Since sales are the lifeblood of your business, sales forecasting should be on your business' list of priorities. Without a sales forecast to base your business plans on, you will be under pressure to develop your cash flow forecasts, production plans, or even your workforce plans (among other things).
Let's look at what sales forecasting is and how it works.
What is a sales forecast?
Candiff and Still gives a concise yet easy-to-understand definition of the term.
„Sales forecast is an estimate of sales during a specific future period, the estimate of which is tied to a proposed marketing plan and assumes a specific state of uncontrollable and competitive forces.- Candiff and Still
While most people would view sales forecasting as something that only large companies would do, this is clearly not the case when looking at Candiff and Still's definition.
Regardless of the size of a company and the nature of its business, it should still make sales forecasts so that it can set a future direction that has an opportunity for business growth.
Now that you have a better idea of what the definition of the term is, let's dive into the gist of why you should be using it.
Why you should use sales forecasting
1. A sales forecast is a planning tool.
Planning is always one of the best ways to ensure adaptability to your organization's ever-changing ecosystem. It reduces uncertainty, leading you to increased responsiveness and improved services.
There are certain changes within a period that occur regularly or those that are already certain (such as the seasons and occasions). These events almost always affect your sales.
Sales forecasting allows business owners to plan their much-needed requirements such as raw materials, manpower, budget and other logistic-related requirements.
When you use a sales forecast as a planning tool, you can not only prepare your resources, but also deliver your goods to the market consistently. Items like these can maximize your sales as you won't have to turn away a single customer/client due to your lack of inventory.
As you can probably imagine, getting your goods ready and available on the market at the right time (or when demand is judged to be high) can make the difference between getting hundreds of thousands of sales, or nothing at all.
2. A sales forecast is a mitigating measure.
Because sales forecasting lets you spot potential problems before they actually happen, you have ample time to prepare for potential problems, making it easier for you to avoid them.
In short, you can mitigate risk or business problems through sales forecasting. It allows you to anticipate changes and make the necessary adjustments before the changes happen.
3. A sales forecast is a decision tool.
Sales forecasting is a remarkable decision-making tool because it gives you a better view of all the elements that are in place that can affect your sales.
Sales forecasts contain not only sales records and estimates, but also events and their possible dates (among other things). It even tells you how your sales performance has been in the past, giving you better insight into what would happen if you took certain actions (like the ones you've taken in the past).
With all these pertinent details at your fingertips, you can now make informed decisions that have a higher chance of producing excellent results.
However, it is worth noting that some executives or experts have the wrong attitude towards sales forecasting.
According to the research "Sales forecasting, market research and the value of information' conducted by London Business School's Michael Barron and David Targett, forecasters tend to focus (overly) on the accuracy of their sales forecasts rather than their decision usefulness.
While the accuracy of the forecast is undoubtedly important, the sales forecaster should also place as much emphasis on the relevance, value and decision-making utility of their reports to the business.
4. A sales forecast is a performance evaluation tool.
Sales forecasting can be an effective metric to measure the effectiveness of your sales team or the organization as a whole.
It presents goals that all departments can base their respective action plans on to support the sales team and achieve better results. This can improve communication between both departments and enable continuous improvement.
When you forecast sales, you can—to a certain extent—reduce uncertainty about the future. This can result in increased team readiness and better aligned your overall game plan for generating sales for the circumstances your business will face in the future.
The factors affecting sales forecasts.
At this point, I guess you're already convinced why you should start sales forecasting (if you aren't already).
Allow me to share with you the factors that you need to consider when forecasting sales.
1. The internal factors.
Internal factors include (but are not limited to) your employees, your policies, and certain changes in your organization.
Be aware that the comings and goings of employees - especially in your sales department - can have a negative impact on your company's sales at any time. Therefore, your HR department needs to have systems in place to address employee turnover especially during critical moments (e.g. holidays, product launches, special events).
