inventory or cash flow.
The sole purpose of sales forecasting is to enable a business to make informed business decisions and growth plans.
Moreover, there are other factors to consider. With adequately prepared sales forecast you can consider hiring additional staff members. Alternatively, start searching for new offices.
On the other hand, the sales forecast predicting a 30% decrease in sales can prevent you from overspending. This way you gain enough time to reduce expenses, cut costs or reevaluate your marketing efforts.
Forecasting brings benefits
Sales forecasts are beneficial and have a real impact on your company’s future.
Researcher and analyst Peter Ostrow directly links accurate sales forecasts with better business results. Including year-over-year revenue increase. That’s because forecasting allows you to plan how to allocate your resources efficiently and what strategies you need for growth.
Creating a sales forecast is indeed a cornerstone of business planning. As Geoff Hurst of the Chartered Institute of Marketing was once quoted:
“Sales forecasting is essential. If you don’t plan, you can’t know where you’re heading. But, if you don’t know where you’re heading, you shouldn’t be surprised if you end up nowhere.”
What are the risks of sales forecasting?
Meanwhile, let’s think about potential factors that can affect sales forecasting and need to be carefully considered.
First of all, what can you say about the economy in your industry? Is it blooming? Alternatively, the market is in decline? Is there much competition sniffing out around your niche? In this economy, what is possible – losing or gaining new customers? You can’t go around the economics of your market; therefore your sales forecast should include the situation on the market.
Secondly, any political or economic regulations can affect your business – of course in two ways. It may be beneficial for you with tax regulation changes. Alternatively, negative with politically driven restrictions to free-market exchange. Nevertheless, you have to analyze any laws or regulations that can impact your business.
Continuing, take a look at your products – are there plans for launching a new product that can impact sales in any way? Are there changes in competition offer that are affecting your sales? Is there a risk of price increase/decrease during to changing access to workforce or materials? Keep that in mind to increase your sales forecast accuracy.
Last, but not least keep an eye on your marketing team – new campaigns can make or break your business. New strategies can be a better fit for the present market situation. Perhaps it is an excellent time to launch a new website? Increase your online presence?
In summary, keep in mind not only your company inside data but also outside conditions that may affect sales forecasting.
Methods and techniques in sales forecasting
While researching methods for sales forecasting, you can encounter two different types: quantitative and qualitative. First of all, it’s important to stress out that even though they have different methodologies, they are equally crucial for sales forecast.
Establishing that, let’s dive deeper with short definitions of both sales forecasting method types.
Quantitative Methods of Sales Forecasting are focused on using historical sales data to predict revenue. They are based on mathematical methods. In the meantime, Qualitative Methods of Sales Forecasting are more subjective. They concentrate on opinions, perceptions, and emotions. Qualitative methods conclude data from market research and focus groups for experts — also analysis of trends.
Methods of sales forecast
In the next few paragraphs, I’m going to introduce you to a mix of quantitative and qualitative methods of sales forecasting. Some of them are specific to an industry or market. Others work for everybody.
So, let’s get started.
Following four methods are qualitative methods that are most marketers friendly. However, they require knowledge and experience to produce an accurate sales forecast.
1. Consumers’ intentions survey
First of all, you have to research all potential buyers and prepare a list. Next, in-depth interviews are conducted with selected, a representative group of buyers. Based on the data gathered an estimate of sales is drawn and transformed into a sales forecast. Industrial marketers use buyers intention method as it produces a large amount of data based on real customers. However, they can be time-consuming and expensive.
2. An opinion poll of the sales force – intuitive forecasting
In this method, we use the expertise and knowledge of Salesforce. Most salespeople have a pretty good feel of the market and its trends. Based on an opinion poll, the estimate is drawn. Furthermore, this method is cheaper and easier to conduct. It can be a great replacement, if the first method is not possible, based on market condition or budget.
3. Expert opinion
To prepare a specialist opinion, you have to develop a list of experts in the fields, specific to your industry or market. Objectivity is crucial; thus it’s preferable if experts are outside professionals. However, they can be your company executives from finance, marketing, and sales departments.
4. Market test
This particular method is useful when a company wants to roll a new product to a market. Part of a consumer base gets access to a new product. Selection is generally based on their demographic information. It can be an additional or primary method. Some startups use it to increase brand awareness with a soft launch. The company can predict sales forecast based on actual sales in that market. This method is also called market probe.
Next few methods are qualitative and require more mathematical approach.
5. Projection of past sales (historical)
The historical method obviously can work only for established companies with a longer track record. Based on last year’s sales (including market changes and variations) sales forecast is made. It’s one of the easiest, most widely used methods. However, it works best for stable companies in stable markets. Thus shouldn’t be used in industries where certainty is a rare luxury. Like I mentioned before, this method is useless for new companies. Alternatively, businesses launching new products.
6. Products in use analysis
This method works best in older, more established markets, saturated with brands. The company can analyze products of similar brands and apply the same assumptions to its sales. Hence, this method presumes that consumers preferences will not change. Same goes for market conditions. This method can produce inaccurate data. In the result, the sales forecast can too be inaccurate.
7. Statistical demand analysis
This particular method required to gather relevant factors which can influence sales. Factors like income, prices of products, demographic data, marketing campaigns. This date is analyzed and based on gathered information sales forecast is predicted. Statistical analysis is based on factors, hence thorough research of impact points is highly recommended. With today’s technology, such study is cheap and accessible, even on a small budget.
8. Time series analysis
This method is based on the company’s data; therefore it is inexpensive and easy to use on a low budget. However, you need access to data from previous years. Based on long-time trends, seasonal and cyclical changes and any variations sales forecast is predicted. Mathematical methods are used to clear data of any irregularities and statistical errors. It’s one of the most objective methods.
