Effective Sales Forecasting: The Complete Guide to Predicting Your Revenue
If you’re planning an outdoor activity, chances are you’re going to check out the weather forecast. After all, you don’t want your picnic to be ruined by getting caught in the rain. You want to make an informed decision to increase the chances of everything going right.
Accurate and effective sales forecasting enables you to do the same for your business. Besides helping you estimate your future revenue, it also lets you make smarter hiring, prospecting, and budgeting decisions.
As a matter of fact, organizations with accurate forecasts are 10% more likely to grow revenue and twice as likely to be the best in their field. At the same time, as much as 55% of companies admit to struggling with their sales forecasting accuracy. Whether you’re in the same boat as them or just starting to build a formalized approach to forecasting, you’ve come to the right place.
What is sales forecasting?
In short, a sales forecast is a company’s expected revenue over a period of time. It is an estimate of how much your company, sales team, or a sales team member will sell in a period of a week, month, quarter or year. So, in order to ensure your sales forecasting process is efficient, you’ll need to focus on two key projections:
- How much revenue each sale will bring into the business
- How much time will pass before the revenue comes in
That said, predicting the future isn’t an easy task. Forecasting sales accurately means relying on a mix of intuition and data. That’s why teams with the most accurate sales forecasts factor in:
1. Who is the prospect?
To make an accurate sales forecast, you need to know who you’re talking to. If your prospect is the actual decision maker, closing the deal might take less time. However, if you’re talking to an influencer instead, you need to factor in possible delays in the purchasing decision.
2. What solution is being offered?
While your profit depends on products or services you offer, what you’re ultimately selling is a solution. During your conversation with a prospect, two of your main goals are to:
- Identify which problems the prospect is facing
- Assessing how well your company can solve those problems
3. Why is the prospect considering the solution?
Whether it’s a new prospect or an existing client looking to buy more products or services from you, understanding why is crucial for your sales forecast. A prospect with a clear and urgent need for your solution is more likely to buy from you soon. Likewise, a deal with a prospect who’s just looking for options for the future might stall indefinitely.
4. How will the purchasing decision be made?
Even if your prospect is the decision maker, that doesn’t mean they won’t include others in their buying decision. Often, prospects aren’t even aware they have a specific decision making process until you suggest it. Asking about who, inside or outside of their company, they usually consult when it comes to buying something similar can give you valuable insight for accurate forecasting.
Why sales forecasting matters
Estimating future revenue is a factor that touches upon every aspect of your business. Without at least a general idea of what your expected sales are, you can’t confidently manage costs, allocate resources, regulate quotas or hire staff. The goal of sales forecasting is to provide you with actionable information that you can use to make informed business decisions.
Ultimately, revenue is what funds operations across an organization. Sales leaders rely on forecasts to plan quotas, finance uses them to create budgets, a marketing team needs them to create demand plans, and so on. That said, accurate sales forecasts are only the beginning.
If you don’t share information from your sales forecasts across departments, you risk expensive mistakes. For example, imagine running a grocery store. In order to meet customer demand, you need to know how much inventory of a specific product will sell before the food goes bad. You have the historical data and now all your team needs to do is order the products.
However, if you’re not sharing this data with your team, you end up with too much inventory. Once the food goes bad, you’ve lost both your investment and the profit. So to make sure you at least break even, you’ll have to settle for a trade-off in the form of a sale.
As you can see, an accurate forecast helps you identify potential issues while there’s still time to counteract them. The sooner you figure out what’s gone wrong and correct it, the better your bottom line will be.
What are the benefits of sales forecasts?
While forecasting might focus on sales revenue projections, information is the real value it brings to a business. With accurate data and realistic expectations, business leaders use sales forecasting to make sure internal and external operations run smoothly. This is because accurate sales forecasting results in:
1. Strategic decisions
Spotting potential issues early on gives managers and sales reps time to either completely avoid them or to adapt to the changes. For example, if a sales rep or a team is at risk of not hitting their targets, sales forecasting helps managers identify the cause.
Once the problem is identified, you can then make adjustments to your sales strategy. Whether it’s a matter of bringing in new leads or exploring new revenue streams, sales forecasting lets you make strategic decisions now that will help your business succeed in the future.
2. Realistic goals
Setting business goals without sales forecasting is leaving everything up to guesswork. Business leaders might set unrealistic growth expectations, resulting in sales managers setting unrealistic sales targets. As a result, the entire company is now working towards an unattainable goal, which inevitably results in disappointment and low morale across the board.
