Money making is the heart and soul of every forward-thing company in this day and age. Irrespective of the driving force or problems your business seeks to tackle, it is essential to continuously make money to grow and stay ahead of your competitors.
Sales forecasting provides a clear pathway for business entrepreneurs and top sales and marketing directors to make smarter business decisions and plans when preparing for year-over-year growth plans, such as their cash flow, predicting customer demands, managing inventory, goal setting, and strategic planning.
Although existing reports have shown that most salespeople spend 2.5 hours on sales prospecting every week, they are still known to be less than 75% accurate. This indicates that there is still much work to be done in sales forecasting.
Since sales is the lifeline of any company, working with accurate sales forecasts keeps your business healthy, the sales team engaged and prepared, and supports business leaders happy. This guide has reviewed what sales forecasting is, the effective forecasting methods, and tools to get you started.
Table of Contents
- What is Sales Forecasting?
- Why is Sales Forecasting Important?
- Bottom-Up vs. Top-Down Sales Forecasting
- Who Is Responsible for Forecasting Sales?
- Benefits of Sales Forecasting
- 5 Elements of Effective Sales Forecasting
- Factors Influencing Sales Forecasting
- Sales Forecasting Methods
- How to Forecast Sales
- Common Sales Forecasting Challenges
- Sales Forecasting Software & Tools
What is Sales Forecasting?
Sales forecasting refers to estimating a company’s sales revenue over a specific time frame, such as quarterly or yearly. This means you predict how much your company will sell in the future.
Sales professionals conduct sales forecasting to predict their future sales revenue within a specific period and help them make more informed decisions in budgeting, spending, and sales strategy to ensure that proper lead flow and revenue levels are maintained.
An accurate sales forecast can help your business function smoothly and eliminate all uncertainties affecting overall sales. However, you need to forecast sales precisely without missing out on vital information or data such as recruitment, marketing, inventory management, and compensation.
Why is Sales Forecasting Important?
Sales forecasting is an integral aspect of the sales operations of any business. It allows sales representatives, marketers, and business leaders to understand what future sales might look like.
If done well, sales forecasting can help you spot potential issues early, giving you enough time to avoid or mitigate the problem (s). The primary goal of sales forecasting is to provide businesses with important information that they can use to allocate resources, hire new staff, increase quotas, manage costs, and make intentional, impactful business decisions.
Also, in situations where the team is underperforming, or a product is not making as many sales as it should, you can analyze past sales data and other business information, as well as conduct competitor analysis to determine the cause of the problem and address this swiftly can significantly impact business growth and success.
Bottom-Up vs. Top-Down Sales Forecasting
Bottom-up forecasting and top-down forecasting are the two common ways to forecast sales.
- Bottom-up forecasting: This is used to predict a company’s future performance by assessing low-level data and working up to revenue.
- Top-down forecasting: Conversely, it gauges future performance by analyzing high-level data and working down to revenue.
Both forecasting types have advantages and disadvantages and use cases depending on the type of business you run.
Who Is Responsible for Forecasting Sales?
Every business has its own sales forecast owners, which include teams and stakeholders who are mostly responsible for forecasting sales. However, the most important professionals charged with this responsibility include:
1. Sales leaders
Sales leaders are mostly responsible for predicting the number that their team will deliver. Their forecast varies depending on the sales leaders’ rank and level of experience. These individuals manage the sales team and determine what goes on in the team.
2. Product leaders
Product leaders are individuals responsible for defining what product will be available to sell and when. They oversee the entire operations of the product team and can provide better insights into the current and future performance of the product.
3. Sales Reps
Sales reps are the prominent individuals in charge of making sales happen in an organization. They develop their data based on their sales techniques and interactions with their clients and report those numbers to their managers.
The sales managers now compare the numbers against the current forecast and use them to establish future sales, which significantly impacts overall sales.
Benefits of Sales Forecasting
Sales forecasting goes beyond just predicting sales, it’s more about having essential sales information to help sales teams and leaders make the right decisions to move your business forward.
Here are the key benefits of conducting a sales forecast
1. Set better business goals:
Having the correct information at your disposal can help sales managers and leaders to set realistic business goals. It forms the basis of your entire company’s strategy in a year and for the future as well as directing your sales team.
Also, since sales teams need to set sales targets to meet their sales goals, they rely on the information from sales data to achieve this.
