It’s hard enough to forecast future sales in “normal” times. During a recession caused by a pandemic with no end in sight? Well, that’s a little harder. But, thankfully, it’s not impossible — and all the same basic sales forecasting principles and best practices still apply.
What is Sales Forecasting?
At the most basic level, a sales forecast is an estimate of how much revenue a sales team will close in a given time period.
Your sales forecast is based on a lot of things — including historical data, industry and seasonal trends, sales team size and performance.
Keep in mind: no one has a crystal ball. No matter how much thought and data go into a sales forecast, you can’t predict the future — so it’s always best to think of your sales forecast as more of a plan or roadmap.
At the same time, your forecast isn’t about setting aspirational goals or targets for your team that they may or may not hit. The key word is “realistic”: based on the data and information available to you, what can you reasonably expect to happen?
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Why Are Sales Forecasts Important?
Sales forecasts are important not only for sales reps and managers, but for the entire company, as well as other people who have an interest in the organization’s performance and wellbeing, like board members or shareholders.
By forecasting future sales, a business is able to make strategic, informed decisions that set everyone up for success. Even a simple sales forecast can have meaningful implications for:
- Budget: Having an accurate picture of what future sales look like can help with budget preparation and allocation for every department, from sales and marketing to customer success and product development.
- Staffing: Sales leaders leverage sales forecasting as they’re making decisions around increasing or decreasing headcount.
- Inventory planning: Depending on your industry, inventory planning has a direct impact on your company’s profitability and requires accurate sales forecasting.
- Territory, quota and compensation planning: A forecast helps managers know how to divvy up sales territories, set quotas and goals, and plan compensation and incentives.
- Trust and credibility: Accurate sales forecasts can help to establish trust and transparency across the organization and its stakeholders.
What Are the Steps Involved in Sales Forecasting?
There are many different sales forecasting methods — but the best way to forecast future sales is to ensure you have clean data and from a variety of sources and inputs.
Pull historical data
Historical data is a critical input as you’re building a sales forecast. Looking to the past can help you identify seasonal trends and set expectations.
Be sure that you’re looking beyond a single period; for example, if you have the data available to you, compare year-over-year performance for multiple years. This will help you to pinpoint recurring or seasonal trends versus one-off events — like a major customer churning or major organizational change — that are less likely to repeat and impact sales.
Account for upcoming changes
As you look ahead, what changes is your team planning or anticipating? These may include:
New pricing or packaging roll-outs
Product or service offering changes
Expansion into new markets, industries or demographics
Investment in new marketing channels
Increase or reduction in headcount
Of course, every change won’t have an immediate impact on your business. Once you’ve identified any changes on the horizon, evaluate each one and determine if, how and when you can expect to see them reflected in your bottom line.
Consider external factors
Whereas you can control or anticipate (to some extent) the internal changes that may be coming your way, you can’t always account for what’s happening beyond your business.
With that being said, it’s important to stay plugged into what’s happening in your sector, industry, end markets, and what’s generally happening in the economy and the world.
- Competitive landscape: Are new competitors entering (or leaving) the market that could impact your ability to earn new business?
- Industry trends: What are the growth drivers and risk factors that influence your sales, and how are they changing? Is new technology coming into play?
- End markets: What’s happening in the markets that you’re typically selling into? Are they healthy and growing? Are they consolidating? Are their organizational structures changing, creating a new or different audience that you may be targeting? How does this change needs and pain points?
- Macroeconomic conditions: Are we heading into a recession? Is it an election year? What does unemployment look like? You don’t need to do a full-on, worldwide economic analysis, but it’s worth knowing what’s happening at a high level because it can ultimately have an impact on your target markets (and their budgets).
Choose your time frame
The kind of sales forecast you ultimately create depends on your organization’s needs. Some businesses require weekly sales forecasts or even daily sales forecasts — but more commonly, you’ll be looking at monthly, quarterly or annual forecasts.
Pick a methodology
Certain sales forecasting methods rely more heavily on certain types of inputs or data. One of the most popular methodologies is Opportunity Stage Forecasting.
This methodology focuses on where a deal is in the sales cycle: generally, the further along a deal is, the more likely it is to close. If you know the sales forecasting period you’re reporting on, you’ll simply multiply the deal’s value by the percent probability your reps will be able to close it. Do this for every deal in your pipeline, and then add it up. This requires a well-defined sales process, a deep understanding of each stage in your sales funnel, as well as clean customer and performance data.
Other methodologies include:
Pipeline-Based Sales Forecasting: This method looks at every open opportunity in your sales pipeline and calculates its individual chance to close based on a number of variables — like the individual rep’s close rate, how long the deal has been open, etc. While this can be very accurate, it can also be extremely time-consuming
Historical Sales Forecasting: This method involves looking at the previous time period and making predictions based off of previous sales. It’s quick, but may not take into account important variables like seasonality or company changes.
- Qualitative Sales Forecasting: This method relies primarily on industry knowledge and market conditions; it’s typically used when historical data isn’t available — i.e., for new companies, products or markets.
Sales Forecasting Tools
Some sales teams invest in sales forecasting software, which can help to ensure your sales forecasts are more accurate and take into account a wide range of relevant variables.
However, for many sales teams, a simple sales forecast in an Excel spreadsheet or Google Sheet — with built-in formulas — is enough.
What matters most is that the data you’re inputting is clean and accurate. To get a good picture of future sales, you’ll likely rely heavily on information that’s in your CRM, as well as data about your reps’ performance that you can find in a sales performance management platform.
Learn how Ambition makes it easier to track goals and KPIs, so you can get a clear picture of sales performance and pipeline. Get a demo today!