Forecasting is a crucial business exercise that companies practice. It not only helps to predict future sales but also helps reveal hidden causes of a particular business problem. The companies without a proper sales forecast have a very elusive target for their revenue and often end up with nonprofitable quarters. Sales forecasting is one of the critical elements of running a business as it helps in setting monetary targets and moves towards achieving it effectively.
According to research, 10% of companies have overachieved their targets with realistic forecasting. If you want to survive in the realm of business, sales forecasting is the main ingredient you should have.
What is sales forecasting?
Sales forecasting is the process of predicting the sales amount for a specific period. Businesses do sales forecasting on a daily, weekly, monthly, quarterly, and annual basis. This estimation is calculated based on an individual level as well as an organizational level, based on the teams’ pipeline and companies’ historical data.
“Sales forecast is an estimate of Sales, in monetary or physical units, for a specified future period under a proposed business plan or program and under an assumed set of economic and other forces outside the unit for which the forecast is made.” — American Marketing Association
A sales forecast is an appraisal of sales capacity that a company can expect to accomplish within the planned period. A sales forecast is more than just a sales prophesying. It is the act of tallying opportunities with marketing endeavors. Sales forecasting is the determining of a firm’s share in the market under a stated future. Thus sales forecasting shows the plausible size of sales.
“Sales forecast is an estimate of sales during a specified future period, whose estimate is tied to a proposed marketing plan and which assumes a particular state of uncontrollable and competitive forces.” — Candiff and Still
Why is Sales forecasting important?
Sales forecasting is one of the essential tasks for a business because it ties to it so many parts of the company. Let’s have a look at what makes sales forecasting is so important.
- Sales Forecasting affects a company’s financial planning, as the projection impacts stock prices.
- The managers run the company and decide on investments they will make.
- Businesses manage and create their salesforce based on the sales projections.
- Helps the creation of sales territories and set sales quotas.
- It helps to decide on hiring, budgeting, and resource management in goal setting.
- Sales forecasting enables employees to work systematically.
- It helps to cut down unnecessary expenditures.
- Sales forecasting allows for a cross-departmental coalition.
- It motivates employees to work hard and achieve the targets.
- Because of the sales forecasting report, all sales reps will be responsible for their targets.
- It helps the employees to focus on work.
Types of Sales Forecasts
There are different types of sales forecasting based on various verticals.
- Economic Forecast
- Industry Forecast
- Long-run Forecast
- Short-run Forecast
Economic Forecast
Most of the large to huge companies adopt this forecasting. This type of prediction involves keeping tabs on the economic trends from the previous five years, the effectiveness of these trends in the same kind of industry. It also takes into consideration the root causes of the specific economic trends, whether it is unemployment, any sort of natural disaster or increment of tax, and various other unknown variables.
This in-depth analysis of the economic conditions of specific countries and across the world and how it may affect the sales is something of great concern for huge companies with an extensive portfolio of products and markets spanning across the globe.
Industry Forecast
The future market demand can also be estimated based on industry forecasts or market forecasts. Industry forecast includes an expected sales forecast of all related industries and similar businesses.
The market
demands may be affected by controllable price, promotion, distribution, and
other factors. A forecasting executive should consider the above factors while
forecasting.
Apart from the economic forecast and industry forecast, there are two other
types of projections from the time series type of estimate.
Long-run Forecast
Generally, a long period usually goes from one year to five years. Typically, five years is a long enough time for a good sales forecasting.
But again, it depends upon how large or diversified the firms and product is. The more complicated the organization difficult it is to make the sales forecast. Here one must break the big complicated mess down into the smaller disjoint chunks of product and calculate them individually. Collate them together to find the value of the final sale.
While taking a period of 5 years into account, choose to ignore any of the seasonal variations, but accept any real changes in the competition, population, economic depression or boom, and inventions.
Short-run Forecast
This type of forecast is more accurate than other types of sales forecasting. The reason is in a short period, the more significant variable that affects sales is more or less constant and has an insignificant effect on the sales forecast.
Consider a maximum of one year in this prediction method.
Again it depends upon the firms on what strategy to follow. The prediction made weekly, monthly, and quarterly. Companies utilize this method for allocating working capital, setting up sales quota, and estimating stock requirements. It also helps management to improve the process and implement the new strategy for the next quarter for better results.
How to forecast sales?
Building a sales forecast is a twofold exercise. You first need to shape the numbers using a bottom-up approach, and then sanity checks them using a top-down approach. If you are not acquainted with these two methods of building financial estimates, this article explains in detail how to do a sales forecasting for a business plan.