2. Make strategic decisions
Data is power. It is the engine that runs many businesses and projects nowadays.
Accurate forecast helps business and sales professionals to make informed decisions about every aspect of their business operations, such as recruitment, inventory management, product development, marketing, and customer relationship.
3. Identify potential issues
Sales forecasting allows sales managers and reps to spot potential issues in sales, overall business, their team, and the target market to give you ample time to avoid or mitigate them.
For example, suppose your sales team is not meeting set targets. In that case, you can identify the cause and develop the necessary strategies and approaches to improve their performance.
4. Make better prospecting
Using sales forecasting tools such as CRM software to forecast sales, you can determine quickly how much prospecting and outreach you need to keep the sales pipeline in shape.
Since prospecting with adequate sales data helps you stay productive by reducing the time you waste on poor prospects, sales forecasting gets you closer to your goals faster.
5. Improve the hiring process
Sales forecasting can be very significant to recruitment and team management.
For example, if your sales forecast reveals a product/service gap in the market that your company can leverage if this is not something you specialize in or focus on, you might need to hire more skilled professionals in that area or hire more people if you have lesser staff to handle the project.
6. Resource planning
Many companies use sales forecasts to plan and allocate resources across different functional departments and teams. Keep in mind that this works differently for these teams.
For example, the finance team will likely use sales forecasts to set operating budgets and project cash flows. In contrast, the production team uses sales forecasts to develop production schedules and quantity requirements.
5 Elements of Effective Sales Forecasting
Sales reps must answer five key questions to build an effective sales forecast. These includes:
1. Who
Many sales managers and leaders make their sales forecasts based on who their prospects are. So the sales forecast accuracy will depend on whether prospects are the decision-makers or influencers.
2. What
Sales forecasts should be based on what solutions you plan to sell. Your products should be based on problems your prospects have and should continuously be developed to serve their needs.
3. Where
For better sales forecasting accuracy, you need to determine where buying decisions are made and where the actual products will be used.
4. Why
When creating a sales forecast, identify why an existing customer or prospect will most likely consider your competitor’s products or services. Identify all the gaps or events influencing them to think this way and try to find answers in your forecast.
5. How
How do your target customers make their purchase decisions? This might be an excellent time to consider if this is not already in your plans.
Factors Influencing Sales Forecasting
Here are the internal and external factors that can influence your sales forecast.
Internal Factors
Internal factors are the events or activities that happen within an organization and can be changed according to increased sales and forecasts. These factors include:
1. Policy changes
Changes in internal policies that govern your sales reps and their practice can significantly affect your sales forecast. For example, making a policy where sales discounts end after the 15th of every month will cause a spike in close rate in the first two weeks which can decrease sales after this period.
2. Recruitments and lay-offs
Sales reps are the engine that keeps your company’s sales running. If a good number of sales reps leave your company either by resignation or termination, this will significantly decrease your revenue as fewer people are working for you. However, if you see a rise in the number of recruits in your company, it is expected to help you grow.
3. Market or territory shift
If you are entering a new marketing territory, it can take time for your sales reps to get familiar with a new territory and build their pipeline. So expect that sales go a bit slower in this period.
4. Inventory Shortage
A lack of products or production materials can lower an organization’s sales forecast than expected.
External Factors
External factors are events or activities that occur outside the control of an organization.
5. Market changes
Changes in your customer’s demands, needs, or new trends that might interest them must be accounted for in the sales forecasts.
6. Economic conditions
Buyers are more likely to invest in their businesses when the economy is strong. When it’s weak, the sales cycle usually takes longer, and there’s greater scrutiny for every purchase.
7. Seasonal changes
Due to different events and activities in different seasons and the weather, moods, etc., your customers might likely buy more at certain times of the year than others. For example, winter clothes will sell more during winter than in summer.
8. Competitive Changes
It’s known that whatever your competitors do will impact your wins. For example, if your competitor slashes their price, you’ll need to quickly develop a sales strategy to counter this by offering aggressive discounts or creating add-ons. On the other hand, if your competitor goes out of business, you’ll likely see an increase/
9. Product Changes
Developing new products, creating a new feature, or introducing a new pricing model can impact your sales. These changes can shorten the sales cycle length, increase their average deal size and win more business.
10. Legislative Changes
New laws and mandates can either help or hurt your business by creating demand for your product or making prospects reluctant to buy anything new.
