Sales Forecasting 101: How to Forecast Revenue

Sales forecasting 101

The bottom line in today’s business landscape, regardless of industry – is that you need to be making intelligent decisions about everything that affects the bones of your business and potential year-over-year growth, such as cash flow, goal-setting, predicting consumer demand, managing inventory, strategic planning, and expectation-setting. strategy. Although to do this, you need to accurately forecast your sales, as research proves that businesses with accurate sales forecasts are over 7% more likely to hit their revenue and sales quotas. Not sure where to get started in accurately forecasting sales? In this short guide, you’ll discover the definition, importance, influences, benefits, methods, and software needed to make accurate and effective projections about your business’s future.

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What is sales forecasting?

Sales forecasting is the process of formulating estimates about your future sales revenue for a specific timeframe, such as quarterly or yearly. Sales leaders use sales forecasting to inform the companies budgeting, spending, and sales strategy to ensure proper lead flow and revenue levels are maintained. Although, just like weather forecasts, sales forecasts aren’t a sure thing – instead, they’re a planning tool to support companies prepare for future business opportunities.

Why is sales forecasting important?

Forecasts are all about the future success of your operation. When done right, sales forecasts can be a precious tool to be used across your organisation. Most importantly, though, you’ll be able to focus your sales team entirely on high-revenue, high-profit lead opportunities, which often results in improved win rates. 

Improved win rates will then increase the alignment of sales quotas and revenue expectations while creating benchmarks you can use to assess future trends. When the sales forecast is complete, you can quickly generate a profit and loss statement, cash-flow statement and balance sheet.

Ultimately, sales forecasts are pivotal to the success of any organisation, considering research found that companies with precise sales forecasts enjoyed 13.4% more year-over-year growth than companies with an inaccurate estimate.

Who is responsible for Sales Forecasts?

Who’s responsible for sales forecast depends entirely on the organisation, in general though, the people responsible usually are:

  • Sales Leaders: Sales Leaders promise the numbers that their sales teams will deliver. How they forecast usually depends on their level of seniority.
  • Sales Reps: Sales Reps report their numbers back to their managers. 
  • Product Leaders: Determine which products should be available to sell and when. 

Also read: A Guide To The Key Account Planning Process

What are the benefits of accurate Sales Forecasting?

Accurate sales forecasting can help improve your business in many ways, especially if you’re a growing company looking to become an industry giant. Your sales forecasting efforts are the key to success and help inform essential business decisions like hiring, pricing, production quantity, investors, etc. Discover the benefits of sales forecasting in detail below:

Inform investors

A history of detailed and well-documented sales forecasts helps build a picture of your performance and performance milestones for potential investors. The more up-to-date and articulate your projections are, the better you describe your business’s position to investors and even employees.

Sales forecasts inform budgeting

Sales forecasts allow you to estimate revenue for any given period, meaning you’ll know how much money to expect to earn and when. This financial heads-up means you can plan for budgeting and resources dedicated to other aspects of your organisation.

Improve marketing efforts

By knowing the approximate amount of revenue you can expect to earn helps you plan for tasks that require budgeting, such as hiring and resource management.

Sales forecasts help you set goals

Power is knowledge, and with sales forecasting, you can determine whether it’s likely you’re going to meet your current goals – which in turn, helps you set goals for the next period.

What goes into a Sales Forecast?

Wondering what exactly the essential components of an accurate sales forecast are? Check them out below and begin to communicate critical information to sales management about future business growth.

Sales Processes: A salesperson may only be actively involved in a few steps of the company’s entire sales process, but everyone must understand the big picture to see how their role fits in with others. That’s why including your documented sales processes from prospecting to closing is essential for ensuring your sales team are following the same formula.

CRM Data: With a CRM, you can look at your dashboard and see what’s in your pipeline. See which sales are forecasted to close this month, so you know how close you are to your targets. Some sales forecasting information to keep track of in your CRM include:

  • The product they are interested in
  • The forecasted amount of the sale
  • The date of your last contact with a customer
  • The date of the next contact
  • The date expected to close
  • List of supporting materials you should be sending them
  • Names of the other stakeholders who will be involved in the buying decision

Sales Quotas: A sales quota is a financial goal that sales reps or teams need to reach within a specific time period, usually once a month or quarter. These are the goals that you are directly compensating for.

Funnel Definitions: What’s the use of a sales forecast if the terms aren’t clearly understood? Your sales forecast should include the definitions for each stage of the sales funnel, like a lead, opportunity, prospect and close – that way; all sales team members can be held accountable to the same standards.

