A comprehensive guide to sales forecasting

Cam McIntyre

Sales forecasting is an integral process in your company's success, and also plays a major role in the development of your own career. Accurate sales forecasts allow you to make better estimates of future commitments and plan in advance for growth. Despite the advantages, many sales leaders struggle to create a profit forecast that is anywhere near reality, and so ultimately the future of their business suffers also.

Why is a sales forecast so important for your small business?

Sales forecasting is important because it allows your company to identify and plan for future opportunities that will contribute to the long-term growth of both revenue and profit. It enables you to forecast trends, understands where your sales are going over time, predicts when cash flow might be impacted by low/high forecast sales months, forecasts the challenges of meeting business targets with a finite workforce and also understand your business as a whole.

Your competitor may be running a new price-cutting campaign, leading to lower margins in your business, or establishing a new sales incentive program could have unintended consequences. The sooner you identify these problems, the less damage they will cause in the long run.

Sales forecasts also come into play for a number of decisions, from hiring and resource management to goal-setting and budgeting.

Sales forecasts are an integral component of a successful business that almost every company requires. Any given time, the economy is fluctuating in some way or another and sales numbers are either up or down. Sales forecasting helps companies in many different areas such as marketing, finance, and most importantly production. Sales forecasting helps inform management about the strengths and weaknesses of the company, meaning they're easy to rectify.

What factors can impact your sales forecasts?

  • Seasonality
  • Legislation Changes
  • Changes in Products
  • Market Changes
  • Changes in the economy
  • Industry changes
  • Changes in Competition
  • Policy Changes
  • Hiring and Firing

Internal Factors:

Internal factors refer to factors within your company and so are within your control:

1) Hires and Fires

When a salesperson from your company leaves, it's likely that there will be a decrease in revenue. If a significant number of staff joined at once, then you can expect an increase in business following this initial period, however, remember for every sales rep there will be a period in time in which they're losing revenue, due to training time and the fact they have not yet built up their pipeline. Ensure that your sales forecast reflects this period.

2) Policy Changes

Adjusting your sales plan without an adjustment to the sales forecast will result in reduced revenue. This is because when faced with a tougher goal, reps are only going to sell to profitable prospects. However, in quarters where there are fewer customers you churn, profits do increase. You have to ensure that every time you change your policy, you figure out how it'll affect your sales forecast.

External Factors:

External factors are factors out of your control that you need to take into consideration:

3) Market Changes

Keep track of what's happening with your customers. For example, if you sell consulting services to hotels, you'd be interested in an anticipated rise in tourism in that particular area. Another example would be if you are running a chain of gyms, you may see an increase in the number of memberships in January after the new year. Always reflect this in your sales forecast.

4) Changes in the Economy

When the economy is strong, companies are more willing to invest in their business and there's an upfront interest for salespeople. If it's weak, companies have less upfront investment and buyers take longer to make a decision with caution.

5) Industry Changes

If a complimentary product sees unexpectedly high demand, it will cause your prediction of sales in your sales forecast to go up as well. Imagine you sell bread, confidentially the demand for spreads will also go up as well. If on the other hand, a complementary industry is forecasted to produce much less than expected, it will affect your sales as well.

6) Legislation Changes

New laws and mandates can be either helpful or harmful to your business, depending on whether they make people more likely to buy your product or reduce demand for it.

7) Seasonality

Your customers might be more likely to buy at certain times of the year. For instance, if you were to sell suncream, you'd have a much higher demand in the summer months.

8) Changes in Products

You just rolled out a highly-requested feature, introduced a new pricing model, or offered a complementary product or service. Make sure your sales team knows how to handle these changes and how best to manage them.

9) Changes in Competition

How much your competitors are selling their products and the prices they're charging will probably impact how many orders you get (win rate). If another company in your space slashes prices then your reps may need to discount more or risk losing customers. If a competitor goes out of business, on the other hand, you'll probably see increased demand.

How to forecast sales:

There are several ways to forecast sales. Many businesses use two or more techniques together so they have a best-case and worst-case scenario.

Common methods to create a sales forecast include:

1. Relying on sales reps’ opinions

Many sales managers simply ask their reps "when will this deal close, and how much will it close for?"

While this is a method you could use to try to create a sales forecast, it's not recommended. Many businesses still rely on this method instead of using a repeatable process that provides an accurate estimate of future revenue. The problem with this method is  that reps can be biased about the future sales of a deal. They may sell the strength of their company and the vision of a client, but if that vision doesn't become reality, then you have inaccurate data.

2. Using historical data

The past performance method is a slightly more accurate prediction of future results than the market share approach, but it does not account for any changes in input that may have taken place over the past year, like the number of sales reps you have, or how your competitors are doing.

3. Using deal stages

In this sales forecasting method, you assign a probability of closing a deal to each stage in your sales process. Then, at any given time, you can multiply that probability by the size of an opportunity to check and recalculate expected revenue

The first sales forecasting method is simple and popular because of this simplicity. However, it does have a vulnerability: it ignores the age of the opportunity. If two opportunities book a sales demo with an identical due date, but one opportunity is 3 weeks old and the other opportunity is 3 months old, are they really equally likely to close?

4. Sales cycle forecasting

As a result of this, it is more useful to calculate the strength of your sales pipeline by evaluating the age of each opportunity.

It compares how long a deal has been in the pipeline, to what is normal for the closure process. If you have different sales cycles and booking deals dependant on if they are from referrals or prospects, then you need to account for their independent probabilities of closing.

A CRM is essential to successful lead management. Without one, a customer support rep must enter too much information from phone calls or e-mails into different applications in order for the lead to be logged with the right type of contact and time stamps.

5. Pipeline sales forecasting

This model is more accurate but still relies heavily on the quality of data. It looks at each opportunity in your pipeline and analyzes it based on a number of factors, such as age, deal type and deal stage.

This technique requires specialized tools to evaluate what is in the pipeline. You will rarely find a program that can do this without some customization.

6. Using a custom forecast model with lead scoring and multiple variables

This sales forecasting technique relies on a combination of all the above, including advanced CRM reports in order to create a forecast with more depth and complexity. Usually you'd need to have an analytics tool or advanced CRM report set up before doing this, as it has similarities to using pipeline sales forecasting but also requires extreme accuracy from reps who are entering data.

The linear percentage method of sales forecasting can be most accurate if you know the resources available to you and take into account all necessary factors like age of an opportunity, its current stage in the sales process, etc.

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