Sales Forecasting Methods
There are various ways to forecast sales for your business. The sales forecasting method you choose depends on your business needs. Keep in mind that on some days, some companies use two or more sales forecasting techniques simultaneously to get more accurate sales forecasts.
Here are the most common ways to forecast sales, with examples to illustrate forecasting methods better.
1. Historical Forecasting
The historical forecasting method is quite popular and makes a good option where organizations record historical data for a particular period. In this method, sales reps predict how much you are likely to sell in a month, quarter, or year by looking at the matching period and assuming you will be equal to or greater than those results.
These methods have been reported to have two issues. First, this method doesn’t take seasonality into account. Then it assumes that buyer demand is constant, and if anything outside the ordinary were to happen, the sales forecasting model wouldn’t hold up.
A key takeaway is that historical demand should only be used as a benchmark rather than the foundation of your sales forecast.
Pros
- It is quick and easy
- It relies on proven historical data
Cons
- It doesn’t consider buyer demand.
- It doesn’t consider market changes or seasonality.
How to calculate?
Here’s an example:
If you made $50,000 in monthly recurring revenue (MRR) in August. Using historical data, you’d assume you would sell $50,000 or more in August. However, if you imagine a 10% increase in sales, that would be $55,000
2. Length of Sales Cycle Forecasting
The sales cycle forecasting method’s length helps predict the probability of a deal going through using the age of individual opportunities to indicate when they are likely to close the deal.
Instead of using the rep’s feedback, this method relies on objective data to give a level of predictability into the mean length of the sales cycle, and a specific number of leads can provide you with the predicted sales figures you are likely to make in one month or few months down the line.
Depending on your sales cycle, you must carefully track how and when prospects enter your salespeople’s pipelines to get more accurate results.
Pros
- It is easy to integrate lead sources to forecast those opportunities better.
- Its predicted calculations are objective
Cons
- It requires that you carefully track data, as any error can change your prediction.
- The sales cycle will likely differ based on who you are selling to. For example, selling to enterprises will take longer than small and medium-sized businesses.
How to calculate?
Assuming your average sales cycle lasts six months, and your sales rep has been working on an account for three months, this method will predict that they are 50% likely to win the deal.
3. Opportunity Stage Forecasting
As the name implies, the opportunity stage sales forecasting method breaks down the sales process or pipeline into different stages. Therefore, you can predict your likelihood of closing a deal by breaking it down into steps.
Most businesses break down their sales pipeline into stages like prospecting, qualified demo, quotations or invoices, closing, etc. When a prospect reaches the bottom of the stage, it signifies a better chance of closing the deal.
Like historical methods, an opportunity stage sales forecast can rely too heavily on historical data. Changing your products, sales process, messaging, or other variables can affect how you close your deal as against the past.
Pros
- Its calculation is simple and highly objective
- It is a lot easier to establish a sales forecast
Cons
- It doesn’t consider the size or age of each prospect
- Inaccurate data can lead to inaccurate forecasts.
How to calculate?
To calculate using this method, start by picking a reporting period, usually a month, quarter, or year, depending on your sales quota and sales cycle length; then, you multiply each deal’s potential value by the probability it will close. After doing this for each contract in the pipeline, add up the total to get your overall sales forecast.
For example:
Let’s assume you established the following percentages for a deal in your pipeline:
First call – 5%
Qualified lead – 15%
Product Demo – 40%
Product trial – 70%
Final call – 85%
Closed – 100%
Based on this forecasting model, a $2000 deal at the product is 40% likely to close, leaving the estimated amount to be $800.
4. Intuitive Forecasting Method
This forecasting method predicts future sales using a good sense of intuition. Salespeople in this situation apply their experience and intuition to estimate the probability or likelihood of closing a deal.
Unlike other methods that use historical data, intuitive processes consider the opinions of the people closest to prospects, which are your salespeople. To assess this situation and see whether a prospect is likely to close a deal, as she says, the sales manager will need to listen to the sales calls, shadow the meeting and or read their conversations.
This method is best for use in the early stages of a company or product when there’s little to no historical data.
Pros
- It doesn’t require historical data
- It relies heavily on the opinion of the sales teams, who are closest to the prospects.
Cons
- This method can’t be replicated
- Its calculations are subjective and depend on the opinions of the sales reps.
How to calculate?
