Sales Forecast Process
Sales forecasting is one of the most important duties sales managers perform. An inaccurate forecast can cost the company money – whether predictions are too optimistic or not optimistic enough.
That being said, we can make accurate predictions about the state of our business in the months and year ahead – and doing this is really important.
A detailed sales forecast allows us to plan for the future based on what’s happened in the past and what’s happening now.
If our forecast shows sales increasing and we’re confident in that prediction, we can then prepare by ensuring we have higher inventory levels to meet demand, have enough employees to help customers, and ensure our supply chain is prepared to handle the increased business.
On the other side of the ledger, if our forecast predicts a drop in sales we can then make sure our staffing levels are reduced, that we’re slowing down product production so we’re not paying to store excess inventory, and in extreme cases, we might look at reducing physical locations, staffing levels, marketing efforts, and things of that nature.
No matter which way your forecast goes, it provides valuable insight into what lies ahead for your company. Because of this, it’s not only important to create a sales forecast, but to work hard to create the most accurate forecast possible.
Sales Forecast Benefits
We just discussed some of the benefits you can reap from creating an accurate as possible sales forecast in broad terms – but that’s merely the tip of the iceberg. Let’s take a deeper dive into the ways a sales forecasting can help your business.
A More Informed Decision-Making Process
At the end of the day, a sales forecast may not be an etched in stone 100% accurate map of the future, but a good forecast will provide you with a great deal of insight into what’s most likely to happen to your business in the months ahead.
Armed with this knowledge, it becomes a whole lot easier to make important decisions.
If projections are up, it may be a good time to expand your workforce, build a new production facility, or look at expanding your product offerings.
If projections are down, you’ll know that perhaps doing any of the above is not a great idea. It might be time to downsize or scale back.
If knowledge is power, then the sales forecast offers up a mountain of valuable insight into what the road ahead will look like. Armed with this knowledge, it becomes infinitely easier to make decisions because you’re basing them on real projections and not gut feelings.
Another way utilizing a sales forecast can help your business is by allowing you to reduce risk.
We talked about some of this above – having a reliable estimate of sales and income will help you make better-informed decisions, but it goes further than that.
A sales forecast can reduce risk at the sales pipeline level too. You’re pipeline is your business’s lifeline – but a sales forecast can show you where issues may come into play that affect your bottom line.
An accurate sales forecast will spot weakness and deficiencies in your pipeline – allowing you to repair them, reduce your risk, and generate more revenue before these issues become an actual problem.
If you have no idea how many sales you expect to generate, how can you hope to create realistic and attainable quotas for your team? The simple answer is you can’t.
Studies show that roughly 66% of sales people aren’t hitting their quotas. Does this mean that they’re all lazy slackers? Does this mean we’re terrible at hiring sales people? In some cases, maybe – but the bigger issue is the quotas themselves.
Far too often, companies make quotas based on taking old numbers and increasing them by a few percentage points. That’s a recipe for disaster. Even the most successful companies have peaks and valleys along their revenue timelines, so assuming revenue will go up 5% every year and setting quotas accordingly is a recipe for disappointment. It gets even worse if you have an unexpected down year. No wonder sales people miss their marks…
Having an accurate sales forecast makes setting quotas easier – you have a real idea of how much revenue you’ll earn, not a gut feeling. Armed with that knowledge, you can set realistic, attainable goals for your sales team.
Set Future Benchmarks
One of the key elements to creating a helpful and accurate sales forecast is recognizing where you’ve been. The road already traveled can provide a lot of insight into what to expect on the journey ahead.
Whether you use sales enablement software to make your projections, or you do it the old fashioned way with calculators and spreadsheets, you’re going to need data. If your old projections aren’t detailed or aren’t particularly accurate, it has a ripple effect on your current predictions.
Commit to making more accurate sales forecasts now and you’ll reap the dividends both in the months ahead and years down the road.
An Optimized Sales Pipeline
We saved one of the most important reasons for utilizing a sales forecast for last.
A good forecast will not only give you a glimpse into the future, but it can help you in the here and now too. There’s nowhere this is more evident than in your sales pipeline.
If your forecast looks rosy and you know which products and services are poised to have big years, you can make sure your team is finding and funneling those opportunities in your pipeline. You may even find that this knowledge allows you to retool your pipeline for maximum efficiency.
This goes back to the Pareto Principle (also known as the 80/20 rule). You want to spend 80% of your energy on the top 20% of things guaranteed to bring you biggest return on investment. A forecast will help you spot those opportunities and allow you to shift your sales and marketing in that direction to take full advantage.
So, as you can see, sales forecasting is vitally important for the future of your business. It’s not just about taking a stab at what revenue might be – it’s building a roadmap to future success that has a trickle down effect into almost every aspect of your operation.
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The Sales Forecasting Process
By this point, you’ve hopefully come to realize how valuable sales forecasting is and how it can bring value to your company.
If you’re new to forecasting, the process can seem pretty daunting – but fear not, because we’re here to share six steps that will get you from ground zero to full-fledged forecast in no time.
Ready to dive in? Then let’s begin!
1 Define Your Market Segment
We start with the most obvious thing – the market segment. You probably already know this – you know what your market is, where you fit in, and who your competitors are already, right? Of course you do.
However, there’s more to unpack here to get started. Let’s talk about those because knowing these things will be vital for your success.
