Businesses depend on sales forecasts to plan ahead, make opportunistic decisions, and know where they’re currently at. But with all the uncertainty in the market, sometimes it feels like these forecasts are nothing more than a shot in the dark. 

In any case, sales forecasting is something that simply cannot be skipped. Similar to a weather forecast, a sales forecast is an indication of the possibility of something, not its certainty, and is definitely of great value when it comes to making certain changes to the current plan to achieve the desired goals. 

In this article, we have compiled the basics of sales forecasting, what impacts it and what are some of the most effective sales forecasting techniques that you can use to create a reliable forecast.

 

What is Sales Forecasting?

Sales forecasting is the estimation of a company’s sales revenue over a specific period of time – typically a month, quarter, or year. 

To put it simply, a sales forecast is an estimate of how much a company is likely to sell in the future.

 

Why is Sales Forecasting Important?

Forecasts pertain to the future and it is impossible to emphasize enough the importance of producing an accurate sales forecast. 

For instance, your team is underachieving the targets for the quarter, or maybe your competitor is rolling out different plans that are sabotaging yours – these and many such issues can be spotted and rectified in time using an accurate sales forecast.

Being able to identify such issues early, as opposed to at the end of a period, has a profound impact on how your business will progress. Also, when it comes to sales forecasts, you should remember that they do not need to be perfect. More often than not, your sales forecast will differ from your actual results.

A highly inaccurate forecast will definitely be a problem, however, if the data you use is right, and the right sales forecasting methods are chosen, then you can use the forecast to plan and make better business decisions.

 

How to Forecast Sales?

The following is a quick guide to forecasting sales. Follow these steps to ensure that your sales forecast is on point.

sales forecasting

Plan your sales

You can’t predict how likely you are to achieve your sales targets if your sales team does not follow a standard process. Every team member needs to have clarity regarding the goals, the techniques, criteria for qualifying a lead, etc.

 

Analyze previous patterns

To form the basis of your sales forecast, first, analyze the previous quarter or year’s sales or any time period of your choosing. Separate the data by product, price, timeframe, sales representatives, and other pertinent factors. Then based on your previous sales revenue, calculate the revenue run rate.

 

Make modifications

Once you have your revenue run rate, you should revise your sales plan accordingly to achieve the target you have set. The following are the factors you should consider when incorporating changes to your plan:

 

Price

Is your product or service going to need a price change? Are your competitors selling at a lower price?

 

Product

Will you be bringing any major updates to your product or service? How well did the previous changes do? Is there anything that should be removed?

 

Promotion

What was the ROI on the previous promotion? Will there be any new promotions for the upcoming time period?

 

Customer

How many customers do you target to onboard in the coming quarter/year? Does your customer base demand anything in particular?

 

Expansion

Do you plan to expand your outlets? Do you plan to go online?

 

Keep an eye on competitors

Consider your competitors’ products and campaigns, especially the major players in your space. Additionally, you may want to check to see if any new competitors have entered your market.

 

Select a sales forecasting method

There are a few factors that will determine the method you use – like the size of your team, the quantity and quality of your leads, etc. 

Also read: Sales kpis

 

What are the methods of Sales Forecasting

There are different methods for forecasting sales. Below are some of the most common ones. 

sales forecasting

Intuition

As the name suggests, this method is purely based on the estimates a salesperson gives, that is, when he thinks a deal is likely to close. A method such as this is useful at the very beginning stages of a company or product when there is little or no historical data available.

One advantage of this method is that it takes into account the opinions of the people closest to your prospects, i.e., your salespeople. On the other hand, reps are generally optimistic and often provide overly ambitious estimates.

Furthermore, their assessment cannot be verified on a scalable basis. For the sales manager to know if a prospect is as likely to close as the salesperson claims, they need to be present in the salespeoples’ conversations with the prospects.

 

Opportunity stage

In this method, each stage that a lead goes through is taken into account and the further it is down the sales funnel, the likelier it is to close.

After selecting a time period, multiply the potential value of each deal by the likelihood it will close. Calculate your overall forecast by adding up the result you obtained for each lead.

This method is among the easiest but the results obtained through it aren’t always accurate. Also, historical data may be too heavily weighted when forecasting sales based on the opportunity stage. You may see a different percentage of deals closing for each stage if you bring any changes, be it to your product or service or promotions, etc. 

 

Sales cycle

If you use this method of sales forecasting, you will have to consider the age of every single opportunity. You are less likely to get a prediction that is too liberal since this technique only uses objective data rather than the sales rep’s opinion.

Your salespeople’s pipelines need to be tracked carefully so that you can get accurate results.

 

Historical data

With this method, all you have to do is reference your previous time periods and pick the one that is most similar to the current time period and simply assume that your results will be similar to those of the previous one. 

However, this method has many drawbacks. Many factors, both internal and external, change and the current period may not have the same type of promotions or sales reps to achieve the same results as the previous period.

In the end, historical data should be regarded as a benchmark, not a basis for forecasting sales.

 

Final Thoughts

The methods listed here are just a few among the many types of sales forecasting methods. Choosing which to use depends on your company’s needs. Sales forecasting is about making assumptions about future revenues that rely on historical information and logic in order to project sales for a business on a monthly, quarterly, and annual basis.