The idea when constructing a financial forecast is to decompose the figure in a set of measurable sub-hypothesis. That way, you will, later on, be able to quickly analyze the differences between the forecast figure and the actual statistic, adjust the hypothesis, and get a new, more accurate forecast.
Here we will use a series of assumptions to build a sales volume forecast and a price hypothesis. How to set the price is described in the pricing section of our business plan outline article. Therefore, I won’t talk about it here.
Estimating the volume is a complicated exercise, but there are a couple of techniques you can apply to increase the precision of your guess.
What do You Need for a Sales Forecast?
There are certain things required to forecast a sale for the upcoming year. It is necessary to break down the duration to week, month, quarter, and the year. So that issues will be addressed timely rather than last moment issues. To forecast a sale, an organization requires the below elements.
Documented Sales Process
A documented sales process is an essential part of predicting a deal. Every organization should have the structure of the sales. The sales process makes it easy to forecast sales accurately.
For example, there are different stages of your sales process. To know the probable conversion rates, you need to know how many prospects are in which phases. How much probability is there for the conversion. Each stage will provide the idea of accurate calculation for the conversion.
Sales Goals or Quotas
Most of the organizations set the targets weekly, monthly, quarterly, and yearly. It is an essential part of sales forecasting. Consider both individual quota and team quota while forecasting sales.
For example, a rep has a weekly target of $5000, and s/he fails to achieve it. In that case, the team’s quota will be helpful.
Current Sales Pipeline
Similarly, pipelines are required to forecast sales. The existing pipeline will provide you a picture of future deals. Both team and individual channels are crucial here. Sales channels can give you the actual sales rate. These targets or quotas motivate sales reps to achieve more sales.
Sales and Prospect Data
All reps should use CRM tools to track the sales opportunity to provide a final closing sale figure. CRM tools are useful at keeping tabs on the status of the prospects. It is an essential part of forecasting sales.
Past History
Most of the organizations consider their recent history to predict sales for the future. For startups that don’t have an account of the past can take the data of (their type) other industry to predict the sales. In addition to past data, a forecaster can consider other factors such as future market demand, the introduction of new technology, which may impact the sales.
Sales Forecast Methods
According to CSO Insights, 60% of forecasted deals don’t close. Hence accurate sales forecasting is as significant as hitting the revenue. Your prediction will be realistic when you adopt efficient forecasting methods. Here are a few sales forecasting methods that are proven to be accurate.
- Lead driven sales forecasting
- Opportunity creation forecasting
- Opportunity stage forecasting
- Based on historical data
- Sales cycle forecasting
- Pipeline forecasting
- Multi-variable forecasting
Lead Driven Sales Forecasting
This sales forecasting method analyzes the historical information of your leads. The journey of the particular buyer provides a clear picture of whether the prospect will be your customer or not.
Data from the lead source will give you a better sense of forecasting. This sales forecasting technique needs three metrics:
- Leads generated per month from the previous time
- Lead to customer conversion rate by lead source
- Average sales price by source
This technique provides accurate forecasting reports, but it fails to meet the quota if there will be unexpected changes in strategy by the marketing team.
Opportunity Creation Forecasting
This model helps to predict sales based on closed sales. Opportunity can be created by monitoring demographic and behavioral data.
By looking at the characteristics of the business and their past journey, you can predict the sales. Look at the recent customer journey and monitor all the similar type of industry’s behavior, if it follows the same direction you are heading, then you can expect closer to perfect prediction.
Opportunity Stage Forecasting
This sales forecasting technique is a popular sales forecasting technique. It helps to predict sales to close based on the position of the prospect in your sales process cycle. To implement this method, you need to understand each stage of your sales process and calculate each prospect’s position in it.
For example, you create your forecast for future sales by multiplying the amount of each opportunity by that opportunity’s probability of closing.
Expected Revenue = Deal Amount * Probability to Close
Forecast based on Historical Data
Though this sounds very easy to forecast sales based on past data, it will not be accurate when other factors come into the picture. For example, every year, your business grows 15%, and you closed $100K of new business this month last year, this year your forecast will be $115,000 of revenue this month. This year you have a significant change in the market, or you come up with a new featured product, there is a probability of inaccuracy of your sales forecast.
Forecasting, based on historical data, has many assumptions. The assumptions pertain to many factors remained constant or the same during the capture of the factual information. However, more and more calculable elements are brought in that have a significant effect on the sales data, better the prediction becomes. Therefore, this forecasting technique is still widely used.