This method does not require any calculation; the sales reps will decide what amount they need to bring in a specific period. For example, Lynn will bring in $xxx in a number of days.
5. Pipeline Forecasting Method
Pipeline forecasting is the process of forecasting from a business’s sales pipeline and relies on your ability to provide high-quality data. If you use inaccurate or imperfect data, you will create sales forecasts that provide zero value.
It looks closely at every opportunity in the pipeline and analyzes it based on factors such as age, type of the deal, and stage of the agreement. Remember that this forecasting method can take some time to handle if you don’t have a program.
It reviews each opportunity available in your pipeline and calculates its chances of closing based on the company’s unique variables, such as the sales rep’s win rate and opportunity value.
Pros
- It takes every unique factor of each opportunity into account
- Its data reliance makes it accurate.
Cons
- It mostly requires a sales forecasting tool
- It is data-reliant and can be easily skewed.
How to calculate?
According to this method, if a sales team closes a deal worth over $5000 within 60 days, it signifies a high likelihood of closing deals in your team’s pipeline. You can use this data to figure out your monthly or quarterly forecast.
6. Multivariable Analysis Forecasting Method
Multivariable analysis forecasting is the most sophisticated method available for sales teams. This method uses predictive analytics of multiple variables and incorporates several factors such as the individual performance of sales representatives, the average length of the sales cycle, and types of opportunities
Since it requires an advanced analytics solution and tends to be the most accurate, meaning it’s not always feasible if you have a small budget. Also, if your sales reps are not dedicated to tracking their deal progress and activities, it won’t yield good results even when you use the most sophisticated software.
Pros
- It is very reliant on data
- It has a higher accuracy rate
Cons
- It requires sales reps to track and clean data consistently
- It requires analytics solutions or forecasting tools, which can make it expensive due to its over-reliance on data.
7. Lead Driven Forecasting
Lead-driven forecasting is where sales reps analyze each lead source, assign a value based on the previous leads, and create a forecast based on the source value.
Using three main types of metrics, such as average sales price leads per month for the earlier period, and lead-to-customer conversion rate, sales reps can assign each lead source a value that can help you understand how possible it is for each lead to become a paying client.
Keep in mind that market trends can affect how the forecasting turns out. To minimize the variation in the results by staying up-to-date with the latest changes and considering them while forecasting.
Pros
- The lead value of each source makes it possible to get an accurate sales forecast
Cons
- The availability of several factors in this forecasting method can increase the chances of variance in the results.
8. Test Market Analysis Forecasting
This method is regarded as one of the most popular sales forecasting methods considering how it records customer data to check the acceptance of new products. It is commonly used for large businesses at the time of their product launch to check the product’s approval or reviews among their target audience.
Businesses using this method select their target audience and collect data to estimate the expected sales revenue. This forecasting method helps companies gain better insights into how the products will perform after launch.
You have better chances of getting more accuracy if you choose the right market to penetrate your audience.
Pros
- It makes it easy to learn the market’s response and fix the problems before product launch.
- Targeting the right market can increase the sales forecast accuracy.
Cons
- It can be expensive.
- The sales forecast has many variations depending on the market.
How to Forecast Sales
Are you looking to create better sales forecasts? Here’s a breakdown of the steps to create an accurate sales forecast for your business.
1. Create a sales process for your team
Your likelihood of making sales will be very low if your sales teams are not consistently using the same stages and steps. For this reason, you must create a structured sales process to define and manage your opportunities, leads, and prospects and close deals.
2. Set individual and team quotas
Sales teams work with sales targets and quotas to define their goals and meet these goals for business growth. Hence, sales managers and reps should work on setting individual and team quotas that will serve as a financial baseline goal to compare alongside your sales forecasting.
3. Choose a sales forecasting method
Now that you created a sales process and set a quota for individual sales reps and teams, the next vital step is to choose a sales forecasting method. We have identified eight sales forecasting methods above with all their pros and cons.
The method you eventually choose will depend on a few important factors, like the age of your business, the size of your sales team and pipelines, and the quality of your sales data and data tracking habits.
4. Invest in a customer relationship management (CRM) tool
Now that you have chosen a sales forecasting method, it’s time to invest in a robust customer relationship management (CRM) tool. Tools like Sloovi can help your sales team track lead prospecting and communication to give you a better sales forecast.
