Sales forecasting is the process of estimating what is likely to happen in future sales. This is done by predicting the amount of product/service that will be sold based on years of collected business data or other methodologies.
A company could choose to forecast sales for the short term or long term. Short-term forecasting is done in a period of six months to a year to plan for short-term goals. Alternatively, long-term forecasting covers over five years and more, mainly for long-term goals.
Who Should Use Sales Forecasting?
Established companies with years of experience have more opportunity to leverage this method. Sales forecasting is an easy method that an individual sales rep, a sales team, or a particular department in the company can implement. It measures how well the market will respond to your products and services, while avoiding overproducing.
Why Sales Forecasting is Important
Forecasting sales is essential for all businesses. It enables you to estimate the amount of the product you need to produce for a particular market during a specific timeframe. Sales forecasting is important in many different ways. Here are just a few.
Predict Achievable Sales Revenue
Sales forecasting allows the sales team and manager to observe the sales trends and analyze the data. They can then make informed decisions that will estimate the right type, quantity, and quality of products/services. The more accurately your team can forecast the sales, the more likely they will achieve the sales goals they have put forward. Sales forecasting allows the team members to notice warning signs that could prevent them from getting their predicted revenue.
Efficiently Allocate Resources
Accurate sales forecasting forms a foundation for proper resource allocation. First, it guides the team when setting their goals. Then, when they reach their targets based on the forecasting, it enables them to estimate the most accurate numbers. This includes the number of products to make, sales budget, equipment/facilities allocation, capital, labor, space, etc.
Plan for Future Growth
Sales forecasting helps estimate how a company’s production could grow. It also guides plant expansion plans, changes in production, and how to use resources efficiently. Sales forecast helps in the supply chain, especially gauging the demand for products needed by consumers. It helps in deciding the extent of advertising etc.
Improving Sales Forecasting
Generating accurate sales forecasts is difficult because we can only influence and not control our customer buying behavior. As a sales manager or team leader, you should always be aware of the factors and changes that may affect accurate forecasting. You can use this information to improve your forecasting.
Forecasting accurately plays a significant role in improving and achieving sales goals. The steps below show how you can improve the sales forecasting process.
Look at Historical Trends
Analyzing the past trends in your sales records is an excellent start to predicting future sales. The records will show you the exact numbers of prices and products. And the teams involved in making the sales conversions during which sales period. If not subjected to any changes, trends can be used to understand the market and make better-informed predictions. Any sales forecast method uses data as a baseline for accurate estimates. The more clean the data is, the more accurate the sales forecasting will become.
Incorporate Changes
Now that you have measured your basic sales run rate, you want to identify the new sales process that will incorporate the changes needed to improve sales forecasting accuracy. The changes will be made based on the numbers that you have estimated for the future. Be sure to communicate each change in the sales cycle with the team. And document it for the next phase of sales forecasting. Whether you plan to change pricing, product, or increase customers or promotions, you and your team must prepare for the new forecast.
Use a Proper Sales Management System (CRM)
An automated sales forecasting CRM helps streamline your sales cycle and can predict future revenue more accurately. Proper CRM records clean data that can be used to improve efficiency in forecasting. In addition, when integrated with your company’s financial system, it can aid in allocating more funds toward your more profitable sales activities. There are many CRMs available, so it’s good to do your research before settling for one.
Consider Trends and Factors Impacting Your Sales Forecasting
This past year has shown us how we cannot control what goes on around us. Therefore, as you prepare for next year’s sales forecasting, do not forget to factor in trends and issues that may affect your estimated numbers.
It can be much easier to predict trends and other internal factors in the near future. Things like market trends, new hires, or business changes are factors that can be anticipated. And you can prepare for them as you plan the forecasting.
However, external factors such as policy changes, economic crises, etc., are not easy to predict and prepare for. You must always be ready to re-forecast. Forecasting is not a one-time activity but an ongoing activity that keeps redirecting you in such a way that you will achieve your desired goals.
Choose a Sales Forecasting Method
There are different types of sales forecasting methods that you can choose. Not all businesses are modeled the same. Each has its uniqueness, even though it may be similar.
As much as it is important to understand what other similar companies are doing, it is also important to note that even though all these methods are good and work for them, they may not necessarily work for you. You still need to choose one method that will factor in the needs of your business. Take into consideration some of the methods discussed below and analyze which will work for you.