Changes in your organizational policies related to sales—prices, commissions, discounts, advertising, and even policies governing the quality of your products—will affect your sales accordingly. It is therefore necessary for you to study how certain changes in these policies will affect your sales so that you can prepare the necessary actions to help you reduce, or avoid, the damage they can do to your business.
Organizational changes can also result in positive or negative results for your sales. Changes in management, change of direction, downsizing, merger or acquisition of more assets, introduction of new technology and other potential major changes in your business need to be carefully planned and implemented as all of these will impact your revenue forecast.
2. The external factors
External factors that can affect your sales forecast include general economic conditions, the market, industry changes and legislative changes.
It is of paramount importance to consider (and study carefully) the general economic conditions that govern your business. A sales forecaster must be able to identify economic trends, which of the trends will positively or adversely affect the business, how these effects will manifest themselves, and how they can be maximized or mitigated.
For the most part, a strong economy is expected to result in more sales for many business owners as citizens will have more purchasing power. However, a weak reading will cause the potential buyers to be just as prudent and cautious with their spending, making it difficult for the business owners to sell their products.
Market and industry behavior must also be considered. You need to be up to date with what's happening in the market - new products, prices, technological advances, designs and promotional activities. You also need to know what your competitors are doing and how they are performing in the market.
Together with business and industry, you should also deal with the state regulations and requirements. Be aware of new laws and regulations that can either facilitate and support your business or limit and hurt you.
Because unforeseen conditions in the economy, industry, and regulatory areas affecting your business can be detrimental to your growth, you must always be on the lookout for unstable conditions—sudden and inappropriate availability of materials, labor unrest, and inadequate government regulations and controls.
Keeping these factors in mind is crucial as it will help you create an effective and comprehensive sales forecast that serves its main purpose of taking your business to greater heights.
Last but not least, you have to consider the period or the time factor. When looking at all the factors that affect your sales forecast, you need to consider “timeliness”. How long is your observation period for your sales forecast? Gathering the information you need from the above factors is then based on a specific time period of the sales forecast you want to create – whether short, medium or long term.
When you have the knowledge and information on all of the above factors, you can complete the following required elements of an accurate sales forecast:
A sales quota that serves as a target for your business sales success.
A structured sales process to guide your sales team through the forecast timeframe.
A standard definition of opportunity, prospect, lead, and close forecast that everyone agrees on.(Video) What is Sales Forecasting - Definition, Methods, Best Practices, Sales Forecast Planning Explained.
A customer relationship management database for tracking opportunities and making accurate predictions.
Accountability. To enforce your sales forecast and let your team recognize and recognize that the sales forecast is not just paper, it is something that you must strictly adhere to and achieve.
Methods of sales forecasting
Now that you understand the importance and basic factors to consider when forecasting, let's look at the nine methods you can use to create a sales forecast.
1. Opinion of sales staff
This is a method in which the sellers or brokers are responsible for setting their estimated sales targets for their respective volume in a given time period.
This method leverages your sales reps' expertise about your customers as they are in direct contact with them. It therefore makes it easier to break down the sales forecast into specific products and markets, giving the sales team more confidence in meeting their quota.
A disadvantage that should be considered when using judgment-based forecasts is the possibility of changes if the results are not attractive to management.
Research "Discretionary Revision of Sales Forecasts: Effectiveness of Forecast Selection', conducted by Brian P. Mathews and A. Diamantopoulous, shows the tendency of managers to revise initially low sales forecasts. These corrections may introduce some bias into the overall prediction.
2. Eine Jury der Executive Opinion
This is known to be the oldest method of sales forecasting. In this method, the board is responsible for preparing the sales forecast, which is believed to be based on the committee members' knowledge and experience of the market factors.
To give you a better idea of how a Jury of Executive Opinion is conducted, here is an example from MarketingProfs.
„Mainframe computer forecasting is performed by conducting a series of meetings between a company's two mainframe analysts, the service director, and a research operations analyst. Typically, three or four sessions are required to reach forecast consensus. Between meetings, the forecasts are checked for feedback and reactions by colleagues at home and abroad.” --MarketingProfs
Since the method can be carried out quickly and easily, it is therefore economical. Rigorous collection of data is not required.
