Looking into the future is one superpower that every sales professional would give anything for. Whether you realize it or not, you already have that superpower at your disposal. Sales forecasting techniques give you the ability to make accurate predictions about the future of your business.
Instead of relying on guesswork and setting highly optimistic goals without any precedence or evidence, sales forecasting lets you set realistic goals backed by data.
Knowing the correct sales forecasting techniques is essential for building successful strategies, though. Sales leaders need to understand what sales forecasting means for a business and what a good sales forecasting model should look like.
What Does Sales Forecasting Mean?
Sales forecasting is the process of predicting your future sales based on historical data, market trends, and industry benchmarks.
Sales forecasting aims at improving your decisions, such as managing your resources and cash flows. It helps build better sales strategies to drive revenue and growth.
For established organizations, sales forecasting is much easier. It is because they have enough historical data to fall back on. For newer businesses, on the other hand, historical sales data is not a strong point. In such a case, you may need to rely more on market research, industry trends, and benchmarking to create a more or less accurate prediction.
Importance of Sales Forecasting
Sales forecasting forms the basis of all your financial decisions in business. It is also the foundation of your financial reporting requirements, such as creating your balance sheets, profit and loss statements, and more. Some of the primary benefits of sales forecasting for a business are –
1. Setting Sales Goals
Knowing what the future of sales looks like for your business allows you to set meaningful and achievable goals for your sales team. You are able to answer questions like, “What do you expect to achieve in the next five years?” or “How many new customers are you likely to acquire in the next year?”
2. Ensuring if you have the Required Resources
Having a clear vision of the future of sales will also tell you if you have the right resources to achieve the sales goals you have set. Your sales team may have the capability and skill to deliver the predicted outcomes, but they will need the right toolset for it. Sales forecasting will give you enough time to equip them with these resources.
3. Planning your Sales Budget
When you can estimate the growth rate in sales for your company, you will also make better decisions for budget allocation in your business. Sales forecasting can give you an estimate of how much revenue you could be earning in a given period.
With this information, you can decide how and where your working capital can be allocated. Forecasting also gives you an idea of how future sales can affect your budget, so you can prepare for both best- and worst-case scenarios.
4. Helping Rope in Investors
Sales forecasting also helps you show your business’s potential to investors. Positive sales forecasts may help you demonstrate the amount of growth you expect to see in the next few years to a potential investor. Not just investors, sales forecasting can be a good way to inform all the other stakeholders in your business too.
5. Predicting Interest in Product/Service
Sales forecasting can also help determine which products or services are more likely to sell. Your historical sales data can tell you if you have a best-selling item in your lineup or if a particular product sells more during a particular time of year. This information on product interest will help you prioritize and plan which products to focus on.
Factors Influencing Sales Forecasting Techniques
Sales forecasting techniques may be different for different businesses because there are several factors at play here. Even within the same organization, sales forecasts may not be the same over two consecutive years. Your sales forecast depends on several external and internal factors which you have to account for.
Here are some of the crucial internal and external factors to consider.
Internal factors are those that exist within the organization itself and impact the sales outcomes in many ways.
1. Product Upgrades
If the product you are selling undergoes some change in features and functionality, it may affect the sales figures as well. It depends on how the target customers receive the upgrade. If they are happy with the change, sales may skyrocket, but if they’re not, things may look different.
Your product inventory will also affect your sales figures. A shortage in inventory will automatically cause sales to dip.
3. Working Capital
Your working capital decides whether you can carry on production and for how long. Low working capital would mean lesser production and, thus, fewer sales.
4. Pricing Changes
Pricing plays a crucial role in sales too. If you have made some changes in your product pricing, your sales are likely to change as well. Discounts or price drops may shoot your sales up. An increase in prices may cause a dip, depending on the customer’s need and urgency.
5. Manpower Issues
Any problems with your workforce can also impact sales. Shortage of manpower is likely to adversely affect your sales figures, for instance.
External factors are those that affect your sales from the outside. You usually don’t have much control over the external factors, unlike internal factors.
1. State of the Economy
An important external factor is the economic situation. The condition of the economy directly impacts businesses and their sales. So, sales forecasting for a company may vary depending on the current state of the economy.
2. Seasonal Changes
Sales may also be affected by weather and seasonal changes. For instance, say you are selling woolen garments. Your sales are likely to shoot during fall and winter while summers would be leaner months.
Seasonal changes can impact sales figures in B2B businesses as well. For instance, if you have clients in the U.S. or Europe, your year-end sales may dip as it is the holiday season in these parts of the world. Businesses will usually be less active during this time and purchases could slow down until they reopen.
3. Policy Changes
Changes in government policies and the regulatory environment may also impact sales. New laws may change how and where you can sell. If your business operates across numerous countries, you have to stay updated with their laws and regulations when making sales predictions.
4. Natural Calamities
Unforeseen events or natural disasters can also affect sales. Very recently, the way the Covid-19 pandemic impacted businesses is a perfect example of how unprecedented events can affect sales.
