As a business, it is always crucial to be abreast with everything you can do to ensure that you can attain the maximum possible profit rate at the lowest cost without affecting the overall quality of your product or service.

Something that is sometimes overlooked in business, is Sales Forecasting. We would like to take the time to explain what it is exactly, how it works, its benefits and some of the sales forecasting methods you can incorporate into your business while you work you way towards your goals.

What is Sales Forecasting and How it Works?

Sales forecasting is the process of getting a rough estimate about your future sales. It is important to ensure that you get accurate forecasting of sales as those can help you make informed business decisions on how to manage its resources in terms of budget, production, manpower, etc.

A sales forecast can be long term or short term and can be based off of past sales, economic trends, emerging or current competition from existing companies or disruptive innovation.

Benefits of Sales Forecasting

There are several advantages of sales forecasting. Here are a few of the top benefits can be expected once you start doing this.

Plan Formulations

As the famous saying goes, “If you fail to plan, you plan to fail”. Planning for the future prepares you to effortlessly tackle whatever comes your way.

You cannot formulate a strategic plan without knowing what the future holds. With an accurate sales forecast, you can now devise plans that would ensure that the company meets the demand for their products or services all while increasing their profitability.

Financial Need Estimation & Planning

With a sales forecast, the company can estimate the finances required to ensure that they meet the demand for their output. Financial estimation would involve factors such as the use of plant and machinery, the amount of electricity needed to cover production, number of employees needed in the company, marketing funds, depreciation costs, etc.

Once the total production, sales and other miscellaneous costs have been estimated, the company gets to plan on how to go about their funding. They can choose to use the cash in hand, raise funds or borrow from the bank to cover all costs. This way, you can rest assured that you’re not likely to run into a shortage of cash once production commences.

Better Utilization of Resources

When thinking about losses of a company, most people usually focus on losses that are incurred during the selling process, theft or damage of the products.

There are a number of other important factors that are often overlooked. Unutilized resources almost always directly or indirectly affect the company’s overall profitability. Such resources could be space, machines, employees, time, raw materials, etc.

Underutilization of resources results in the actual output being lower than the potential output which indirectly does indeed affect the business’s profitability.

Best Sales Process

Equipped with a carefully estimated sales forecast, managers can ensure that they can put all the resources they have to good use instead of spending more money and time acquiring other resources that might not have increased any value on the total output.

Better utilization of resources would ensure stable inventory, efficient procurement and supply chain management process, all personnel’s work meet the company’s and industry’s standards, etc.

Quality of Management and Decision Making Process

The quality of management would improve as managers would be compelled to ensure that the company meets the expected sales level.

Forecasting would allow the managers to see to it by taking the correct and prompt actions that would positively impact the company’s overall performance.

Cooperation and coordination amongst all department heads would improve as every department would be focused to play their role in ensuring that the company meets their sales objectives that are usually based on the sales forecast.

Overall Business Success

With everything planned accordingly and running smoothly across all of the organization’s departments, you can rest assured that the overall success of your business is guaranteed which is mostly determined by your sales.

Competent managerial processes, well utilized resources, accurate financial and overall company plans would warrant for the maximum capacity required to meet the sales predicted.

Effective Sales Forecasting Methods in 2020

1. Opportunity Stage Forecasting

Opportunity stage forecasting provides the estimated value of the deals in the pipeline that could eventually reach the closing stage. This method can also be used should you want to assess the performance of your sales rep across all stages of the pipeline.

Doing that can help you determine which sales rep is having what problem and what stage of the sales process which you can rectify by providing more training.

This form of forecasting is not usually based off of math or science, instead it is based off of the subjective opinions of your sales reps. However, there are a few things to consider if you want to at least acquire an objective prediction.

Generally speaking, most companies’ pipeline stages consist of the following: prospecting, qualification, quoting, and closing. The higher the stage the deal goes through in the pipeline, the better the chances it has to get to the closing stage.

To understand the rates of success on each stage of the pipeline, you’ll need to analyze the sales team’s past performance. This forecasting technique is more suitable if you’re looking to estimate the deals in the pipeline, incoming revenue and your sales department’s overall performance.
Pro

You can quickly estimate your incoming revenue while using historical data to better understand future opportunities.

Con

Even though you get a numbers prediction, the information you eventually get is inaccurate because it cannot account for individual factors such as whether the deal involves a repeat client of a new one.

2. Length of Sales Cycle Forecasting

Best Sales Process

This is one of the sales forecasting methods that take into account the average sales cycle of the products or services to be sold and focuses on the historical data of the sales process that would eventually be used for an accurate sales forecasting.

This is one of the quantitative sales forecasting methods that allows you to predict the day the deal is likely to close by dividing the total number of deals closed and the total days it took to close them. It’s focused on the age of the deal rather than the success rate of closing the deal.

With this method, you can objectively answer questions about when a deal starts, when it will end, where the sales team is at the process and what strategies you can use to ensure that you actually close the deal based on the historical sales data collected from the previous average sales cycle.