Types of Sales forecasting
Intuitive Forecasting
The Intuitive Forecasting method is based on the prediction made by someone who is thought to have more knowledge and trust and will make the most accurate estimates for others. It could be one person (experienced salesperson) or a group of people (sales + marketing experts).
Since the sales reps are the closest people to the leads and the customer base, forecasting is based entirely on the opinion of the sales reps and how confident they are that these estimates will close the sales. It is the most common forecasting method, especially for start-up companies who have no prior data/past revenue history that could be used as a basis for forecasting. However, this method does not have high accuracy because the forecasting relies on subjective judgment, and there is no way to verify the opinions of someone.
For example: in a sales forecasting meeting, a sales rep will analyze the potential sales and the value of each sale based on what they plan to bring in and other potential opportunities. They then make a statement similar to, “I plan on bringing in $5,000 monthly revenue within the next 28 days.”
Test Market Analysis
This is another method of forecasting used by most big companies trying to understand the market response before rolling out a new product/service. However, instead of making intuitive estimates on the sales performance, this method utilizes a controlled environment setting to forecast the performance.
You identify a smaller sample market size that you want to test and analyze based on the predetermined factors such as geographical areas, age range, similar preferences, etc., that will represent your whole targeted market. Then, within a set period of time, you observe how the market responds to the product/service, how it sells and how they feel about it in general.
The data collected from this test market will provide valuable insights that sales reps and other experts can use to forecast the performance of the bigger targeted market. Not all markets are the same. Hence it is essential to note the factors that could change from one market to another.
For example, a company can do a soft launch before the official launch, producing limited products to gather customer opinions or rolling out to a limited set of market samples.
Historical Forecasting
The true definition of sales forecasting, this method uses records and data that have been gathered over a substantial period of time to predict future sales performance. This works under the assumption that the factors that favored the previous period’s performance remain the same and that the market will not change. Therefore, you can use historical forecasting as a stepping stone to your sales forecasts as it is one of the quick and easy ways to forecast.
For example, a team can determine their monthly revenue for the next month, week, or year based on the past monthly revenue records.
Multivariable Analysis Forecasting
This forecasting method considers the various factors (internal + external), trends, and other forecasting techniques to forecast the next round of sales performance accurately. These variables include cycle length, individual performance, opportunity, and more, making it the most complex method of forecasting and the most accurate.
Sales forecasts based on Multivariable Analysis are highly data-driven, requiring advanced analytics solutions to produce highly accurate results. Communicate with your team to record clean data as much as possible if you choose this type of forecasting.
Lead-Driven Forecasting
Lead-driven forecasting uses every lead record available from different sources to evaluate the buying journey trends of each lead and use this information to forecast the trends of the next lead. To predict more accurately, your team can assign a value to each lead source and have data on leads per month for the previous time period, lead-to-customer conversion rate by source, and average sales price by source. This will help you understand the lead generation process from each source.
When using this method, you must consider that the average sales cycle for each lead source and conversion rate may change. Hence you must always have the up-to-date records on any changes that may have happened to your leads.
Opportunity Stage Forecasting
Based on past performance, this method analyses the characteristics of your customers that have closed the deals. You can compare this with your customers or other similar businesses’ customers to calculate the chances that you will be closing the “deals.” This forecasting has more straightforward calculations that look at the various stages of the buying journey that your prospect fits and the percentage that others have closed on that stage.
Just as it is easy to predict someone based on their appearance, opportunity stage forecasting uses a similar approach to predict the probability of a prospect closing the deal based on the behavior and demographic data provided.
Leverage Your Sales and Hit Your Targets
In the times we are living through, businesses and companies face a lot of competition and uncertainty. It is not easy to succeed and capture your market out of a comprehensive marketplace. Sales forecasting is an essential tool that you can use to leverage your sales to hit your targets.
However, it can be challenging to implement these methodologies in your business if you are just starting. Hence, you should discuss with a sales expert to help you determine the best method you can use to forecast sales accurately.
To succeed in business, you can’t do it all alone – you need partners you can rely on. Waterways is a partner for many businesses just like yours. We will help you get the most out of your sales forecasting with high-quality equipment.
Contact us today to learn more.