However, when you use previous sales data to inform your decisions, the chances of growing your business are higher. With effective sales forecasting, you no longer sales reps who aren’t motivated because they’re working towards unrealistic goals.
3. Accurate budgeting
The best way to have a company go under is to spend more than what you’re bringing in. That’s why the role of sales forecasting in business finances is crucial for success.
Knowing what your future sales performance is likely to be allows you to create a financial plan that makes sure you don’t just break even. Or worse, lose money because of poor budgeting.
4. Better prospecting
Since sales forecasting usually involves a CRM, it can help you maintain a strong sales pipeline. Keeping your deal information up to date lets you reduce the time sales reps waste on prospects whose needs don’t align with your solution. In turn, you can now assess how much prospecting you need to do to keep the pipeline going.
5. Informed hiring
If your forecast predicts increased future sales, you might need to take a look at your sales teams. After all, you don’t want to be understaffed during periods of high demand and lose business. Similarly, if a decline in future sales is on the horizon, you might want to reconsider your hiring plans and focus on bringing in more leads.
How to create an accurate sales forecast
If you want to predict future sales effectively, you need to come to terms with the fact that sales forecasting is a continuous work in progress. With that in mind, creating a general plan for achieving the best sales outcomes possible is just the beginning. Here’s how to create one and what to do next.
1. Establish a sales process
If you haven’t established a unified sales process for your team to use, you’ll have a hard time predicting the chances of an opportunity closing. That’s because your sales process defines standard opportunity stages in your pipeline.
Your sales reps need to agree on what each of the pipeline stages means. That way, your forecasting data will be more accurate and your team will know how to nurture leads throughout the sales cycle.
2. Set sales quotas
Without setting a sales target, you won’t know whether your sales forecast is working or not. Your entire sales team needs to have a common goal to work towards, but you also need to set appropriate individual goals for each sales rep.
The easiest way to do so is to look at your reps’ historical performance and work with them to determine and adjust expectations. That way, you’re creating a point of reference that you can compare against your sales forecasting to make necessary changes before the sales period ends.
3. Use a customer relationship management software (CRM)
Your sales forecasts are only as good as the data behind them. If you’re relying only on estimates and speculation, you’re leaving the accuracy of your sales forecasting to chance.
With consistent use of a CRM tool, you’re making sure all the relevant data is available in real time. And when you have clear visibility into your sales funnel, you can support your team with high-level decisions about refocusing their efforts.
4. Decide on a sales forecasting method
Once you’ve decided on a sales process, determined your goals, and set up a CRM, it’s time to choose a sales forecasting method that works for your business. The success of the method you choose depends on:
- How long you’ve been in business
- The size of your sales team
- The quantity of your sales data
- The quality of your data tracking
The key to successful sales forecasting is finding a balance between a process that is specific enough to be relevant, but not too complex to maintain. That said, choosing the right sales forecasting methodology for your business can be a difficult task. To make it easier for you to decide which method would work best, we’ve collected the five most common examples below.
5. Review previous sales forecasts
If your company has previously forecasted sales, you can use this data as a starting point. Start by comparing the actual sales data you have available to the previous forecast to determine:
- How the sales team performed
- In which key areas sales underdelivered
- Whether the goals set were unrealistic
- Any unpredictable events that weren’t factored into the sales forecasting process
6. Include data from other company departments
While historical sales data is crucial for an accurate sales forecast, it is not the only data that can provide you with valuable insights. Other company departments, such as marketing, product, HR, and finance, can also impact your sales forecasting.
Your marketing department is a direct link to the quality of your sales pipeline. Understanding their plans and strategies for the sales period you’re forecasting helps you work together towards bringing in more quality leads.
Similarly, if your product team is working on something new for the coming year, consider how it will impact the company’s sales growth. Factoring in new product launches or new features into your sales forecast can help you create a well-rounded strategy that aligns with your business goals.
Speaking of business goals, this is where your HR department comes in. If you see that your future sales goals mean additional employee resources or new hires, mapping out the process with HR will help you understand how this will impact your forecast.
And last, but not least, your finance department has all the information about the financial condition of your company. Working with them lets you fully understand the overall financial goals of the business, ultimately helping you align your forecast accordingly.
7. Keep your sales team in the loop
No matter which sales forecasting method you choose, the only way for it to work is to keep your team in the loop. Train them on best practices, hold them accountable for their performance, and communicate changes and decisions.