Sales Cycle Forecasting
This forecasting method depends upon the duration of the prospect’s journey into the sales cycle. If an opportunity takes six months to become your customer or your average sales cycle of a lead is six months, and your sales rep is working on an account for three months, your forecasting should be the deal has 55% likely to close.
This technique provides more accurate results as it is more dependent on a very real-time data rather than rep’s word.
When it comes to the referral, the conversion takes less time than the usual time. In that case, this technique works well, but you need to track each type of sales carefully to forecast.
Pipeline Forecasting
All sales organizations ask the reps about their pipelines. They calculate the lead channels based on the opportunities listed to close the deal for the day. For example, your sales team closes the deal in a month between $500K to $10000K, and this matches the pipeline they provide, then you can use this data to forecast.
This technique is entirely dependent on the ability of your sales reps. The accuracy of the forecast is dependent on the ability to convert a prospect to your customer.
Multi-Variate Forecasting
One of the most effective sales forecasting techniques combines various methods to get the forecasting reports.
The multi-variable forecasting method involves combining a lot of statistically correlated and codependent variables, find the relationship between them, and use them for predicting future sales.
These are used in productive analytics, statistical approaches, trend analysis, and other similar forecasting methods. It doesn’t consider one technique of forecasting; it combines multiple sales forecasting methods to get accurate forecast reports.
Examples of Sales Forecasting
Sales forecast example 1: Forecasting Based on Historical Sales Data
Let’s assume that last month, you had $250,000 of monthly recurring revenue and that over the previous 12 months, sales revenue has grown 12% each month. Over the same period, your monthly churn is about 1% each month.
Your predicted income for next month would be $166,500.
You multiply last month’s income by your expected growth, and subtract your expected churn:
($250,000 * 1.12) – ($250,000 * .01) = $277,500
Example 2: Forecasting Based on Your Current Funnel
Let’s presume you have three open opportunities this month:
- One where you’ve had a quick call, with an expected value of $2,000.
- Product demos are worth a deal value of $2,500.
- And one with an offer, with a probable value of $2,200.
You’ve done your calculation, and you know that in each of these stages, any given opportunity has the following likelihood of closing:
- “Connect Call” = 30% chance of closing
- “Demo” = 40% chance of closing
- “Offer” = 70% chance of closing
You multiply that probability with the estimated value of the deal, and sum them all up to come up with an aggregate sales forecast of $3,140, like in this example:
Sales forecast example 3: Forecasting Based on Lead Scores and Multiple Variables
You’ve done your research, and have lead scoring set up in your CRM. You cluster your leads into three groups of varying quality: A, B, and C. These determine how likely an opportunity is to close.
You also know that businesses with less than 50 employees close at a slightly lower rate, and companies size lager than 50 employees are more likely to close.
You could then use average prospect sizes to calculate the forecasted value of any given opportunity, using a table like this:
Challenging factors to consider while forecasting sales
Your sales forecasting will be realistic when you consider the following factors.
- General Economic Condition
Considering the economic condition during forecasting provides a more accurate forecast report. Thorough knowledge of economic trends – inflation or deflation helps a forecaster to forecast as the financial condition affects a business massively. Consider past behavior of the market, individual income, national income, the revenue of the affected business for forecasting.
- New Competitor’s Entry
Future sales are massively affected by the offer your competitors (especially new competitors) provides. The arrival of the new company to the market provokes customers to go with the bargain they provide. It is an essential area where companies lose customers to better deals from competitors. Hence, this area also should be considered while forecasting sales.
- Industrial Behaviours
If you carefully observe the market, many businesses are selling the same products. The difference between the products may be some features or less price against good. Understanding the future strategy of your competitors and having an accurate analysis of it will provide you a rough idea of market demand down the line of one year. Understand the behavior of the businesses is another crucial part of sales forecasting.
- Internal organizational Changes
Consider internal organizational changes for sales forecasting. It includes hiring and firing employees, team shuffling, and alteration of the sales process.
Hiring often new employees slows down sales. Starting from day one to getting deals takes a month on average for a new rep.
Sales also get affected when the management implemented new strategies by shuffling the team. Again it takes time for a rep to adjust with the new group. The changes in the sales process also affect sales until the sales reps adapt to the new process. In the later stage, it may provide you excellent deals, but initially, expect the dip before picking up again.
- Product Changes
As explained above, the impact of product change is similar to the process change. Initially, it will slow down the sales until the sales reps get used to the new product. Understanding the latest product, learning about it, getting unexpected questions from the customers’ side, and getting trained to answer those questions take time. Until then expect the poor performance of the sales reps. It is one more challenging factors that need considering.
