Everyone starts a business dreaming of success. But to succeed in business, you need much more than a dream. And we are not talking about the money that you need to invest. As you know, you need to research the market for the demand, the audiences, the competitors, etc. Then you need to pick marketing strategies that will work for your business. And you need to forecast sales.
Some people see sales forecasting as science because it is about numbers. Same as other forecasts, it is not exact, so others consider it more as an art. Whether it’s one, the other, or both, at the same time, it is an essential part of business management.
The sales forecast isn’t related exclusively to the prediction of future sales anymore. In today’s world, you need to predict future revenue, find ways to avoid risk and grab the opportunities at the best moment. Although it isn’t a crystal ball, a sales forecast is incredibly helpful in business if you know how to do it. In this post, we will explain the sales forecasting process. Let’s dive in.
What Is Sales Forecast
The sales forecast definition says that it is a process in which a company assesses its future revenue for a certain period. Usually, people make forecasts for three or six months or an entire year. It is generally based on past information, sales pipeline, and industry trends. Mostly, it is a method designed to help you better manage the team, money, and everything else in the company. Every process in the company depends on forecasting. Without a clear idea of your future sales, you can’t manage the inventory, plan the cash flow, or even your company’s growth. You need to do regular sales forecasting to be able to make informed decisions in the future.
For example, if the forecast shows that the sales will increase by 30% in the coming period, you may want to get a bigger space and hire more people to meet your audience’s demands. Similarly, if after the forecast you realize that the sales drop, you may take steps in advance to protect your company from big losses.
Now, it is safe to assume that sales projection gets simpler when you have plenty of past information. But it doesn’t mean that new companies cannot benefit from it. However, forecasting for a relatively new business requires more time.
Source: Salesforce
The Importance of Sales Forecasting
While explaining what sales projection is, we mentioned why it is useful. It is pretty clear why experts say that forecast is the foundation of any successful business. But let’s see more detailed benefits of this process.
- When creating a business, we are not only focused on immediate success. Of course, the sooner we start to see the fruits of our labor, the better. But it is where our story begins. The point is that the tree of success keeps growing and bears more and more fruit. So when making a sales forecast, it is important to answer some of these questions.
- What do you plan to achieve in the next few months? A year? How do you protect your business in five or ten years?
- How many customers would you like to see in the future?
- How much profit do you intend to gain from an individual customer?
A properly conducted sales forecast will answer these questions. But it will do more than that. You see, as an entrepreneur, you are not trying to attract only customers or clients but also potential investors. A solid sales forecast gives them an insight into your performance and performance milestones. The investors are interested to see that you have identified goals and the path your company will take in the future.
Another way sales forecast can help you in your business endeavors is related to money. You can assess how much you can spend based on this forecast. For example, it can help you realize how much you need to invest in marketing strategies and how much in administration and performance.
Different Factors May Affect the Sales Forecast
Source: propellercrm.com
Forecasting wouldn’t be just much easier, but also more accurate if everything depended only on your company. But unfortunately, many external things affect the sales forecast. Maybe the most important is the general economy, of course. In the post-COVID 19 worlds, peoples’ purchasing power decreased. Therefore, it is logical to expect that they will not buy as much as before.
Another factor is related to competition. You need to research whether new companies that offer the same products or services enter the market and their chance to take over some of your customers. Besides that, new legislation may also impact your sales. In such cases, you may have to change your approach or find a solution to help potential clients meet the new requirements.
What Do You Need to Include in Your Forecast?
The first thing you need to think of is the reason for forecasting. Creating it for the entire company will lead to a pretty generic forecast, which won’t be very useful. At the same time, it also doesn’t make sense to make a forecast for every single product or service.
Here is a potential solution. Say that you opened a restaurant, and it’s running for a couple of months. By this time, you have more or less an idea about the time of the day your restaurant has the most visitors. Therefore, you should include breakfast, lunch, and dinner in your forecast. You can also include a cocktail hour, happy hour, etc. On average, you should make a forecast for up to 10 categories. More than that will require much more work, and it won’t give you adequate results. But there is no need to stress too much about it. Even if you can’t think of ten categories, you can start with what you have and add them later.
How to Forecast Sales
- You need to document the sales process. Without information that describes the actions you took to make a sale, you won’t be able to predict how future sales would go.
- Decide on your goals and quotas. Knowing what you want to achieve is the primary step. Even if the forecast isn’t harmonized with your goals, you need to set them clearly to know what you are aiming for.
- Make sure that you can easily measure sales metrics such as the time it takes to close the deal, the average price of the deal, the onboarding duration, and average renewal and conversion rates.
- Make sure that you have a clear idea of your current pipeline and customer relationship management.
Sales Forecasting Methods You Can Use
Now you know what sales forecasting is and how to do it. Though there are plenty of methods at your disposal, here we will discuss a few that we see as most efficient. Let’s have a look.
Opportunity Stage Forecasting
When you opt for this method, you first need to choose the reporting period. Think about whether you will benefit from monthly, quarterly, half-yearly, or annual forecasts. You should rely on your sales team quota and the length of the sale cycle. Once you do that, you need to multiply the value of each deal with the chances of closing. After that, you add up all the deals to have a full forecast.
Relying on Sales Representatives Opinions
This method is pretty self-explanatory. People that select this method ask the reps about the estimated value of the deal after it gets closed. Though common, this method is not the most effective because the reps often overestimate the forecast.
Relying on the Past Information
We mentioned this method earlier in the text. You simply use the data from previous sales to assess the future situation. Of course, to do this, the general conditions must be the same. If the conditions haven’t changed over the past two years, you can notice the growth or decline of your business more easily.
Pipeline Forecast
Pipeline forecasting is a pretty accurate method but relies on high-quality data. You need to analyze every opportunity in the pipeline. There are various factors that you need to include in the analysis. Some of them are age, type & stage of the deal. Although accurate, it is a sophisticated method that requires skills and knowledge to be done properly. Ideally, you should use an analytics tool to get the maximum from this method.
Bottom Line
As you can see, sales forecasting is an educated guess about future sales. It relies either on the previous data or common sense to project the sales for a certain period. In general, you make a forecast for a month, three months, six months, or a year. It is essential for every modern business, and it is pretty simple to do it. You can hire professionals to do it, but in general, you as a business owner are the most qualified for it as no one knows your customers and your market better than you.
Image source: pixabay.com
