How to create a sales forecast

Reading the future of your business is impossible. But forecasting what it could potentially look like is essential. Sales forecasting is a crucial part of predicting your team’s sales activity to identify gaps in performance, control cash flow and to understand how you can best allocate your resources.

We get it’s daunting crunching the numbers, but you don’t need a degree in accounting to make a sales forecast. In this guide, we walk you through the various options and give you the pros and cons of each method. By the end, you will have a variety of tools to create a clear sense of direction for your sales strategy and understand where your account books are taking you.

How does sales forecasting work?

Forget instinct, intuition, guestimates and gut feelings. Sales forecasting is completely data-led. In a nutshell, you use your current information and other macro conditions that could affect your sales to estimate how much you’ll sell over a certain period of time (monthly, quarterly, semiannual or annual). Let’s look at this more in depth.

Overview of the process and its purpose

Sales hinge on several factors. These need to be considered in your sales forecast. These include your industry’s recent growth or contract rates, the economy in general, the competition’s sales of similar items, new product or service launches, fluctuations in operating costs, and other regulations restricting your usual operation. For instance, when COVID-19 hit, companies forecast a reduction in sales as consumers spent less.

When you consider these factors, you can then identify both internal and external sales issues and resolve them with enough time to reach your sales goals. Ideally, you’ll be able to create a sales forecast that gives you all the right data to make robust business decisions for hiring, budgeting, prospecting, and other activities that are impacted by your revenue. For instance, if your sales forecast predicts a 26% increase in opportunities, you’ll likely want to recruit some more people to keep up with demand.

Although no sales forecast will ever be perfect – after all, who could have predicted the pandemic or supply chain shocks – it provides an invaluable framework. . to set goals, identify gaps in performance, manage cash flow and serve as a motivator for your sales and marketing teams.

What are the different types of sales forecast (and when do you use them?)

There’s no one-size-fits-all way of creating a sales forecast. The model you choose will depend on your goals and your business. Here are the different ways of forecasting your sales:

• Opportunity stage forecasting → this one is all about your sales funnel. It looks at what stage in the funnel a deal is at, so as you can probably guess, the lower down the funnel a deal is, the more likely it is to transform into a sale. Once you’ve picked a reporting period – quarterly, yearly, etc – you multiply each deal’s potential value by the probability it will close. You repeat this process for all your active leads and then add them all up to get your total sales forecast. However, keep in mind this doesn’t account for the age of an opportunity. For instance, if you’ve been working with a prospective client for months, it’s more likely the deal will close even if it’s not as far down the funnel.
• Historical forecasting → this is a pretty simple one that businesses with a couple of years of maturity can use, especially if your company is affected by seasonality. You start by taking your recent or seasonal data from the equivalent period in the previous year or period, and assume your results will be equal to or greater than those results. Obviously, this model will assume that buyer demand will be constant so it’s not a highly reliable model if the market is fluctuating. This model should be considered a benchmark rather than a robust prediction.
• Length-of-cycle forecasting → this pertains to the period of time over which your sales funnel progresses. In other words, you look at the age of individual opportunities to get an idea of when they’re likely to close. This way, you can have a rough estimate of how many sales you’ll be making over your chosen period of analysis. To get the most accurate length-of-cycle forecasting, you’ll want to rely on robust data rather than on the feedback of your sales representatives, as they’re likely to underestimate the speed at which deals can close. This is where the right CRM system can provide you with invaluable information. .
• Multivariable analysis forecasting methods → this one is the most sophisticated sales forecasting method. It uses predictive analysis and incorporates several of the factors mentioned like average sales cycles length, probability of closing based on opportunity type and individual rep performance. Because it takes so many variables into account, it tends to be the most accurate. However, it requires an advanced analytics solution meaning it’s not always feasible if you have a small budget.

What are the different kinds of sales data and metrics?

Sales terminology is a seemingly endless stream of jargon and acronyms. We’ve listed and explained some of the most relevant here:

• Total revenue: gross sales or turnover. This refers to the entire income generated from all operational and sales activities across all products and services that you offer. It is the quantity of products and services sold x price of the product or service. It basically measures your ability to generate income, so ideally, you want to have the highest total revenue possible.
• Revenue by product or service: this is the income generated per product or service. This is key for a nuanced understanding of which offerings are pulling the heavy weight of your total revenue. The equation is simple – you just have to times the quantity of each product service sold x price.
• Market penetration: this is your total customer base compared with the total market potential. Basically, you’re trying to measure how well you’re doing at reaching potential customers and turning them into actual clients. The higher the market penetration rate, the greater the opportunity for growth and revenue. To calculate this you need (number of customers/total target market size) all multiplied by 100.
• Year-on-Year growth: the name sort of says it all. You’re basically comparing the revenue generated from year to year, and ideally, you want that to keep going up. This is a good metric to track to get a feel of your company’s overall performance and success. You can calculate this as follows: (Current year metric – previous year metric) / previous year metric all multiplied by 100.
• Average Customer Lifetime Value (CLV): this measures the total revenue a business can anticipate from generating a single customer over the course of its relationship with your company. You can therefore track how long a customer sticks around, which is really useful specially for businesses that offer subscription based products or services.
• Average length of sales cycle: this refers to the time it takes for a potential customer to go through all the stages of the sales funnel until they finally become a customer. The shorter the length of the cycle is, the better as you’ll spend less resources and time trying to persuade a customer to hop onboard.
• Cost of selling: also known as selling expenses, this refers to the costs you incur in the process of selling your products or services. This can be the cost of paying the salaries of your marketing department, any software or platforms you use to advertise, and buying space for ads online. You can calculate it as the average of the revenue that sale made you, so the lower the percentage, the better.

The 5 steps to creating a sales forecast

Once you’ve assessed which type of sales forecast works best for your business, you can start the process of building it. . This can be done in five steps: setting a sales goal, identifying sales drivers, gathering sales data and metric, analysing your sales data and creating a sales plan to reach your goals.

1. Set sales goals

Before you sit down to start crunching any numbers, you’ll need to have an objective definition of success. This will obviously be very different for every business and will depend on the resources you have and what your long-term goals are. To set a realistic goal, you can sit down with your sales representatives to understand what a feasible sales quota is. This will then serve as your financial baseline to better make your predictions and check whether you’re setting yourself realistic targets.

2. Identify sales drivers, trends, and seasonality

The next thing you’ll need to grasp is the health of the economy and what is driving sales. For instance, if you’re a clothing ecommerce store, seasonality will heavily affect your sales. For example, you’ll want to release new clothing lines for the summer in spring to sustain your desired level of sales. You’ll also want to consider macroeconomic factors – you can obviously expect lowered sales of summer clothing if the country is in a prolonged recessionary period or experiencing unseasonably bad weather.

3. Gather sales data and metrics

In order to understand how you’re performing and how you’d like to perform to meet or overtake your sales forecast, you need hard numbers to guide your decisions. Remember that your sales goals should not be based on a gut feeling, but on what you can realistically achieve based on the resources and data you have at hand. Good accounting software or CRM software is a time and labour-saving way to surface this information as accurately as possible.

4. Analyse sales data and forecast sales

Now that you have the building blocks of your sales forecast, you need to drill down into the detail to get a feeling of what you can expect and achieve over the next period. Is that increased opportunities? Lowered sales? A new entryway into a new market that could boost revenue? This step is crucial: your sales decisions will be informed by your interpretation of the data.

5. Create a sales plan to reach sales goals

The last part is to create your sales plans based on the insights you’ve gained from your data and your goals. Keep in mind that a sales forecast is not fixed – you might have to go back and readapt it if there’s a change in the market that throws you off track whether in a positive or negative way.

How to use a sales forecast

Once you have a more solid idea of what to expect over the next sales period, there are multiple ways a sales forecast can add value to your sales teams’ activity.

• Monitor sales performance against goals: the best ingredient against business performance anxiety is knowing that your sales are exactly (or above) where they need to be. Your sales forecast helps measure how well your business is actually doing. For instance, your sales may be lower than the month before, but – using a Year-on-Year comparison – you can be reassured that they’ve doubled compared to the same month the previous year. . Sales forecasts can help give you a big picture perspective that allows you to more accurately understand variable metrics.
• Manage sales resources more effectively: by surfacing potential sales methodology issues, cost savings and market trends, a sales forecast allows you to adjust resources with enough time to still achieve your sales targets.
• Use sales forecasts for planning, budgeting, and decision-making: your sales forecast allows you to be flexible and plan for predictable market changes. For instance, it can flag which months there’ll be extra cash for hiring and new software and when it’s better to rein in extra spending.. In this way, you can meet your goals,whilst also keeping cash flow stable.

Conclusion

If you’re serious about growing your business, you can’t get by without a sales forecast. A realistic and well-structured sales forecast will keep you on track to reach your targets facilitating data-led decision making and effective allocation of resources.

To make an accurate sales forecast, the devil’s in the data. data. Your accounting or CRM software is the best source , but you’ll definitely want to look at Year-on-Year growth, revenue, and market penetration as these can help identify gaps in performance and understand what realistic goals look like.

Although sales forecasts are not crystal balls that can perfectly predict the future, they are definitely useful compasses that let you navigate through your market in the right direction.