Accurate sales forecasts help predict your business's revenue potential and identify risks that are a threat to your profitability. As such, as a sales manager, you cannot afford to overestimate or underestimate the sales forecast of your team. Check out these stats that underscore just how important sales forecasting really is:
- 93% of sales leaders are unable to forecast revenue within 5%, even with two weeks left in the quarter
- 67% of organizations lack a formalized approach to forecasting altogether
- 80% of sales orgs do not have a forecast accuracy of greater than 75%
- 55% of sales leaders do not have high confidence in their forecasting accuracy
- 97% of companies that implemented best-in-class forecasting processes achieved quotas, compared to 55% that did not
- Companies with accurate forecasts are 10% more likely to grow revenue year-over-year and 2 times as likely to be at the top of their field
What’s tricky is that forecasting is not an exact science—it is a tool to help you understand what has happened in the past and what might happen in the future. There are many ways to forecast future models, but they all require judgment calls made by humans at the end of the day.
Are you ready to take the next step towards becoming a better sales forecaster? Or perhaps you are already proficient and want to see where you can improve. No matter who you are, this blog can help with your journey. Below, we’ll cover some of the different approaches businesses should take when using sales forecasting, including:
- What is a sales forecast?
- Why do you need a sales forecast?
- How do you do sales forecasting?
- What are examples of sales forecasting?
Let’s dive in!
What Is a Sales Forecast?
A sales forecast is an estimate of future sales, produced for the purposes of making business decisions. It can also be helpful when mapping out your sales strategy.
Many small to mid-sized businesses shy away from forecasting because they see it as a complicated process, but with the right tools and methodologies, forecasting can be simple and straightforward.
Sales forecasts are essential pieces of information that every company should have, regardless of size. They're important for planning your company's future; whether you want to know how many products or services to produce, or which staff member(s) should be hired next, an accurate sales forecast is what you need.
What Is Sales Forecasting?
Sales forecasting is the process of estimating future sales. Accurate sales forecasts enable companies to make informed business decisions and predict short-term and long-term performance. Companies use sales forecasts to anticipate how many products or services they will sell at a given point in time and thus help determine their cash flow, inventory needs, labor requirements, capital investment, and other critical inputs for conducting business.
Having reliable sales forecasts is important for both new and established businesses because it allows companies to build the appropriate infrastructure. For example, if your forecast indicates that you’ll have a 50% increase in customers three months out, then you might need to hire additional employees or scale your marketing and inbound sales efforts so that you can meet demand without compromising customer experience.
If you’re just starting out as an entrepreneur or laying the groundwork for a startup, then you’ll need to create an initial forecast based on your own research and assumptions—kind of like test driving a new car. In this instance, understanding how much work goes into forecasting (and therefore what factors into your analysis) will be key in determining overall sales performance down the road.
Why Is Sales Forecasting Important?
Remember our stats from the introduction? Fewer than 20% of sales organizations have forecast accuracy of 75% or greater according to research. Other reports show less than 50% of sales leaders and sellers have high confidence in their organization’s forecasting accuracy.
This is, despite data showing that “Sales organizations that leverage a formal and structured [forecasting] review process increase their win rates of forecasted deals by 25% versus those that take a less formal approach.”
In fact, The 2021 State of Sales Forecasting study revealed that:
“Once you remove human bias, errors, and other issues that stem from manual efforts, satisfaction with forecasting accuracy grows to 76%.”
Sales forecasts are crucial, and it’s important you do everything you can to ensure you have the most accurate forecast possible.
First, sales forecasting helps you plan for future growth. It gives you a better idea of when, where, and how much to invest to grow your business. This can help your team focus their efforts on the right things, in the right places, and at the right times. It also ensures that you aren’t wasting money or other resources unnecessarily while preparing for growth or expansion.
Second, good sales forecasts identify potential problems before they happen so that you have time to develop an appropriate response. For example, if new competitors are expected to enter the market soon, then this could be problematic if not addressed properly with advanced planning (e.g., by lowering prices). This is true for both B2C and B2B sales. By preparing ahead of time, teams can avoid surprises down the line and make sure nothing gets missed along the way.
Third, sales forecasting helps companies prepare for bad times, and it frees up cash flow by allowing them to plan ahead so their customers aren’t left hanging if demand unexpectedly dips suddenly during hard times. This means less pressure because all parties involved know about any potential issues well before they become an actual problem instead of getting blindsided. This also applies when dealing with slow periods as well).
How to Forecast Your Sales
Forecasting sales correctly is a critical skill for any business owner, but it can be hard to get started. Here are six steps you can take starting today to start building a successful sales forecast:
1. Make a Baseline Forecast
Update your past data and use whatever historical information you have available to make an initial projection for the next quarter or year.