- Market Growth
What’s your market’s growth look like? Are you in an established market where trends are clear and well-defined? Are you in a new market where everyone’s vying for space and volatility is common? Knowing matters – if you’re in a volatile market, you need to factor that potential volatility into your forecast. If you’re in a stable market, it’s easier to predict the trend as far as moving forward.
Figure out where you are to find success.
- Seasonal Fluctuations
Are you a company that sees big increases during the holidays? Whenever seasonality and forecasting comes up, I always think of that episode of The Simpsons where Homer invests in pumpkins and sees they’re way up in October and feels like they’re going to peak in January. That’s a great example of how not to do forecasting for seasonal fluctuations.
At any rate, this step is pretty simple – if you have business that peaks at certain times of the year or craters at others, it’s important to factor that into your forecast.
It’s also important to be aware of how your pricing compares to your competitors and the market. Are you undercutting everyone? Are you at the high end? Pricing can affect volume and sales velocity. You may have to adjust pricing – but at the very least you need to be aware of how it can impact your sales and factor that into the forecast.
- Industry Changes
The only thing constant in life is change as the old saying goes – and that’s as true for your business as anything else.
What upcoming changes are you facing? Are there new regulations coming? Will you have to embrace new technology? Is your industry changing in some major way? Change can bring increased costs – and you need to be aware of them and determine how they’ll affect your bottom line when making a sales forecast.
- Historical Data
If you’ve been tracking your sales data in detail for years, now’s the time to use that information to help you formulate your new forecast.
Whether you’re trying to forecast sales for the entire company, a product line, or a single service, any historical data you have will be invaluable in helping you determine what to expect going forward. If you’re using sales enablement software, this becomes even simpler – as the software can give you all of this data at the press of a button.
Measure that older data against all the other information you’ve accumulated so far and your sales picture should start to become clear.
2 Choosing the Right Forecast Model
There are numerous ways and methodologies you can use to create a sales forecast, but it essentially breaks down into two schools: qualitative and quantitative forecasting.
Let’s get familiar with both.
- Qualitative Forecasting
Of the two methods, qualitative forecasting is potentially easier to implement – but also feels less reliable for people who want hard data behind their predictions.
Essentially, a qualitative forecast is made by asking experts for their opinions. Polling your sales team, product experts, industry experts, and so on will provide you with insight for what to expect in a forecast.
The problem is this relies primarily on personal observation and gut feeling. That can work, if you find the right people, but it’s really not a reliable methodology. That being said, if you don’t have historical data or detailed analytics, the qualitative forecast might be your best option starting out. It’s hard to make mathematical forecasts if you don’t have numbers…
- Quantitative Forecasting
This approach is much more mathematical. If you possess historical data you can then use it to project future revenue and sales.
With the right information, you can utilize trend analysis forecasting to spot potential trends in your industry and capitalize on them.
Exponential smoothing is a commonly used technique that looks at past sales data and uses an exponential average of sales to predict your future revenue. It’s quite reliable.
And finally, there’s the simple moving average, which basically takes a timeframe and extrapolates forward from there based on sales.
The upside of quantitative forecasting is that it uses hard data to arrive at its conclusions. Math is not infallible, but given the choice between hard numbers and gut feelings, we take hard numbers.
3 Collecting and Validating Data
This step is super simple, but also the one companies screw up most often.
To make these quantitative predictions, you need data. And that data comes from your sales team.
The issue is that your sales team isn’t always great at putting information into the CRM – meaning you have inaccurate, outdated, or flat out incorrect data. Obviously, this is bad news for your forecast.
Instead, we need to collect clean, accurate data – and one way to help your sales team do this is through the use of sales enablement software. Good software will automatically transcribe sales calls into the system, track meetings and emails, and basically make sure the info in your system is as accurate as possible,
4 The Trial Forecast
Now that you’ve got everything in place and organized, it’s time to test your system.
This is really pretty simple to do if you have some old historical data. Basically you can grab that data, run it through your forecast methodology, see what you come up with, and compare it with real numbers.
If the numbers are close, great! You’re ready for the real thing.
If they’re not close, you’re missing something somewhere, so work through it again. Or try a different method.
Honestly, this is all a lot easier if you’re using software to help. The right software will have the data and can do all the heavy lifting for you – saving you time, the headache of finding potential mistakes, and giving you very detailed predictions.
At this stage, if you’re getting accurate numbers in your test run, you can then plug in some newer numbers and see how things shake out.
5 Choose and Implement
And finally, we come to the last step – and it’s the easiest step.
If you’ve tried multiple approaches, now’s the time to pick the one you feel most comfortable with and gives you the most accurate results.
And from there, it’s just a matter of implementation. Start putting in your latest data and get to forecasting. You’ll be cranking out detailed projections in no time.
Sales forecasting doesn’t have to be intimidating or a ton of work. In fact, once you’ve implemented a sales forecasting method you like, the hardest part is over – everything then becomes a game of plugging in new data and getting results.
Some companies still like to do their projections manually, but sales enablement software is the way of the future. Not only can these programs take the work out or projecting numbers and crunching data, they can give you projections that consider far more data than most humans could handle.
Whichever approach you choose, we hope you realize how important projections can be to the success of your business. Forecasting provides an incredible amount of insight and value for a little time and effort. Don’t miss out because you’re afraid it’s too complicated or difficult.
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