It pays to have accurate sales forecasts. Research shows that companies with accurate sales forecasts are over 7% more likely to hit their revenue and sales quotas. If sales is a game of inches, precise forecasting can provide that extra inch of leverage that allows you to hit your annual targets and continue year-over-year growth.
Sales forecasting is an indispensable tool that offers several benefits, such as predicting consumer demand, managing inventory, strategic planning, expectation-setting, and devising a marketing strategy. However, nearly 80% of sales organizations miss their forecasts by at least a 10% margin.
In this guide, we’ll go over the basics of sales forecasting, how to accurately forecast your sales, and how your sales team can benefit from better forecasting.
But first, let’s go through why it’s relevant for businesses to predict their future sales. There are multiple benefits to knowing what’s coming your way sales-wise, but most importantly you’ll be able to:
- Estimate Revenue: You’ll know what kind of money you can and should expect, and when. For example, if last year your sales skyrocketed during Black Friday, there’s a good chance it might happen again.
- Allocate Resources: If you have no idea what will happen, it’s also hard to predict how you should distribute the resources you have. But if you know that come Black Friday, everyone wants your product or service, you know exactly how to deal with the surge in demand.
- Plan for Growth: When you know what’s coming, it’s easier to make the most of it and make sure you don’t miss any opportunities to scale. Maybe it’s time to start planning your Black Friday marketing campaign?
And that’s only the beginning! This one’s a doozy, so jump right in to learn all there is to know about sales forecasting.
What is a Sales Forecast?
Sales forecasting refers to the estimation of future sales and the various accounting and analytical processes involved therein. In other words, sales forecasting is all about using accounting software and other tools to predict future unit sales.
Research by the Aberdeen Group found that companies with precise sales forecasts enjoyed 13.4% more year-over-year growth than companies with inaccurate estimates.
Forecasts produce reports that predict unit sales for a given week, month, quarter, or year. Sales representatives create forecasts that managers and directors use to estimate revenues and devise a sales strategy.
Accounting software helps streamline sales forecasting and pipeline reporting. These reports are used by board members and senior sales management and are shared with stockholders to steer the strategic direction of the company.
It’s no surprise, then, that sales forecasts are important tools for growing vertical organizations.
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What Goes into a Sales Forecast?
Below, we’ve listed a few essential elements of a sales forecast. Together, these sales forecasting features communicate critical information to management about future growth.
- Sales Quotas: Every sales forecast includes a quota section that individuals and sales teams use to gauge progress and define an objective that must be hit for a sales campaign to be deemed “successful” by management.
- Sales Processes: Documented sales processes are important aspects of a sales forecast because they structure the funnel from sales prospecting to closing the deal. Including a step-by-step process description for a sales representative determines how they proceed toward a deal and makes sure all team members are following the same sales script or formula.
- CRM Data: Customer relationship management (CRM) software provides a centralized database for all team members to track their relationships with prospects, leads, and customers. Tracking the relationships your team has with prospects and customers can help forecast future sales and facilitate the closing of deals.
- Funnel Definitions: A report isn’t worth much unless the terms used in it are clearly defined. A sales forecast should provide definitions for what constitutes a close, a prospect, an opportunity, and a lead. This way, all members of the sales team can be held to the same benchmark standards.
- Forecast Follow-Up: The follow-up component of a sales forecast provides accountability for salespeople who fail to live up to their forecast. Unless there is a planned follow-up discussion if a salesperson misses their forecast, the salesperson may become complacent and no longer believe that they have to forecast future sales accurately.
What Influences a Sales Forecast?
There are several factors, both internal and external, that impact a sales forecast. Below, we’ve listed a handful of the most common influences on a sales forecast.
- Policy and Governance: Changes in corporate policies or the governing structure of an organization can make a big impact on the outcome of a sales forecast. For example, if a business institutes a sales comp plan change in which salespeople cannot discount after the 20th day of the month, you’re going to expect a surge in the close rate during the first 20 days followed by a steep decline through to the end of the month.
- Personnel Changes: Hiring and firing new talent will have a major impact on your sales forecast. Sales managers should expect to see a significant drop in sales revenue after a recent termination. Likewise, a surge of new hires will create a commensurate spike in sales.
- Economic Shifts: Changes in the business cycle will make a significant impact on your bottom line. During an economic contraction or recession, individuals and businesses are less likely to spend money and, therefore, your team should expect a drop-off in sales. However, periods of economic expansion will generate an uptick in sales.