What influences a Sales Forecast? Common sales forecast assumptions

There will always be external and internal factors that influence your sales forecasts; we explore several below:

Economic Shifts

As we all know, during an economic downturn or recession, it’s more likely that both individuals and companies won’t spend money – and you’ll have a slump in sales. Whereas moments of economic growth are more likely for you to see a hike in sales

Seasonal Changes

Seasonal demand affects many businesses and will see sales fluctuate throughout the year as the product or service becomes in need. 

Policy and Governance

 Suppose there are changes in your corporate policies or governance structure. In that case, it can impact the sales forecast in a big way – especially if it involves changes to your sales compensation plan as it directly influences your sales team’s behaviour. 

Personnel Changes

Hiring and firing affect your bottom line, whether that’s a drop in sales after termination or an influx of new deals after recent hires. 

Legislative Changes

Your local laws or mandates have the power to affect business – either by creating new or improved demand for your product or making prospects hesitant to buy anything.

Competitive Changes

What your competitors are up to, unfortunately, also has the power to affect business for worse, or sometimes for the better. For instance, if your competitors halve the prices, you may need to react quickly with a similar offer to avoid losing the sale. Comparatively, if your competitor goes out of business, you’ll see an increase and demand in sales.

Different types of Sales Forecasting methods

There are various sales forecasting methods you can use that have different uses and benefits. Here are a few of the most popular ways to forecast sales, with some examples further illustrating each sales forecasting method.

1. Opportunity Stage Forecasting

As one of the most popular sales forecasting methods, the opportunity stage sales forecasting method is perfect for those looking to predict the probability of their leads becoming closed customers based on where the prospect currently is in the sales p

As one of the most popular sales forecasting methods, the opportunity stage sales forecasting method is perfect for those looking to predict the probability of their leads becoming closed customers based on where the prospect currently is in the sales process.

How it works

Expected Revenue = Deal Amount * Probability to Close.

Opportunity Stage Forecasting Formula

The sales forecasting model starts by picking a reporting period, often a month, quarter, or year – whichever makes sense depending on the length of the sales cycle and your sales team’s quota. Then, all you need to do is multiply each deal’s possible value by the probability it will close. Once you’ve done this for every deal in your sales pipeline, calculate the total to determine your overall forecast. 

The Pros & Cons

While the opportunity stage sales forecasting method offers easy, quick results, it doesn’t account for the age of an opportunity making inaccurate overall. Suppose you opt to use this sales forecasting method. In that case, you must consider that a deal that’s been floating in your sales rep’s pipeline for months will be treated the same as an opportunity that’s only days or weeks old – mainly if their close dates are similar, which means that you have to either remind or trust your sales reps to maintain and clear their sales pipelines. 

2. Length of Sales Cycle Forecasting

# of days from the first contact + customer conversion = # of days of combined sales

Length of Sales Cycle Forecasting Formula

The Length of Sales Cycle Forecasting model uses data about the time it takes a prospect to convert into a paying customer. It’s perfect for sales reps to forecast their sales per month or quarter while reminding them that objectivity is the key to sales success – not just relying on “gut-feeling.”

How it works

This sales forecasting method requires constant tracking of when and how prospects enter the sales pipeline. That’s why it pays to have a robust CRM system integrated with all other functions of your organisation, alongside practising sales enablement techniques to synchronise both sales and marketing teams. 

The Pros & Cons

You should first consider that if your CRM doesn’t integrate with your marketing software and automatically log interactions, sales reps will spend too much time manually entering the data – a costly and laborious activity that’s easily avoidable. Furthermore, if your sales team don’t relentlessly track data, even small mistakes can substantially affect predictions. Overall, it’s a handy objective method that you can apply to various lead sources to generate a more accurate forecast.

3. Intuitive Forecasting

“I plan to bring $X in #X of days.”

If your business is brand new, but you want to forecast sales, you can’t rely on historical data – so what can you do? Ask your sales team to forecast their sales for the following required period but based on their intuition. Salespeople can do this by examining their current deals in the sales pipeline alongside any prospect opportunities they have planned to produce an approximate sales forecast.

4. Historical Forecasting

The historical sales forecasting method is a quick, simple framework for estimating sales for the upcoming month, quarter, or year. The method works by using historical data to roughly determine numbers for the same period. 

The Pros & Cons

While this method seems pretty cut and dry, it’s also a little too simple to give the most accurate projections. Mainly because the model assumes that your buyer demand is consistent and constant, alongside not accounting for seasonality, this sales forecasting model is best suited to being used as a benchmark tool rather than the foundation of your projections. 

5. Multivariable Analysis Forecasting

Possibly the most advanced sales forecasting method, multivariable analysis forecasting uses predictive analytics and several other vital components such as the sales cycle length, probability of closing based on opportunity type, and individual rep performance. 