5. Trends and Preferences
Customer preferences keep changing and new trends arise every once in a while. These changes can impact your sales figures as well.
Sales Forecasting Techniques and Methods
Sales forecasting techniques do not follow a one-size-fits-all approach. Different organizations may adopt different sales forecasting models. The model needs to fit their requirements and help them create clear and accurate sales goals.
Some of the popular and most commonly used sales forecasting techniques are listed below.
1. Length of Sales Cycle Forecasting
The length of the sales cycle is an important factor for every sales team. Length of the sales cycle is the time taken for a lead to complete the journey through the sales funnel to the point of closing a deal.
In this sales forecasting technique, the length of your sales cycle is a key metric in making your sales predictions. Understanding the length of the sales cycle helps salespeople determine how long it would take to nurture and convert a lead.
Unless there is a plan to optimize or shorten the sales cycle, the length should be considered fixed and all predictions made by keeping this length unchanged.
This sales forecasting technique works best if you have kept track of when and how leads enter your sales pipeline and when they convert. It requires the sales team to work closely with the marketing team and acquire all the lead generation information.
2. Lead-Driven Forecasting
The lead-driven sales forecasting technique relies on what you know about your leads. For this model, you need to know how your business’s relationship with its leads is. Certain things that might help you understand this relationship better are –
- How many leads could you generate per month in the last sales cycle
- What the lead to customer conversion rate is for each lead source
- Which lead sources generate the most valuable leads
These and similar questions will help you make accurate sales forecasts based on your lead data.
This sales forecasting technique, however, could be affected by changes in the sales cycle, market conditions, and other factors.
3. Opportunity Stage Forecasting
The opportunity stage sales forecasting technique is based on which stage a particular prospect is in the sales pipeline. You need to divide the pipeline into several opportunity stages. Then predict the likelihood of a prospect converting based on which stage they are in.
For instance, a lead that has just entered the sales pipeline has a 10 or 15% chance of converting. Someone who has interacted with your sales reps has a 50% chance of converting. Someone who sat through a presentation or a demo has an 80 or 90% chance of converting.
The sales forecasting happens based on how many leads are in each of the different opportunity stages. The sales prediction is made in terms of what the prospect is worth at that stage. Assume a lead has interacted with sales reps, and the value of the deal is 3000 USD. Then the worth of the prospect at this stage is (3000 x 50%) 1500 USD.
For this sales forecasting technique, you require a considerable amount of historical data. So it may not be the best choice for newer businesses.
4. Intuitive Forecasting
The intuitive sales forecasting technique is not the most scientific method of forecasting. Yet, it gives more or less accurate outcomes. That is because the people working in sales hands-on are usually the ones who know best. The intuitive method relies on what salespersons feel about the future of a company’s sales.
Gathering feedback from the salespeople directly handling prospects can be a good way to gain insights and make future predictions.
The accuracy of these predictions may not be 100%. That is not because they don’t know. It is rather because their opinions are subjective and may vary from one salesperson to another.
Moreover, they would usually be optimistic. Nobody would want to tell their sales manager that the lead they are following is not likely to convert. So, there has to be a way to verify that the data you rely on is accurate.
This model is good for new businesses that don’t have much historical data. It can be a good way to start forecasting and gradually building up from here.
5. Test-Market Analysis Forecasting
Test-market analysis is another sales forecasting technique. It works by launching a test version of your product or service in the market and gauging consumer response. Based on how customers react to the limited version, you can make predictions of sales for the full product.
This can be a great sales forecasting technique if you are already planning a soft launch of a new product. Test-market analysis can give quite accurate insights for certain businesses. For instance, startups that do not have enough historical data or companies that haven’t invested much in market research.
6. Historical Forecasting
The concept of the historical sales forecasting technique is quite simple. If you made sales worth 100,000 USD last year, you would make at least the same amount or more this year. It considers that you will make year-on-year growth in sales based on historical data.
Though this sounds quite optimistic and practical, it is not the most reliable sales forecasting technique. This model does not take into account any of the internal and external factors that may affect sales. So, if an unprecedented change occurs, your forecasting is likely to go haywire.
You can use it as a basis or a benchmark but not as an accurate prediction.
7. Multivariable Analysis Forecasting
This sales forecasting method is probably the most comprehensive and detailed model of all. The multivariable analysis forecasting model takes into account several variables that may impact sales. It is far more complex than the other methods. It is purely analytics-driven, making the outcomes very reliable.
For the multivariable analysis sales forecasting technique, you will need strong analytical capabilities and tools. The investment here is quite considerable. So this may not be the most feasible choice for businesses that are just starting out. For established businesses, though, it is by far the most effective method there is.
Sales forecasting techniques may seem unnecessary when you are just starting out. You might think – we’ll learn as we go. However, knowing where you’re heading can actually make a lot of difference to your decision-making and strategy-building capabilities.
Sales forecasting prepares you to handle sudden changes in the market or industry so that your bottom line is unaffected. Adopting a dynamic sales forecasting model will allow you to modify and pivot your sales strategy whenever you need to.