- Seasonal Changes: Many industries see fluctuating sales throughout the year due to increased seasonal demand. For example, lawn care companies or tax preparation firms should expect significant sales growth during peak season followed by a period of low demand.
- Product Changes: If your company changes its lineup of product offerings, you should analyze whether these products are complementary and whether they can be bundled together. If so, you should expect to see larger deal sizes and an overall increase in unit sales.
Sales Forecasting Process
In addition to all the fun that comes with being able to predict the future, sales forecasting offers actual value to your business. Here are a couple of things your company will benefit from once you start estimating your future sales.
Why You Need A Sales Forecasting Process
- Profit: Sales forecasting allows you to spot potential issues in your sales strategy while there’s still time to avoid them or change course completely. Discovering problems early on gives you enough time to react to them so they’ll never disrupt your business operations again.
- Business Predictability: When you’re forecasting with a CRM, you can quickly determine how much prospecting you need to do to keep the pipeline in good shape. And if you want, you can do it without a CRM just as easily. Simply create an Excel spreadsheet and do your calculations there.
- Investor Relations: Investors can be reluctant to invest in your product or service if you don’t have realistic expectations and knowledge of your future growth. They may ask you how your company is planning on growing, and if and when you (and they) will be seeing results. Whenever you’re looking to raise capital or find new investors, you need to have a solid understanding of how your business is going to perform in the future, and why.
- Marketing Efforts: With an accurate sales forecast, you’ll know how much you need to spend on things like your marketing efforts and demand generation in the future. If you have valuable data from the past to show how these efforts have previously paid off, you’ll know which parts of your marketing strategy you should tweak and how in order to get the best results.
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What Data You Need To Create An (Accurate) Sales Forecast
Before you can proceed with forecasting, you have to have certain basic processes in good shape. These have an impact on your sales performance and thus affect your forecast, too.
- Individual Rep & Sales Team Quotas: This is quite simple, but to gauge performance, you need an objective definition of success. In other words, you just need to know how much you want to sell and grow. Your goals need to be realistic and concrete, so that each individual and the team knows what is expected and how. You can’t really expect 20% of growth per year if you have set no concrete goals or KPIs to measure your team’s success.
- Clear Sales Process: Whether you’re doing inbound sales or outbound sales, you should always consistently go through the exact same steps in your sales process to be able to predict how your future sales processes will go, and how to close upcoming opportunities. Once the process is clear and structured, you know how it will typically go, and have a general understanding of the probability of an opportunity closing based on certain data.
- Structured Sales Management: You go through all this trouble to create a sales forecast and hope it all works as planned. But what happens when the forecast is missed? Well, sales forecasting always has to do with sales management. In order to realize the sales you’ve included in your forecast, your salespeople need to take action and actually realize that forecast.
- An Organized CRM: This can greatly improve the accuracy of your predictions, and some CRMs can also be used as forecasting tools of their own. The most sophisticated ones can even build sales budgets and quarterly sales forecasts based on the past performance of your salespeople, which will greatly help you with the accuracy of your forecasts.
Sales Forecasting Factors to Consider
Now you have the foundation in place, and that’s great. But before you get to work, remember to take some additional things into account.
The more factors that you take into consideration, the closer to reality your sales forecasts will be. Here are some internal and external factors you should definitely pay attention to.
Internal Business Factors
- Past Performance: All historical business data across all levels and sectors of the organization matters. Why? Because this data shows, without a doubt, what happened to the business under different conditions in the past. This is why the same data can be used to predict what may happen in similar circumstances in the future.
- Changes in your Organization: Internal organizational changes may result in unpredictability, but you can also use this information to predict how similar events may affect your organization and sales in the future. Even if you don’t know about internal changes beforehand and they still happen for unforeseen reasons, you gain valuable information for your next sales forecast, and you can tweak your existing forecast accordingly.
- Marketing Efforts: It is quite possible (and almost certain) that your previous marketing efforts have had an impact on your current sales and revenue. This basically means that first of all, when making your forecasts, you should remember the effects of your marketing activities that have already occurred. Secondly, you now have a better understanding of what earnings you can expect from similar marketing efforts in the future. A quick campaign that results in a certain amount of sales will probably work in a similar way next year.
External Business Factors
- Current Global Conditions: You should always adjust your forecasts according to any major global events that may have an impact. You should apply this to everything, including your production level values, marketing budget, and product pricing. Events that affect the global economy are likely to affect your business in some way or another, too.