The Pros & Cons

While the multivariable analysis forecasting model is one of the most accurate, it’s also data-driven, which means you’ll need a robust analytics solution or forecasting tool to get the job done while also ensuring sales reps are consistently cleaning and tracking data. 

6. Pipeline Forecasting

The pipeline forecasting method reviews each opportunity currently in your pipeline and calculates its possibilities of closing based on unique company variables, including the rep’s win rate and opportunity value.

The Pros & Cons

While one of the most accurate sales forecasting methods because it takes into account the unique factors of each opportunity, it also heavily relies on your ability to provide high-quality data. If you provide insufficient data, you’ll end up with forecasting that provides zero value.

How to Forecast Sales in 7 steps

Ready to get started building your forecast and improving the backbone of your business? Follow these steps.

1. Establish a sales process

We’re not saying one size fits all here, but it’s likely your ideal customers all have various goals in common, so it’s fair to assume that their hidden agenda for buying your product or service is also very similar. Once identified, you can begin standardising your sales process, which will enable you to scale up, grow, and dominate your industry. That’s why the first step is to have an efficient, reliable and consistent sales process for each stage of the sales pipeline optimised to your sales teams strengths.

2. Set individual and team quotas

If you want to gauge sales performance, you need to define what “success” looks like. To do this, work with sales reps to set achievable and realistic sales quotas, as these will serve as financial baseline goals to compare alongside your sales forecasting.

3. Invest in a robust CRM

Having robust customer relationship management (CRM) software is critical to accurate sales forecasting because your sales reps need precise information to organise and track their opportunities. However, it’s crucial to involve any employees using the CRM in the discussion process because their essential insights will help you understand their needs and create a CRM that best suits your organisations’ workflow. Some CRM’s even allow sales reps to synchronise alerts and reminders to their calendars so they can be sure they never miss an opportunity! 

4. Choose a sales forecasting method

Now you have a clearly defined sales process, sales quotas, and a robust CRM in place – you can choose a sales forecasting method that suits you best. However, the sales forecast method you choose will depend on several factors, such as your businesses age, the size of your sales team and their pipelines, alongside the quality of your sales data and data tracking habits.

5. Include data from other departments

While having and understanding your past sales data is crucial for creating accurate sales forecasts, there are several other valuable insights in your company, which is why you need to ensure you include the following data in your forecasting process: 

  • Marketing: Your marketing data can directly correlate to the quality of your sales pipeline. That’s why you need to communicate with your marketing team to understand their tactics and strategies for the forecasting period. 
  • Finance:  Working with your financial analysts to understand how well your sales forecast aligns with the overall financial goals of your company. 
  • Product: How do product launches factor into your overall forecast? Create a well-rounded sales forecast by including data about any new products you’re considering launching. 

6. Review prior sales forecasts

Consider how did your sales team perform this year and last year? Remember to compare the data you currently have to the prior year’s forecast alongside noting discrepancies or variations you notice. While working through this data, ask yourself:

  • Did your organization underdeliver anywhere?
  • Were your previous year’s goals unrealistic in any way?
  • Did any significant events or seasonality affect business?

7. Keep your sales team accountable

Whichever sales forecasting method you decide to use, you must immediately communicate changes and decisions to sales reps – another reason to invest in a robust CRM that helps inform sales reps about every interaction between them and leads. However, you must also hold them accountable for their sales performance the sales quotas and forecasts you’ve provided. Ultimately, we can’t control what goes on outside our business, but we can control what goes on inside them. We want to help your team perform at their best, so download your free sales performance improvement plan and support them in staying motivated, focused, and accountable.

Sales Forecasting tools & software

While this list is by no means exhaustive, here are some of the best sales forecasting tools that will help come closer to accurately predicting the future.

  • CRM: A CRM tool will help you store and record information vital to closing sales – while benefitting you from being a dedicated sales tool that supports your sales reps close deals. Use this tool to lead track, view your funnel analytics, call sequences and record how prospects heard about you to help determine when you should follow up with prospects and existing customers. There’s a lot to consider when choosing a CRM tool based on the size and nature of your business. 
  • Lead Scoring Tool: You’ll need a lead scoring system that helps you grade leads according to their actions on your website or any other trigger you want to follow.
  • Accounting Software: Forecasting complex data like gross margins will require data usually connected to accounting software – luckily, most have integrations that allow for convenient transfer of information and data.
  • Excel or Google Sheets: Sales forecasting often involves creating simple spreadsheets; when making calculations, consider all the internal and external factors that may affect creating an accurate report.
Infographic on the ideal sales forecasting tech stack

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