Pro

It can allow you to create algorithms for different types of deals because it is not tied to strictly defined categories

Con

To get accurate information, you’ll need to make sure that the sales data you collect is absolutely accurate or else you could end up being disappointed

3. Survey of buyers’ intentions

This sales forecasting method involves asking a prospect on their intentions of purchasing your good or service sometime in the near future. The process usually involves the use of questionnaires, consumer panels and tests of new products and services being sold.

The Survey of Buyers’ Intentions method is ideally suited for a short term sales forecast however, you cannot expect to get 100% accurate results due to the various factors that might change the prospect’s mind after the survey.
Pro

You get to actually scope out what consumers are looking for and whether they’d be interested in making a purchase for your product or service

Con

Not suitable for someone who is looking for 100% accurate sales forecast due to the subjectivity of the customer’s opinion

This method may not be affordable for small organizations

4. Statistical Demand Analysis

This sales forecasting method involves the use of complex set of methods that involve math and science which produce reliable results that are free from bias. It is mostly suitable for organizations looking to have a long term sales forecast of their products or services.

It is done by determining the relationship between sales and other factors that can positively or negatively impact sales. It’s typically done using regression analysis.

Historical data is analyzed and a relationship is determined between historical sales data and the events happening during that period. Various factors could have effects in sales, such as competition, political stability, financial policies, etc.

Sales could be predicted based off of the anticipated events that would usually have a determined relationship with sales.

Pro

Accurate, unbiased and reliable information is guaranteed

It is time and cost effective

Con

Involves a lot of statistical methods that may not be easily understood by someone who isn’t adept in complex mathematics

5. Forecasting Using Industry Benchmarks

Best Sales Methods for Time Period

Industry benchmarks are general business processes and performance metrics of the competition in your industry that you can use to compare you company’s processes and performance metrics.

Using benchmarks can help guide your growth. You can compare the average return on investment on marketing, your sale’s margin, profit, etc and figure out whether you are behind or ahead of the competition. Once you know where you stand, you can easily put processes in place to improve your position.

Pro

Use of industry benchmarks increases a company’s performance due to the changes incorporated to meet the industry standard

Con

Sometimes, the information acquired from the industry benchmarks may be insufficient in other areas

6. Intuitive Forecasting

This involves forecasting using your sales reps’ best guesses on the number of future deals they anticipate, their value and the period it would take to close.

The probability of the information you collect to be 100% correct will depend on how experienced your sales reps are and whether they know their prospects well enough as well as their confidence in their ability to close.

While this can be effective if sales representatives are realistic about their capabilities, the status of their pipeline and their average win-rate, intuitive forecasting is not always reliable but might be the only thing suitable for you if you’re new to the market and don’t have any past sales to use as benchmark.

Pro

This method is easy to use, time and cost effective and doesn’t require a background in statistics

Con

Results may not be reliable since accuracy depends on the skills and abilities of the sales reps to predict without any bias

7. Historical Forecasting

With this method, assuming that the market is based on similar conditions as in the past, you use previous sales to determine the present or future sales. For example, if your business typically grows 10% year over year and you closed a $100k of new business last year. That would lead you to forecast $110,000 of sales revenue this year.

The main concern with this sales projection model is that it assumes constant demand and growth, regardless of seasonality or long-term market demand fluctuations.

To improve accuracy, you can choose to predict sales per month or per quarter based off of the historical sales of the previous year’s per month or per quarter sales. For example, there is a high probability that last year’s Q1 sales would match this year’s Q1 sales assuming both of the years’ market are constant.

Pro

Provides quick ballpark estimates of future sales

Con

Market and demand fluctuations may result in inaccurate predictions

8. Forecasting with Engagement Data

This sales forecasting method is suitable for someone looking to get a quick estimate of expected future sales. It involves looking at the customer engagement data.

Customer engagement can be in the form of website traffic, customer sending queries through the Contact Us page of your website, phone calls, emails, or their level of interest and willingness to make a purchase as they go through the pipeline.

The sales prediction may not be 100% accurate but higher a higher probability of successful prediction may be achieved depending on the sales reps ability and experience to accurately predict whether the prospect is likely to make a purchase and how soon that will be.
Pro

It is a quick technique that is time and cost effective

Con

It is not likely to produce 100% accurate forecast sales

9. Multi-Variable Forecasting

Multi-variable sales forecasting involves determining the relationships of multiple variables to sales and how their change may affect future sales.

Examples of variables that may be included in this process are calls made, number of emails sent, competition, customer engagement, average sales cycle, historical sales data, etc. The process usually involves the use of multiple linear regression.

Regression analysis requires skill and practice to properly execute and understand the results. When done correctly, it can reveal valuable business information that will help with future growth.