- Seasonal Demand Trends: When forecasting, consider if there are any special seasonal demands for your product. If, like in the example from our introduction, your sales skyrocket during Black Friday, it’s a good idea to include it in the forecast. Anything else? Do people tend to buy your product as a present? If yes, include traditional gift-giving holidays into your forecasts.
- Changes Within Your Industry: Similar to global events, no business is likely to remain unaffected by changes or shifts in conditions related to your specific industry. These may include things like new government policies, the rate of growth in a specific industry, market share within your sector, etc. You name it.
- Inflation: Inflation affects the values of any currencies used in your business operations. The bad news here is that nobody really knows what the inflation rate will be in the future, and as many unforeseeable factors affect inflation, forecasting it is about as easy as predicting next week’s weather—especially with a global economy.
Forecasting Methods & Tools
- CRM: A CRM is a useful tool you can use to both store and retrieve all the sales data you need, and it also includes useful tools you can use to close more deals. Useful methods for sales forecasting are any tools related to lead tracking, funnel analytics, call sequences, and reporting. Modern CRM systems use artificial intelligence and analytics to figure out what you should use.
- Excel: As mentioned, sales forecasting can involve a lot of simple spreadsheets. When doing your calculations, take all the internal and external factors that may have an effect into account.
- Sales Analytics Platform: Using a sales analytics platform may be useful for combining data for many products and services, building forecasts, and diving deeper into the fascinating world of sales analytics. Businesses often use scenario models to predict sales. It can be useful to calculate what happens in different scenarios. This way, you’ll be better prepared even if something surprising happens.
- Lead Scoring: Lead scoring means grading leads according to their actions on your website, interactions on your site, or any other trigger you want to follow.
- Accounting Software: If you want to forecast anything more complex, like gross margins, you may need to include data from your accounting software. Some sales forecasting tools can be easily connected to your accounting software, which makes it very easy and convenient to transfer the required information whenever needed.
How To Do A Sales Forecast
Sales forecasting is not exactly the same for every business, we get that. Here are some basic ideas for how you can get your forecasting on, regardless of your company type.
Forecasting for Pre-Existing Businesses
Sales forecasting is a slightly easier task when you already have an existing business, simply because you already have past sales data that you can use.
If you can, start by forecasting unit sales per month, as it’s easier to forecast by breaking things down into smaller parts. Many businesses sell in units, whether it’s a product or service business, so that’s a good starting point.
If you have past sales data, your best friend is the most recent past. There are some statistical analysis techniques that take past data and project it forward into the future.
- Trend Analysis: Based on your past sales data, you can discover certain trends and patterns, and you can then apply those to similar circumstances that may occur in the future. These may be, for example, seasonality or economic demand.
- Use Exponential Smoothing: This means smoothing time series data using something called the exponential window function. If you’d normally just weigh every past event equally, exponential functions are instead used to assign an exponentially decreasing weight over time. Here’s a great example, along with a sample sheet.
- Project: If you project unit sales monthly for 12 months and then annually, you must also project your prices. You can try this out with a simple spreadsheet: in one column, place units of different sales items, their prices in a second, and use a third column to effectively multiply units times price. This way you can calculate your sales quite simply, accurately and smoothly.
Forecasting for new businesses
Having a new product is no excuse for not having a sales forecast. Of course, you may not have any past data to build a forecast on, but there are still techniques you can use, and then tweak your forecast as you go and do get that data.
- Take an (Educated) Guess: With new products, sales forecasting is mainly about making educated guesses. A good technique for this is just looking at other companies with similar products and comparing your business with them.
- Create a Range of Outcomes: You can also try to create a range of different forecasts and calculate an average for those by using standard deviation. Basically, standard deviation calculates the “central tendency” of your data. A low standard deviation means that the values are closer to the expected value of the set of data points, and a higher standard deviation suggests that the values are spread out wider.
A Simple Sales Forecasting Checklist
While sales forecasting may sound like a simple task, there are many little things you need to take into account. Also, don’t forget that you’re always allowed to tweak your sales forecast once situations change—your crystal ball won’t be able to predict everything, after all.
Here’s a quick checklist to get you started—but remember, practice makes perfect!
✔ Make sure you have a structured and clear sales process with clear definitions and goals
✔ Take into account all the internal and external factors that may have an effect: the more there are, the closer to reality your forecasts will be
✔ Pick the best tools that work best for your business
✔ Get forecasting, and don’t forget to tweak your forecasts when circumstances change
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