Keep in mind that your sales team is in constant contact with your prospects. They can provide you with valuable feedback on what’s working, what isn’t, and what opportunities you’re not taking. With that information, you can analyze how you’re performing against your forecast and make appropriate adjustments.
5 common sales forecasting methods (with examples)
Now that you know what it takes to make your sales forecasting as accurate as possible, it’s time to choose a forecasting method that helps you support business growth. That said, remember that the primary role of sales forecasts is to bring valuable insights. As such, they don’t have to be perfect and completely align with your goals. Whatever sales forecasting method you choose, be prepared to adjust and reforecast as needed.
Forecasting method 1: Opportunity stage forecasting
Opportunity stage forecasting is based on predefined stages of your sales process and which of those stages a certain deal is in. The further down the pipeline a deal is in, the more likely it is to close. So, to create a forecast, all you need to do is multiply a deal’s potential value by its probability to close and add up the numbers for all the deals in your pipeline.
Granted, establishing a sales forecast this way is relatively simple and the calculations are objective. However, this method has important drawbacks to consider, both of which can make your sales forecast less accurate:
- It ignores the size and age of opportunities. When you’re relying only on the stages your deals are in, your reps are at risk of wasting more time than an opportunity is worth. This means you’re treating deals of all sizes and ages the same as long as their close date is within your desired time frame. As a result, your reps aren’t motivated to clean up their pipeline and keep chasing deals indefinitely instead of focusing on better leads.
- It doesn’t account for real-time changes. While relying on historical data is necessary to a certain degree, this method puts you at risk of ignoring real-time developments that impact close rates. For example, if there are changes in marketing messaging or products, the likelihood of deals closing by stage will also be different than it was before those changes were implemented.
Opportunity stage forecasting example
Imagine that your company is selling software. Using historical data, you’ve established the following likelihood for deals to close based on your pipeline:
Product trial: 40%
Product demo: 75%
Let’s say that you have a $1000 deal opportunity at the Incoming stage, $2000 at the Product trial stage, and $1500 at the Product demo stage. Based on the probability for each of these to close, the forecast for the three deals would look like this:
Deal 1: 5% x $1000 = $50
Deal 2: 40% x $2000 = $800
Deal 3: 75% x $1500 = $1125
Total forecast amount for these three deals: $1975
Forecasting method 2: Length of sales cycle forecasting
Sales cycle forecasting is based on the age of the deal. In other words, it takes into account how long a deal was in your pipeline before closing. To use this method, you simply need to add up the number of days it took to close recent deals and divide the total by the number of deals you closed.
That said, make sure to account for how and when prospects entered your sales pipeline as different types of deals will have different closing rates. For example, a new lead might take several months to close, while referrals can take anywhere from a matter of hours to days. That’s why this method requires you to have accurately and carefully tracked data.
Length of sales cycle forecasting example
Imagine you’ve recently closed three deals. Calculate the number of days it took to close each one and then add up the numbers:
Deal 1: 55 days
Deal 2: 63 days
Deal 3: 60 days
Total time: 178 days
Next, divide the total number of days (178) by the amount of deals closed (3) and you’ll see that your average sales cycle is approximately 59 days long. Now that you know your average sales cycle takes two months, you can apply it to other opportunities in your pipeline. For example, if a rep has been talking to a prospect for a month, your forecast predicts a 50% chance to close.
Forecasting method 3: Intuitive forecasting
As the name suggests, intuitive sales forecasting relies on your reps’ gut feelings to estimate the likelihood of deals closing. And while salespeople are the closest to the prospects, their opinions without data can result in poor estimates.
For sales managers, there is no way to verify the likelihood to close without listening in on calls and tuning into prospect conversations. That said, there is a time when this method is valuable. If your company is in early stages and there is no historical data to rely on, subjective calculations from your reps are your best bet.
Intuitive forecasting example
Your business is brand new, so there’s no historical sales data to go on. However, you have a few sales reps on your team, so you ask them to give you a revenue estimate for the next six months. Based on their previous experience, current leads, and intuition, they give you a ballpark figure. This is now your first ever sales forecast that you need to track and improve upon in the future.
Forecasting method 4: Historical forecasting
With historical sales forecasting, you’re comparing two equal time periods and assuming your actual sales will be the same or better than the previous period. And while this method might work for businesses with stable markets, it also comes with a set of challenges.
Successful historical forecasting relies on steady buyer demand. If the demand drops for any reason, your forecast will automatically be off. Similarly, any market changes caused by external factors will have a huge impact on the accuracy of your forecast.