A guide to creating a sales forecast
1. Start by creating a system
To know what doesn’t work for you and what brings positive or negative results, you need to have something to evaluate. A clear set of rules and requirements will undoubtedly help to guide this process.
The sales process can be easily individualized. Each of your sales reps could have their system. However, that wouldn’t make it any easier for you to sales forecasting, would it? You would have to make as many forecasts as systems of sales practiced in your company.
So if you want to achieve a real understanding and predictability, you need a unified system for sales forecasting. Also, according to the seminal Predictable Revenue book by Aaron Ross and Marylou Tyler, such a system should embrace a clear understanding of your funnel, average deal size, and defined timeframes.
Bear in mind that analyzing the results of an existing system before implementing a new one is a crucial thing to do. You can’t forget about it. By doing so, you’ll lose tons of valuable data that could speed up your sales process. Moreover, this data should be a part of your sales forecast.
2. Define timeframes
You can create a sales forecast for a month, a quarter or a year. It’s all up to your preferences – it doesn’t have to be convenient for anyone other than you or your company management.
A year may not always be the best choice, because it’s general. For some companies, over 50% of their yearly sales occur during certain periods, such as the Christmas season. In cases such as those, it would be more beneficial to create a sales forecast for those hot periods in particular. You can compare the results year over year to measure success and estimate future growth. Sales forecasting can be a seasonal action.
3. Measure the results rather than the means to them
Reasoning, measuring the methods you took to get certain results may be useful when you want to evaluate things such as your employee’s work. However, when it’s the process that’s under consideration, the results will work way better as indicators of success. That’s because nothing else will tell you more clearly that your process works.
For example, one metric useful in sales forecasting is a number of sales qualified leads (SQLs), i.e., the leads that are ready to enter a deal, a contract or some other form of business transaction. For instance, if you know that it in your company it takes on average ten qualified leads to close one sale, you can easily count that to get 100 deals you’ll need 1000 SQLs.
Therefore, using sales qualified leads as your KPI in your sales forecast lets you know how to plan the budget and resources to generate enough qualified leads to meet your sales targets for the period.
It will be way more beneficial for you to track SQLs in your sales forecast – rather than say, Calls Per Day. Although quite a popular metric, the number of calls per day will tell you only about your agents’ work but not about the sales process for the team. It certainly won’t be of much use in sales forecasting.
4. Evaluate your past sales
As Aaron Ross and Marylou Tyles stated in Predictable Revenue, it’s important to stay in touch with the clients that you already have. It’s especially important to track the ones that were your early customers. The experience they have with you, and that you have with them lets you evaluate the sales process you’ve been using in the past. Therefore, improving your sales forecast in the present.
Analyzing your own mistakes is the best way to learn. Think about asking your former clients about their experiences and the way you made deals with them. Therefore, it will surely help you forecast your sales.
When you compare client behavior during the sales process with the behavior of your present leads, you may start to discern patterns. Thanks to that you’ll be able to estimate a little bit more precisely in which part of the funnel your leads are currently.
5. Put it all together and…
…you’re almost done! Now it’s time to analyze and implement what you’ve learned in your own sales forecast.
Remember to keep a copy of your past sales forecasts, so you could reach for them in the future and compare with what’s happening at present. Making such comparisons of your previous sales forecast will show how fast your business is growing. Also, if it’s going in line with your goals and strategies.
6. Just a few more things to keep in mind
Stay tuned with trends in the global economy and your industry.
Following current trends in sales and business can help you avoid overestimating your possibilities. Thanks to that, you’ll be more aware of industry growth, business trends, and the size of your competitors. When you study your rivals’ affairs, you learn how well they are doing and can draw conclusions for your own business. Therefore, better sales forecast for your company.
Use software with extensive reporting in real-time
KPIs have a real impact when it comes to creating a sales forecast. However, tracking the metrics all by yourself may be time-consuming, tiring and, as a result, filled with mistakes. So when assembling your sales stack, make sure that the tools you deploy come with extensive reporting. Ideally in real-time, so you can always keep your eye on the ball. This way sales forecasting will not only be a less tedious task but also more accurate.
If you’re at the same time serious about optimizing your outbound and inbound sales, make sure you check CrazyCall out. We provide easy and convenient solutions to boost your revenue by as much as 40%. Are you skeptical? Read our customer success story and find out for yourself.
Sales forecasting for new businesses
Admittedly, sales forecasting is more difficult for a brand new business. The main problem is the lack of history or learning experiences. Established companies can use their past sales as a baseline for new predictions. A new company has no track record; therefore sales forecasting can be a challenge.
When working on a sales forecast for a new business, you should focus mostly on analyzing your target demographic and how many of them are within your reach. Research on companies that are similar to yours and are located in similar geographical areas can help you clarify what revenue to expect.
Then, as time goes by, your data will be building up. Soon, you’ll be able to compare and analyze your own experiences from past months to create a more realistic and accurate sales forecast for your company.
Sales Forecasting for Existing Businesses
Established companies with customers base have access to data. Therefore, sales forecasting is easier to conduct. There is a baseline with past sales that can act as a sales forecast accuracy meter.
Knowledge about a market, experience about trends combined with actual data from past sales can produce very accurate sales forecast.
Granted that, companies should be aware that even on stable markets and with large customer base they are not 100 percent safe. Trends change, there can be unexpected events and law regulations that overshadow even more accurate sales forecast. It’s good to use different methods, to keep sales forecast precise.
You set goals you hope your business will achieve. A sales forecast allows you to stay realistic. It shows you how much your business is supposed to deliver based on its history of performance and new elements you introduce, be it processes, employees or products.
Your sales forecast shouldn’t demotivate you! On the contrary, it should encourage you to push the boundaries and hone your skills at making better and better predictions for the months and years to come.