- Marketing efforts
While forecasting, consider the marketing effects you have done in the previous year. Check the impact of marketing that is still impacting your business and judge it while doing business forecasting.
- Seasonal Demand
The picture of seasonality is there in every business. It depends upon the type of business. For instance, if you are into the apparel business, you can expect a spike in your sales and revenue in the festive season. Seasonal demand can be considered based on previous years’ sales.
Sales Forecasting Tools
- CRM: CRM software combines the storage and retrieval power of a database with dedicated sales tools that help representatives close deals. These contain lead tracking, funnel analytics, call sequences, and reporting features.
- Excel: If your firm is just starting out or only has a few products, Excel should be sufficient enough to build your sales forecast.
- Sales Analytics Platform: A Sales analytics tools combine data for many products and services, makes a forecast, and gives you deep analytics. Plus, many also encompass helpful graphs and charts built-in. Lastly, dedicated analytics tools also have the benefit of staying updated in real-time.
- Lead Scoring: These tools grade the prospects according to the actions taken on your website, outcomes of discussions, and any other touches that your team deems pertinent to the sales process. Also, a lead scoring tool can support your marketing team with campaign segmentation and content personalization.
- Project management tools (including resource allocation): Follow-through is an essential part of your sales cycle, and is the only way to shape strong customer relationships. Project management tools such as Gantt Chart aid your team stay on task and ensure that the team has the resources to complete the project.
- Accounting Software: If all you crave is a new revenue forecast, more basic tools are excellent. However, if you’re going to forecast gross margins and account for the cost of goods sold, you may also have to include data from your accounting software in your forecasting exercise.
Sales Forecasting Applications
There are a lot of sales forecasting applications that help organizations to forecast their sales. We have mentioned a few tools here for your reference.
- Zoho CRM
- Microsoft Excel
- Forecast Pro
- IBM Planning Analytics
- Mo-Data
Zoho CRM
Zoho CRM helps all types of organizations ranging from small to large-sized companies. It has a feature called the Customer Relationship Lifecycle(CRL) management system. It helps to manage organization-wide Sales, Marketing, Customer Support & Service, and Inventory Management on one platform. Apart from these, it has other features such as Correlation Analysis, Dashboard, Exception Reporting, Graphical Data Presentation, Modeling & Simulation, Performance Metrics, Sales Trend Analysis, Statistical Analysis, and various other features.
Microsoft Excel
Excel is used to track the data. To forecast the sales with Excel, you need to have past sales data and other factors that affect your sales. Use Microsoft Excel’s forecast function can to predict future sales numbers. It is more useful for startups and for the company that has a few products.
Forecast Pro
Forecast Pro is specifically for the business forecasters. It has sophisticated forecasting techniques that are powerful, accurate, and easy to implement. It enables organizations to manage the activities from hierarchies to sales and operations. Apart from these, it has other features like Dynamic Modeling, Exception Reporting, and Graphical Data Presentation Modeling & Simulation.
IBM Planning Analytics
It is an on-premise and cloud-based that helps manage the planning, analysis, scorecards, budgets, and forecasts. With a powerful calculation engine, this enables you to move beyond the limits of spreadsheets, automating the planning process that drives faster, more accurate results. It has different features like Statistical Analysis, Dynamic Modeling, Dashboard, Competitor Analysis, and Graphical Data Presentation.
Mo-Data
It is exclusively designed for the sales forecasting and is a fully automated sales forecasting platform for high-growth teams looking to scale. It provides a detailed insight into the past, present, and future for your sales. It also tracks the quota of each rep and indicates which rep needs more pipelines. Apart from these, it has features like Correlation Analysis, Dynamic Modeling, Graphical Data Presentation, Performance Metrics, Statistical Analysis, Modeling & Simulation, and Sales Trend Analysis.
Sales Forecasting Templates
Now that you know all about sales forecasting, we have gone ahead to create a set of 14 sales forecasting templates for your reference.
What can you expect from these templates? These excel templates will give you a framework to start with. Since every business is unique, we have made the templates as generic as possible.
All the spreadsheets have 2 sheets in each of them.
- One sheet contains the template with dummy values inserted in it, just to give you an idea.
- The other one has the same template with blank spaces.
Check out the full list of revenue projection templates here!
Conclusion
There is a plethora of sales forecasting software getting launched every year with new features. While forecasting and using tools, you need to be more careful with the data you are integrating. Wrong data may lead to the inaccuracy of the forecasting report.
