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Learning to Use Sales Forecasting for Small Businesses

It's a small business owner's dream to make their company grow. But, when the economy is challenging and resources are scarce, how can small businesses manage? One answer is forecasting sales. Forecasting sales has been used by small businesses for decades as a way to stay in touch with what potential sales could be like over the next 6-12 months. It's not easy to forecast sales but this blog post will provide you with definitions as well as some basic "How To" information about using this technique so that you can start doing it yourself!

Learning to Use Sales Forecasting for Small Businesses

It's a small business owner's dream to make their company grow. But, when the economy is challenging and resources are scarce, how can small businesses manage? One answer is forecasting sales. Forecasting sales has been used by small businesses for decades as a way to stay in touch with what potential sales could be like over the next 6-12 months.

It's not easy to forecast sales but this blog post will provide you with definitions as well as some basic "How To" information about using this technique so that you can start doing it yourself!

What is a sales forecast?

Forecasting is the process of using historical data, what you know about the future, experience, and intuition to predict upcoming trends and figures.

A sales forecast is a prediction of upcoming revenue based on the expected future level of demand for goods or services. It can be in the form of an estimate, projection, budget, plan, or target and it's generally used by small businesses to better understand their potential sales over the next six-twelve months.

Why do you need a sales forecast?

A traditional cash flow or 3-way forecast is a hugely important tool for monitoring your overall finances and preventing any problems there, but they can be tricky to turn into tangible company decision making.

This is where sales forecasts come in. Knowing how many future sales you are predicted to make or need to make helps ground your growth strategy and motivate your sales team. Sales forecasting helps small business owners and sales managers keep on top of other day-to-day decision-making processes as well, such as maintaining inventory levels, staff levels, supply chain, or sales cycle dilemmas - a lot of business strategy can be influenced here!

Using sales data to create a forecast also helps make your cash flow and budget projections more accurate. Rather than just basing your financial budgets on historical data or past trends, you can use actual upcoming secured business and sales figures. It makes it much less like looking at a mysterious crystal ball, you know where these figures are coming from and where you're going to get the money from.

How do you create a sales forecast?

Creating accurate sales forecasts is an ongoing process, they need to change as your business changes so firstly you need to make regular reviews of your sales forecast part of your process. Obviously, it's good to have a budget to work against but you also need an accurate representation of upcoming sales revenue.

Step 1: Record secured sales revenue

The impact of this step is dependent on the length of the sales cycle in your business. If you work in a shop that deals mainly with foot traffic and people spending immediately in-store, there probably won't be much to record, however, if you are working with bigger ticket items with longer payment terms there will be more to do.

You're going to want to take a look at each of these "done deals" and assess when the money is likely to be paid for each of them. Even the best-negotiated payment terms can throw a spanner in the sales forecasting process so best to err on the side of caution.

This goes for the full figure as well. Is there a chance that any of these deals could drop out? As a manager, you may not know the inside-out of all of these deals so speak to your sales team to get the full picture.

If there are too many sales to go through them individually (lucky you), then you're going to need to estimate a percentage that you might lose during the sales process. Apply this to the full amount and then you'll have an adjusted, forecasted figure to use.

Step 2: Predict future sales (sales forecasting methods)

There are a few different things to consider here to create accurate sales forecasts, not all of them will be applicable depending on the type of business that you're running so don't worry if you don't feel like all of these apply to you.

Sales pipeline forecasting (Opportunity stage forecasting)

The complexity of your sales pipeline is going to depend a lot on your sales cycle and the way that your sales team works. For example, in a business that requires demonstrations of products, multiple meetings, and a contract, the sales pipe is going to be quite complex. But even more traditional businesses may be able to track some of this revenue, for example, bookings in a restaurant.

Your pipeline may be managed in a traditional way (whiteboards, spreadsheets, and stacks of paper) but a lot of business leaders recommend implementing a CRM (Customer Relationship Management) system for your pipeline management.

Usually, your pipeline will have "probability to close" percentages next to each stage of the sales cycle. If yours is organized like this then you can take the value of the deals in each stage of the pipeline and multiply it by the probability percentage to estimate the value that will become revenue. An estimate will be needed for each of the stages as to when the sales will be done.

If you are unsure of your win rates from these different stages of your pipeline then you should be looking at the criteria for moving deals to these stages in the first place. Funnel metrics are an important part of sales forecasting, especially pipeline forecasting.

In some CRM systems, such as Salesforce or Hubspot, this information will be available to be exported from the CRM for your own purposes. In Futrli Predict, this sales data can be imported directly into your forecasting software to help create your forecast.

Trial Predict today.

Sales cycle forecasting

Sales cycle forecasting is an alternative sales forecasting methodology that uses the length of time in the sales pipeline to determine the probability of success by comparing the amount of time that deal has spent in the pipeline vs how long the average deal does.

This method is good because it uses objective data, rather than anecdotal evidence from your sales team but it does require excellent record keeping, a lot of data entry, and a little bit of maths. (This sales forecast methodology is another great reason to invest in a CRM system!).

Bottom line forecasting (Indirect method)

If your sales process doesn't work by tracking a particular sales opportunity through a pipeline then you're going to need to look at the bigger picture rather than just individual sales. There are many ways to do this, and as I said earlier, this is an iterative and ongoing process so don't stress if you think you haven't nailed it the first time round.

First thing's first, take a look at your own business - looking at current sales data and historical data from the company what can you predict sales will look like for the next 6 - 12 months? Take a look at the last few months of business and then, because most companies see seasonality in some form, take a look at the same periods last year. It may be worth speaking to your sales reps to get an idea of how busy you are. This should you a good idea of the trajectory that you're on and you can put in some predicted sales figures.

Once that's done, it's time to start looking at what other data you can use to make your sales forecast a more accurate sales forecast. Industry trends and market conditions can have an effect on your business so keeping on top of those via the news or social media is a really good idea. Similarly, staying in touch with your supply chain to make sure that there are no disruptions that are going to affect your sales quotas are coming up. Other data points like website traffic or messages in your email address inbox may be indicators of revenue you can use for your sales forecast.

Step 3: Use technology (forecasting software and prediction software)

If this seems complicated that's because, to be frank, it is.

Don't despair though, there are tools available to help you with the forecasting process. We've already instilled the virtues of a CRM system in you, but you can take it one further and use software for your forecasting needs as well.

Futrli Predict is the only automated forecasting software on the market at the moment that takes into account sales pipeline forecasting information (direct forecasting method), and the bottom line forecasting (indirect forecasting method).

Predict integrates directly with your cloud accounting platform and then uses all of your historical data to do the heavy lifting for you. Then it looks at your upcoming invoices and bills and does the future sales forecasting for you as well.

Trial Predict today

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