Pro

This method is usually accurate and you get to determine which variables actually have an impact and what you can do to ensure that they positively affect your sales

Con

It takes advanced skills in mathematics for one to get successfully use this technique therefore, you might need to hire someone if you’re not capable of doing it yourself

10. Pipeline Forecasting

This sales forecasting method focuses on the prospective deals that are under negotiation with current and prospective customers.

As the negotiation keeps going up the pipeline, the chances of the deals closing increases. Aside from predicting sales based off of previous pipeline movements and getting to the closing stage, sales managers can also identify the challenges sales reps face on every stage of the pipeline and ponder on how best to tackle them.
Pro

Provides useful information on what it takes to get the prospective customer to close the deal and the possible techniques to consider in order to get it done

Con

May not be accurate depending on the skills of the sales reps, and the unpredictability of customers

11. Forecasting by Sales Rep Submissions

This process takes into account the sales reps educated guesses on expected sales. You can ask you sales reps to submit weekly, monthly or quarterly sales forecasts based off of their own predictions influenced by the prospects they have in their sales pipeline and their confidence in getting them to eventually close as well as the time period it would take.

Unfortunately, the sales forecasts may not be 100% accurate however, you can increase its reliability by holding your sales reps accountable for every forecast they submit and providing the necessary training they need to ensure accuracy in their forecasts.

Pro

Results are quick and may be close to accurate if you have a hardworking and experienced sales team

Con

Results may be wildly inaccurate if your sales team is inexperienced or unmotivated to work towards providing an accurate forecast.

FAQs

How do you accurately forecast sales?

There are a lot of factors that go into consideration when planning to accurately forecast your sales.

It all starts with the raw data you have in hand. You need to ensure that you have accurate data that is recorded accordingly and is easily accessible. To do this, ensure that your sales department is well trained to use the CRM of your choice and can be held accountable in case of any sales data entry errors or inaccuracy.

Every step of the sales process should be properly documented and made easy to understand. Bonus point, if you have backed up your data. You never know when disaster might strike and having the right sales data at the right time will save you a lot of time and headache.

Another thing you can do to ensure accuracy when it comes to forecasting your sales is holding your sales team accountable for their sales forecasts.

They have to make sure that they use the correct method of sales forecasting and that their results are almost always accuracy. This way, you can actually rely on your sales team forecasts for a higher probability of success when it comes to sales forecasting.

While it is crucial to hold your sales team accountable, it is also important to not overwork them or force them to constantly work on creating time-consuming sales forecasts. Instead, provide them with adequate training that would allow them to pick the right method and a reasonable frequency of the number of sales forecasts to be created.

Understanding what converts a prospective customer into a closed client is extremely important. By looking through historical data as well as the previous sales pipeline, you can notice some patterns which may provide insight on the factors that converts prospects or cause you to lose the prospect.

Which sales forecasting technique is most accurate?

The use of thorough and complex analytics when it comes to forecasting have been proven to provide the most accurate results which include the use of statistical methods such as regression analysis whether linear or nonlinear that play a huge role in ensuring accuracy provided the data used is accurate.

Depending on what you’re looking for, I’d say the most accurate sales forecasting methods are Statistical Demand Analysis and Multi-variable Forecasting due to their in-depth analysis covering several variables that go into consideration when working on achieving accurate sales forecast results.

However, since these methods require advanced analytics knowledge which could require hiring extra talent, it might not be feasible for your company if you’re small or on a tight budget.

How far into the future should I forecast?

On average, there are about 3 types of sales forecasting timelines: Short term, medium term and long term sales forecasting. Short term sales forecasting may cover a period of about 3 to 12 months. This is mostly done when the organization requires immediate steps to be taken to support sales in the very near future.

Depending on the size of the organization a medium term sales forecasting may take about a year and is usually done when a company implements a new strategy into the operations of the company. A long term sales forecasting would take about 3 or more years. Well established organizations are more likely to opt for long term sales forecasting.

Due to the ever changing factors that affect sales within the economy, a long range forecasting is more likely to affect the probability of success of your sales forecast. Your sales forecasts should be based upon the frequency of changes that would usually affect your sales.

Generally speaking it’s recommended to predict monthly sales when you’re first starting out and then later on switch to annual sales forecasts as your company grows and sales become more predictable.

Conclusion

The importance of sales forecasts have been mentioned over and over again but not all businesses take advantage of it. Conducting sales forecasts have been proven to give you a competitive advantage over your competition.

Deciding on the right type of sales forecasting techniques to implement indispensable. It is recommended that you always start with the end result in mind before you start anything.

That way, you are aware of where you are and where you want to be. Hiring or outsourcing talent to assist you with the sales forecasting techniques that is most suitable for you would be exceptionally beneficial for your business.

With the detailed information provided in this article, we hope you can accurately decide on the best forecasting method for your business while taking full advantage of sales forecasting has to offer.

Even though choosing the right sales forecasting methods may be a bit of a hassle when you start out, as time goes by, you’ll be able to alter and modify your forecasts the more you learn about your market and customers.