On the other hand, the latter is also one of its disadvantages, since the primary basis of this method is not factual data and will be more or less a product of conjecture.
3. Consumer Purchase Plan
This is the case when information is collected directly from consumers by conducting a survey to ask them about their likely purchases under certain conditions at a certain point in time. This method works best for products with few customers, such as manufactured goods.
While this method deserves first-hand information and knowledge of the user's intent, it is limited by the fact that expectations cannot be measured. It's also difficult to identify actual buyers; Therefore, the survey responses are not as reliable.
4. Test marketing result
This is a method where you present your product (or products) to a group of people from a geographical test area. The results are then examined and used as a basis for sales forecasts.
This method is considered reliable because the sales forecast is based on actual results. The method is best suited for new products.
However, it is important to note that using this method is time-consuming and costly.
This is simply a sales forecast made based on expert opinions. Some companies rely on experts or hire them as consultants, then analyze and use their opinions to create a solid sales forecast. This method is fast, inexpensive and requires expertise. However, it is not that reliable as it depends on the competence of the consulted experts.
To remedy this, aCheck performed on marketing forecastsconcluded by recommending using structured techniques – such as conjoint analysis and role-playing – when making predictions based on judgment.
The study also suggested explicitly writing down things that might be wrong about the prognosis. This strategy serves as a tool to give prediction intervals more accurate calibrations.
6. Market Factor Analysis
This sales forecasting method is performed by determining and studying the key market factors that affect sales and creating a sales forecast from the results of the study.
This method uses statistical analysis (correlation and regression) to establish the relationship of certain market factors.
7. Historical method
As the name suggests, this method uses past sales records to create a sales forecast. This is the easiest and quickest way to predict sales by matching records of previous sales to a future time period and assuming a certain percentage of addition or deduction to the sales results depending on the conditions set.
8. Statistical Method
There are several statistical methods you can use for sales forecasting:
The trend method
The graphical method
The time series method
Choosing the statistical method for a product can be quite difficult considering that there are multiple options available, not to mention the fact that there are also different types of products (e.g. stable mature products, slow running products, new products, etc. ).
If you don't know which method to use, you can bring in a sales forecasting expert so they can analyze the data themselves and choose the appropriate method.
9. Econometric modelling
This method uses a mathematical approach to study the factors that affect sales. Similar to market factor analysis, this method also uses statistical analysis to establish a relationship between market factors. However, this method uses more than just correlation and regression analysis and therefore requires the availability of complete information.
Not meeting your sales forecasts can have a negative impact on your business.
Regardless of size or industry, your business should generate revenue forecasts to determine your future direction and maximize business growth.
Don't miss resources and opportunities that the forecasts would have otherwise alerted you to, or jeopardize your ability to make important business decisions because you don't have a clear understanding of your company's overall performance or status.
Get a better understanding of why you should use sales forecasting with oursSales status report.
What is mean by sales forecasting? ›
A sales forecast is a projection of future sales revenue and a prediction of which deals will move through the sales cycle. Sales forecasts drive short-term spending decisions and impact decisions on key deals.What is a sales forecast example? ›
Common sales forecasting examples include historical forecasting, opportunity stage forecasting, length of sales cycle forecasting, multivariable forecasting, and pipeline forecasting.What is forecasting and its uses? ›
Forecasting involves making predictions about the future. In finance, forecasting is used by companies to estimate earnings or other data for subsequent periods. Traders and analysts use forecasts in valuation models, to time trades, and to identify trends. Forecasts are often predicated on historical data.When should you use sales forecasting? ›
Sales forecasting is the use of current and previous sales data to predict your team's sales activity during an upcoming monthly, quarterly, semiannual, or annual period. You can use sales forecasts to identify internal or external sales issues and resolve them with enough time remaining to hit upcoming sales goals.What are the three main sales forecasting techniques? ›
There are three basic types—qualitative techniques, time series analysis and projection, and causal models.