2. Add in Seasonal Factors
Depending on your industry and product or service, you may need to adjust your forecast based on factors like holidays, new product releases, marketing campaigns, and other events that could affect how many sales you make.
3. Adjust for Marketing Efforts
Whether it's paid advertising or larger-scale efforts like media appearances or public relations campaigns, any substantial marketing investments should be taken into account when forecasting sales since they're likely to increase revenue from sales.
4. Forecast for New Products or Services
If you're adding new items to your product line next year, you'll need to factor those into your projections as well since they'll likely mean more revenue than what was previously projected without them included in the numbers yet factored in.
5. Get Feedback from Your Team
Tap your teams, specifically salespeople, for direct feedback on your sales forecast. The input of experienced sellers can help give insight into things like potential deals coming up in the sales cycle, which might not have been accounted for yet, so ask around.
6. Automate Your Process
Use software tools that automate much of the process and make it easier than ever before with just one click! There are plenty out there, like PhoneBurner, which have reporting features built into the power dialer software.
Sales Forecasting Methods, Steps, and Software
There are a number of methods you can use to forecast sales. The two most common techniques are qualitative and quantitative.
The qualitative forecasting method uses sales history and your intuition to predict the future; the quantitative method uses statistics and mathematical models to predict the future.
Qualitative techniques include:
- The market research technique: This method is useful when there is little data available about a product or service that you are selling. It involves conducting surveys, focus groups, or interviews to gather opinions from experts in the industry or people who are likely to purchase your products/services.
- Delphi Method: This approach involves asking participants for their forecasts in an anonymous manner with no discussion as part of the process.
- Consumer survey technique: This approach includes asking consumers what they intend on purchasing in a specific time period based on recent purchases they made with you or other companies like yours (such as competitors). It is important that this technique be administered carefully so consumers don't feel pressured into giving “wrong” answers by anticipating what they think will please you more than what would actually happen in real life situations where money isn't involved at all times - only sometimes! For example if someone wanted some candy but didn't have any cash at hand then instead he might pick up another item he needs instead because it's free!
Quantitative methods include:
- Naïve Approach (aka Naïve Forecast): This is a simple approach where you forecast that the next period’s numbers will be the same as the previous period. For example, if the next period is the month of March, you would forecast that the month’s sales will be the same as last March’s
- Straight-Line Method (aka Historical Growth Rate): This method is best for calculating future sales while factoring in growth. Here's the formula for this method: Previous period’s sales revenue x (1 + % rate of sales growth) = next period’s revenue (Pro Tip: You can save time by using a sales forecast template based on this method like this Excel version or this Google Sheets version)
- Linear Regression: If your business doesn't experience much annual fluctuation, you can use this method to get an average based on the charted progress of your sales. If you want some help graphing out your data in a linear regression chart, check out this helpful video that explains how to use the TREND function in Microsoft Excel to predict future monthly sales (from one to multiple months) based on historical values
- Run Rate: This method is best when you’re tracking sales for a set period. The formula is simple: Total revenue / sum of past sales periods. And you can use this Excel sales forecast template to make forecasting even easier.
- Simple Moving Average: This method is best for forecasting short term trends. The formula you’ll use is: The sum of previous periods sales / total number of time periods included = next period’s forecasted sales
Here are some other common forecasting methods:
- Relying on sales reps’ opinions
- Using historical data
- Using deal stages
- Sales cycle forecasting
- Pipeline forecasting
- Using a custom forecast model with lead scoring and multiple variables
Case in point, you can use a sales report to forecast and predict growth. Let’s say you have 10 reps who each typically close $50,000 per month. You can forecast they’ll each close $150,000 quarterly and $600,000 annually.
How to Create a Baseline Sales Forecast
The first step to creating a sales forecast is choosing a model that aligns with your business. There are lots of models out there, so make sure the one you choose is easy to use, flexible, and scalable. A good place to start is to build a baseline forecast:
- Build a baseline forecast that uses historical data and current market trends—you’ll want to add seasonal factors later
- Add in seasonal factors. If you sell things like Christmas ornaments in December, you might want to increase your holiday sales each year by 10-15%
- Take into consideration new product launches or big marketing campaigns that could affect sales
Once you have your baseline forecast, you can start looking at things like seasonality and short-term events that could affect future sales forecasts. This will help you get as close as possible when predicting what your revenue will look like over the next few months or years.
Start with a Baseline Forecast
When you're starting out, creating a sales forecast is an exercise in educated guesswork, and it's important not to overthink it. Your first sales forecast will serve as a baseline you can use to compare your actual performance. That will help you refine your forecast going forward, picking up on factors that were overlooked the first time around.
