A sales forecast is the use of current information and conditions to predict future sales. Sales forecasting is crucial for planning your sales strategy, and budgeting appropriately for your sales team. The most difficult aspects of sales forecasting include sales history, inaccuracy, seasonal influences, research, and terminological inconsistency.
You’re always selling something in business. Even if your business is far from a physical storefront, with cash registers and credit card readers — A consultancy that charges per hour, for example, Every time you sell goods or services, you make a sale. You will incur some expenses to make these sales. You need to be able to predict ahead of time whether sales will cover your costs. Sales forecasting is a great tool.
What is sales forecasting?
Sales forecasting is the analysis of sales data from previous periods to predict sales activity for your team in the next month, quarter, semi-annual, or annual period. Sales forecasts can be used to identify and solve internal or external issues in sales, while still allowing you to achieve your sales goals.
A sales forecast is a prediction. It uses current knowledge to predict future changes. The following factors can influence sales forecasts:
- Recent growth and contraction rates in your industry
- The economy as a whole
- Similar items sold by your competition
- Launch your newest product/service
- Fluctuations of your usual operating costs and sales prices
- You will be restricted by new regulations
- Marketing activities for your company
Sales forecasts are not based on current data. They focus more on future conditions. They are an integral part of the overall sales plan for your company and should be considered alongside other forecasts for the quarter and year.
Also read: Data Visualization Increases Business Scalability With Sales Mapping
How to create a sales forecast
A sales forecast requires basic math skills and a thorough understanding of your sales cycle. However, newer companies might not have this information so they should do some research. These steps will help you create a sales forecast.
1. Choose your forecasting method.
Forecasting sales are all about using the past to forecast the future. However, not all past data are equal. These three forecasting methods are very popular:
- Opportunity stage forecasting: This forecasting method applies to your sales funnel. If you know that 80 percent of the leads in your fourth-stage funnel have become customers and that a current fourth-stage lead is on track to a deal worth $50,000, you can project the revenue from this deal at $50,000 x 0.80 = 40,000.
- Historical forecasting. This forecasting method is applicable to seasonal or recent data. Project the same monthly sales for your product if you have a monthly revenue of $100,000. Seasonally-based companies should use numbers from the previous month instead of using sales data from the previous month. This method can also be used to incorporate growth trends: If your sales increase by 5 percent per month, forecast $100,000 + (0.05x $100,000 = $105,000).
Length-of-cycle forecasting: This is the time period over which your sales funnel develops. If your sales funnel is one month long and your team has been working with a lead for three weeks, then the chance of a sale is three to four weeks = 75%. You can project $100,000 x 0.75 = $75,000 sales if the sale results in $100,000 in revenue.
Each method has its advantages and disadvantages in terms of data accuracy, external factors, and other considerations. They are simpler and more reliable than other methods. This means they might still be the best method for sales forecasts.
2. Identify the product you are selling
Although this may seem obvious, a comprehensive sales forecast will require you to identify all items you sell. Incorrect sales forecasts can be made by excluding an item you don’t sell or including an item you are no longer making.
3. Calculate your sales prices and quantities.
Once you have a clear understanding of your product, you can calculate the sales price and estimated sales. To quantify your sales, you can use the forecasting techniques described in step 1. The sale in the length-of-cycle example can be viewed as a sale for 0.75 units.
4. Multiply your quantities and prices.
The $100,000 x 0.75 operation from the length-of-cycle example above shows you how to multiply your quantities and prices. If you use historical forecasting, this step will look a little different. In that case, multiply your previous period’s sales quantity by the number of products sold.
5. Consider your costs.
You can’t see the true picture of your profit margins if you don’t take sales costs into account. You should multiply the cost per sale by the number.
Let’s take, for example, the historical forecasting method. It uses 500 units sold at $1,000 in the previous month to predict $500,000 in sales. If each unit is $100, then your sales costs would be 500 x $100 = $50,000. Your profit forecast is $500,000- $50,000 = $450,000.
6. Consider your inventory.
You might feel overwhelmed now that you have a basic understanding of forecasting sales. You might be wondering if you need to calculate these numbers for every item. The answer is generally yes. However, if you have a large inventory, it may be necessary to consolidate revenues and costs into larger categories as shown in this sales forecast table.
Why are sales forecasting important?
Sales forecasting provides you with the information you need to adapt your company’s sales strategy and budget in the future. A forecast can help you identify gaps in your sales team’s methods, areas where you can cut costs or trends in sales. This forecast gives you ample time to adjust and keep your sales goals in mind.
A sales forecast also gives your sales team something to aim for. Salespeople need to stay motivated. If your forecast gives them a target, they will be more likely to keep their eyes on it. This is especially true if there are incentives to beat the forecast over a certain period of time. For example, team bonuses or increased commissions for sales that exceed expectations.
Also read: 5 Best Sales Mapping Software
What are the key challenges of sales forecasting?
These are some factors that could complicate your sales forecast.
- Sales history. To create an accurate sales forecast, you need to have detailed data about your company’s sales. For newer companies that have little to no sales history, this can be a significant challenge. Without any past data, many forecast factors — sales prices, operating costs, and marketing activities — are not available for your company.
- Research. You can fill in the information gaps if your company does not have a long sales history by doing thorough research on your industry, competitors, and target markets. Even if your company has a long sales history, it is still important to do research. Both cases can present challenges in sales forecasting due to the time and money involved.
- Data accuracy. Although sales forecasting assumes that the data sets are correct, it is possible for human error to occur, even when using customer relationship management software (CRM). An incorrect sales forecast can be caused by sales reps recording inaccurate data in their CRM program. This could lead to poor planning.
- Superficiality. Sometimes sales data is merely a display of numbers, without any explanation for fluctuations. Forecasting future customer behavior is more difficult if you don’t have these explanations. This can affect your sales forecast accuracy. Nearly all industries have a busy or slow period. If a sales forecast is based on a slow period it may not be accurate. Even the most meticulous sales executives sometimes overlook this discrepancy.
- Sales funnel inconsistency. It is possible for two companies to have completely different sales funnels. Additionally, sales reps can use different funnels. This internal discrepancy can be prevented by working proactively. Unstandardized sales processes or terminology gaps can lead to misleading information that could skew sales forecasts.
What to do if your sales forecast falls short
Forecasts can be predictive tools. Sometimes, sales forecasts may not meet expectations. You should analyze your forecasting process and examine market conditions and operations for the period in which the forecast was not accurate.
Take a close look at how you created your sales forecast. It may have been based on lofty goals rather than historical sales data. If your team has historically generated between $100,000 and $200,000 per quarter, expecting them to suddenly generate $500,000 with no changes in operations is a recipe for failure.
The same could be true for sales forecasts that were based on a dependency not met. If your forecast was based on the assumption that your marketing team would generate 20% more leads than the previous period, but the team generated only 5 percent more leads in the current period, it is unlikely that the sales forecast will be achieved.
Sales forecasting supports financial planning and sets sales targets
Sales forecasting is essential for setting a benchmark for your sales team’s success, and also for giving them a goal or target to exceed. Although achieving a sales forecast can be an important goal, especially if it is based on historical data and anticipated lead generation, surpassing it can be a sign of great success. Sales forecasting is an excellent tool for financial planning and a motivator to motivate your sales team.