5. Use data from other departments
Although past sales data are essential for creating accurate sales forecasts, much other information in your business can provide valuable insights—working with data from marketing, product, finance, and HR departments.
Understanding your marketing goals and plans, product development strategy and analysis, the financial health of your company, and employee resources can give you better insights that will make your sales forecast more accurate.
6. Review past sales data
How was your sales team’s performance this year? What was your sales team’s performance in the previous years? Are there areas in your sales that are not performing as well as others? Were the goals set in the earlier years unrealistic?
When reviewing your past sales data, asking these and many more questions would be best. Understanding your goals, target market, product, and reasons for an increase or drop in sales will help you.
7. Keep your sales team informed and accountable
There are many processes and steps involved in sales forecasting, from creating a sales process to setting a sales quota, investing in good CRM software, and choosing a sales forecasting method, among many others. For higher chances of success, ensure that you keep your sales reps and team informed about all these choices and communicate all changes and decisions often.
Also, considering that most of your decisions still fall back on the sales team to make it work, you need to choose options that work best for your team. After all, they are the closest and most familiar with your prospects and the overall sales performance of your company.
Common Sales Forecasting Challenges
Here are the expected sales forecasting challenges that can affect your sales.
1. Overestimating the forecasts
Because of the sales team’s operations (with sales performance leaderboards that broadcast the success and failures of each sales rep), many sales reps are often tempted to overestimate their sales forecast. This subjective data can make it hard for the representatives to predict their future performance accurately.
2. Unpredictable markets
The uncertainty of the sales market can significantly impact your sales forecasts. Unforeseen economic crises, extreme weather conditions, civil unrest, natural disasters, and global pandemics (like COVID-19) can affect your present and future sales projections.
3. Competitive changes
Whatever your competitor does can affect your sales forecast. If your competitor suddenly lashes their product prices, this can drive clients to them during this period and make you lose your potential clients. Conversely, you will likely get more clients if a competitor goes out of business.
4. Recruitment changes
Firing or hiring new sales reps in your team can significantly affect your sales forecast. For example, if you suddenly lose a substantial number of your sales reps after building a sales process that works best with them and setting a sales quota achievable by them, you’d have to go over the steps all over to fit the sales needs of your new hires.
Sales Forecasting Software & Tools
Here are the top sales forecasting software and tool to use in 2023:
1. CRM Tools
CRM software is mainly used to manage customer relationships and help sales reps build better relationships with their prospects. CRM software like Sloovi, HubSpot, Salesforce, and Outreach will help sales teams achieve all their sales quotas and enable sales managers to manage their team (and resources) better.
2. Sales Analytics Tools
You can use sales analytics tools to gain better insights into the sales pipeline and employee performance. It keeps you abreast of any loopholes in the sales forecast. Examples of these tools are: HubSpot Sales Hub, Power BI, Zoho Analytics
3. Excel or Google Sheets
Many small businesses use excel sheets to build their sales forecasts as it is flexible, affordable, and easy to use. However, working with an excel sheet won’t be a good option for larger organizations.
4. Lead scoring tools
A lead scoring tool is an excellent prospecting tool that can help you identify promising prospects from a list of prospects. This tool can help you determine how interested a prospect is in your product or service and help you decide who’s worth pursuing and who’s not. These tools include Salesmate, Active Campaign, HubSpot, Pipedrive, etc.
5. Project management tools
Project management tools help you get the job done. With many tasks that need to be completed, this tool can help you achieve your project and reduce manual tracking – making it easy to track all your tasks. These tools include Trello, Asana, Kissflow project, Wrike, Momday.com, etc.
6. Accounting Software
As you know by now, your sales forecast accuracy is essential to your business success. Unfortunately, if your data gets altered or you miscalculate any figures, you are less likely to get the correct projections. However, using accounting software like Freshbooks, NetSuite ERP, Gusto, Paychex, etc. You can create more accurate sales forecasts.
Sales Forecasting Methods: The Conclusion
Sales forecasting provides sales representatives, managers, and business leaders critical insights about future sales and essential information that can help in resource allocation, recruitment, cost management, and other impactful business decisions.
Using the proper sales forecasting methods can improve your forecasting process and create impactful data to help you prepare for the future and stay ahead of your competitor.
Although many factors, like economic changes and changes in market demand, among others, can affect sales forecasting, we have identified the proper steps and tools to use to increase the accuracy of your sales forecasts.