For now, just try to get something on paper. Here are some things to keep in mind:
- Start with existing data, such as past performance based on your sales metrics or industry benchmarks. If you're selling online, use average order values and conversion rates from your ecommerce platform's analytics dashboard. If you have past sales data from a similar product or service, use it too
- If you're selling a product, start with your current revenue and adjust it to account for any changes in sales since the last forecast. If this is the first time you've ever made a forecast, use your own judgment to estimate your expected revenue
- If you're selling a service, estimate your average order size and multiply it by the number of orders you expect to close. You can also use this as a baseline to create a forecast if you've never done it before
The best way to forecast sales is through the use of historical data. If your company has been in business for several years, you should examine past sales figures to see how they correlate with factors such as advertising spend, changes in staff or seasonal fluctuations. If your business is fairly new (or if you're just unsure where to start), you can use industry statistics to give you a baseline forecast.
Add in Seasonal Factors
The other major factor you should keep in mind when forecasting your sales is seasonality. Just as the weather behaves differently throughout the year, so does consumer behavior—especially for companies that sell winter products like snow boots or swimsuits. Seasonality can also be more subtle, like the way customers buy fewer bridal dresses in November than they do in June.
It may seem challenging to predict seasonality, but there are some simple ways to plan ahead:
- If you're new to forecasting and don't have a full year's worth of data yet, look at historical trends from similar companies in your industry to see if there are any patterns or correlations between changes in their sales and time of year.
- If you have a full year (or more) of data under your belt, use it! Given that consumers tend to behave similarly over time, looking at last July's sales compared with this July's will give you an idea of what next July can expect.
- Experiment with different types of forecasts (more on those soon). It will take some trial and error—not just this month but all year long—to find out which model works best for your business given known seasonal factors such as holidays and product launches.
Adjust for Marketing
Once you’ve established a basic sales forecast for your products, the next step is to adjust for other factors. The most important of these factors is marketing. Your goal in this step should be to estimate how many sales marketing campaigns will drive and how much they will cost you. You’ll also want to consider what impact certain types of marketing will have on your overall sales goals.
Marketing can increase or decrease sales depending on the type and strength of campaign you launch. There are several different types of promotions that can lead to greater sales volume:
- Promotions that increase price—examples include discounts, rebates, and coupons
- Promotions that increase volume—examples include trial offers, buy-one-get-one deals, introductory offers, and limited time specials
Marketing may also be used to introduce new products or boost existing product lines. Launching new products can either increase or decrease overall revenue depending on whether customers replace purchases from an older product with a newer one (cannibalization) or decide to purchase the newer one in addition (addition).
Forecast for New Products or Services
The forecast for new products and services is especially difficult because there is no historical data to draw on. So, while research should always be conducted before launching a new product or service, it becomes even more important when forecasting sales.
When you are researching new products and services, focus on the specific needs of your target audience. For example, if you have a large database of existing customers who have purchased from you before, look at their buying habits to help with your forecasts. This will enable you to determine whether the new product or service will complement their existing purchases, which would indicate that it could go on to become a big seller—or not—in which case it may not be worth launching at all.
Once the necessary research has been carried out and the decision has been made to go ahead with the launch, use past data (where possible) and market conditions to build a forecast for the first few months’ trading only. It can be tempting to try and make forecasts further into the future but this can lead to unrealistic expectations which will only serve to frustrate sales teams later down the line when they struggle to meet targets that might be set too high, too early.
Ensure that you have a plan in place as well as a clear deadline by which time certain parts of your forecast need to be achieved so that you are able to track progress against your forecast throughout each quarter against key milestones.
Be flexible. Regular feedback sessions between managers and salespeople should help identify any potential issues early-on so that they can be addressed in good time before they impact performance significantly.
A good set of forecasts can help you build your business, keep people focused on their goals and show investors the potential for future growth.
For instance, a sales forecast can help you plan for the number of sales reps needed to achieve your targets; it gives you a way to measure your company's ability to generate revenue in the future, and helps boost investor confidence if you need funding.
Build a Winning Sales Forecast
When it comes to sales forecasting, you must look at your business in context and decide which approach to sales forecasting works best for you. Once that’s done, you can apply your knowledge and begin the process of creating a sales forecast that enables your business to thrive.
In the end, it doesn't matter what approach you choose. The most important thing is that you forecast sales regularly. Remember that once you have a sales forecast in place, it's your own accountability tool.
You can easily track progress on sales and make adjustments if necessary (especially if you’re tracking the metrics that matter most). And that means growing your business becomes easier, allowing you to realize your goals one step at a time.
And, if the telephone is one of your team’s sales tools, PhoneBurner can help you boost performance. Our easy-to-use platform can help sales professionals triple their prospecting productivity and have up to 4x more live conversations. And that’s sure to improve your sales forecasts.
If you want to learn how to help your reps be 400% more productive with PhoneBurner’s cold calling software — the #1 rated outbound dialer for 10+ years—get your free trial here, no credit card required.
This is a guest post by Anthony Sills, the Founder & Content Strategist at Professional Pen. Connect with him on LinkedIn.