Historical forecasting example
Let’s say your total sales revenue in March was $55,000. Based on the historical sales forecasting method, you assume the revenue in April will be $55,000 or more. However, if your business has a track record of increasing sales by 5% each month, you’d factor that in, too. In that case, your estimated revenue for April would be $57,750.
Forecasting method 5: Multivariable analysis forecasting
The multivariable analysis forecasting method tends to be the most accurate, but it requires sales forecasting software. It helps you estimate revenue with predictive analytics using data such as:
- Average sales cycle length
- Individual performance
- Opportunity type
- Probability of deals closing
That said, since it’s so data-driven, this method won’t work well without healthy tracking habits. No matter how good your software is, your sales forecast will only be as accurate as the data your reps input.
Multivariable analysis forecasting example
Imagine having two sales reps, each one of them working on a single account. Your first rep just sent a proposal to a potential customer, while the other one gave a product demo to a different company.
Taking into account your first rep’s win rate for the proposal stage and the expected deal of $10,000, the chance of the deal closing is 65%. This leaves you with a forecasted amount of $6,500.
With the win rate your second rep has in the demo stage and the expected deal of $8,000, the chance of the deal closing is 25%. This leaves you with the forecasted amount of $2,000.
To get to a sales forecast for this time period, what you need to do is add up the forecasted amounts each of your sales reps will bring in. In this case, your sales forecast would be $8,500.
5 key sales forecasting challenges
As helpful as sales forecasts are, they also come with a set of obstacles to jump over. To make sure nothing gets in the way of accurate revenue estimates, you need to be ready to adjust your forecast to any internal or external challenges that may arise.
1. Unforeseen circumstances
Depending on your business, location, and customer base, unpredictable events can dramatically change your sales forecast. Economic crises, extreme weather conditions or a certain recent global pandemic can put a stop to everything you thought you knew about expected sales growth overnight.
2. Personnel changes
If your company hires a significant number of salespeople at once, you might see an unexpected jump in sales once they’re fully onboarded. Similarly, salespeople leaving the company for whatever reason can result in a dip in sales unless you can fill their shoes fast. In both cases, your forecast will need some modifications.
3. Market shifts
What your competitors are up to is bound to have a significant impact on your sales forecast. For example, if a competitor goes out of business, you’ll see an increase in demand. On the other hand, if a company in your industry reduces its prices, your sales team might need to get creative with discounts or risk losing customers.
4. Modifications to products or services
Are you introducing a new pricing model, offering new services or rolling out highly requested products? These updates can both positively and negatively impact your sales performance, which means you might need to update your forecast.
Depending on your industry and target market, your prospects might be less inclined to buy at certain times of the year. For example, B2C companies might see a spike in sales around the holidays. At the same time, for most B2B companies, the holiday season is usually slower than the rest of the year.
5 common sales forecasting mistakes
By now, you’ve chosen the best sales forecasting method for your business and noted down how internal and external factors can impact it. You’re ready to start making your own revenue predictions, set quotas, and win more business.
But wait. Before you jump into creating CRM guidelines and investing into forecasting software, there’s one last thing we need to cover. Here are some common sales forecasting mistakes to avoid.
1. Relying on intuition instead of measurable sales data
Measurable data is always a better indicator of the future than a hunch. No sales forecast is completely accurate, but those based on actual behaviours and data always perform better than those based on feelings.
2. Ignoring historical data
Unless your business is brand new, there is no excuse for ignoring past sales data. Your past performance is the best indicator of future performance in a comparable forecast period.
3. Not taking time to define buying stages
If you don’t define the stages of your prospects’ buyer journey, your sales team might unintentionally distort your data. Clearly defined stages and transitions between them keep your team on the same page, resulting in more accurate sales forecasts.
4. Static sales forecasts
No matter the time period you choose for your sales forecast, it goes out of date as soon as circumstances change and new information comes in. Instead of a static spreadsheet, your forecast should ideally be a real-time platform that registers changes and adapts.
5. Failing to define key performance metrics
Deciding on a set of metrics both sales teams and management agree with is crucial if you don’t want constant forecast debates. With clearly defined KPIs, everyone is measuring the same things and working towards the same goals.
When done right, sales forecasting is your company’s most powerful ally. By helping you understand what drives your business, it lets you impact sales outcomes, manage resources, make better decisions, and address any challenges that come your way.
At the end of the day, revenue is what helps businesses move forward. And without making the effort to forecast sales as accurately as possible, you’re risking leaving critical business decisions up to guesswork.
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