The Importance of Sales Forecasting

The Importance of Sales Forecasting

An accurate estimation of future sales is necessary to make informed decisions. Sales forecasting is the process of projecting the amount of revenue a company thinks it can generate within a certain period of time. When done accurately, forecasts play a crucial role in letting companies set goals, recognize potential problems, gauge their performance, and develop strategies to further improve their output. This post aims to cover the details and usefulness of sales forecasts.

Forecasting is extremely useful in helping manage resources that directly affect your sales and revenue. Here are the main advantages of accurate forecasting:

1. They Help You Identify Goals

Setting up sales forecasts helps you clearly lay down what you aim to achieve. You may be asking yourself:

  • What does your organization strive to achieve in a given phase of time? 
  • How much do you expect to expand your customer base?
  • What amount of money do you expect each customer to spend with your company?

2. They Allow You to Plan

An accurate sales forecast allows efficient resource allocation and planned management of cash flow. Forecasting lets you predict if you will be able to achieve your sales target. In the former scenario, you can make arrangements to purchase inventory or hire staff. Similarly, in the latter scenario, you can start focusing your efforts on finding more leads, or building revenue out of certain accounts.

Analyzing sales projections and measuring performance against them allows leaders to tweak their strategies early on. The course of action can be adjusted by seeing early signs of trouble: you can deal with potential problems while still having time to address them.

3. They Help Inform Investors

Explaining your performance and aims becomes easy with the help of detailed forecasts. Having a solid sales forecast can enable your potential investors to vividly visualize your performance and goals. Before investing, they would want to ensure that the trajectory for your business is planned, of that happens in term of Monthly Recurring Revenue.

4. They Let You Improve Your Sales Process

If you forecast consistently, you start to see phases in your sales process that take longer than they should. Once these areas are identified and understood, you can dive into their workings and figure out methods to improve them. 

5. They Can Improve Company Morale

Projections allow companies to relay information to the entire organization. If positive outcomes are expected, employees’ morale is boosted. Similarly, if forecasting shows dampened performance, the company can outline the measures it is taking to improve it to stay in control. 

https://unsplash.com/photos/dBI_My696Rk 

Common Forecasting Techniques

The forecasting process is based on several indicators like economic trends or past financial and sales data. Accurate projection is usually easier for established organizations as they have access to their previous sales data. However, newly launched businesses will have to use market research, analyses of competitors’ strategies, and other forms of interest to estimate their future revenues. 

Many methods exist for both new and established businesses to forecast. The details of forecasting techniques are beyond the scope of this article, but we have compiled a few of the most common techniques below. 

1. Top-down Sales Forecasting

Top-down sales forecasting constitutes an estimate of the market share a company will get within its Total Addressable Market. Note that leaders in the company make this guess: the reps who work in the field are not involved. 

2. Bottom-Up Sales Forecasting

Bottom-up sales forecasting consists of estimates made by sales representatives based on the work and opportunities they have marshaled. This guesswork can be more informed than top-down forecasting as the reps have better knowledge of their field and the work they have lined up.

3. Qualitative Sales Forecasting

Qualitative sales forecasts rely on human intuition: experienced business leaders make them by using their expertise to predict sales. Though qualitative forecasting is based on experience, it is highly subjective in nature. Different leaders can use varying methods to develop projections, which causes poor visibility, obscures pipeline health, and affects the accuracy of the forecasts. Different views of the future can further cause the leaders to develop inconsistent and unaligned plans. 

4. Quantitative Sales Forecasting 

Quantitative forecasting uses statistical analysis of past sales data to forecast. As it is based on objective calculations, this technique yields more accurate results than the others, causing companies to lean towards it increasingly. 

Related Reading; The Best Sales & Marketing Tools to Grow Your Busines

Factors That Can Impact Your Sales Forecast

Forecasting is not a prediction of the future but an attempt at defining the outlines of the future. However, you will have to remember that these outlines may not stay static when certain factors start varying. Here are some of the key factors that impact sales projections.

1. Market conditions

Current and expected changes in the size of the market affect expected sales. Understanding the broader market is crucial to making accurate forecasts. You need to stay on top by keeping an eye on economic growth, influx or outflow of companies in your industry, or availability of materials and labor. On the micro-scale, you need to keep assessing the actions of your close competitors; if they have launched a large marketing campaign or plan on launching discounts, your sales are likely to be affected as well. 

2. Product Updates

If you have changes and updates planned for your products and services, both production costs and consumer reactions can change. For example, you can expect increased sales if you plan to roll out popular/requested features or introduce complementary products. Similarly, introducing new products that can substitute old ones may disrupt the sales of your current products. Your forecasts should reflect any changes you plan to make to your products or services.  

3. Seasons

Some products face different demands at different times of the year. Your past accounting data can show how your sales vary with seasonality. Recurring cyclic variations can then be linked to factors like weather conditions, or holidays. If you do not have prior experience operating in the market, you can analyze your competitors’ actions at specific times of the year to figure out any trends timely and adjust your forecasts accordingly.  

4. Marketing efforts

Marketing directly impacts sales. You need to link marketing efforts and expenses to sales statistics to identify trends and leverage them to make accurate forecasts. Marketing campaigns, investments, and changes in advertising channels will affect your performance, so be prepared to adjust your projections accordingly.

Related Reading; What is Multi-Channel Marketing?

5. Regulatory changes

Certain laws, mandates, and regulations may directly affect the industry you operate in. Though it may be hard to predict the effects, you’ll have to stay prepared to adjust your figures when the time comes.

6. Number of Employees

If your company is planning to take more salespeople on board, you’re likely to see increased sales in the future. Similarly, if an increasing number of salespeople are resigning due to better job opportunities, you should expect a decrease in revenue. Hires and fires need to be adjusted for in your forecasts.

7. Internal Policy Changes

Any changes in internal policies like commission rates will affect your sales and revenues. For example, if you decide to prohibit discounts near the end of a month, you’ll see your sales spike up in the initial weeks of the month and decline rapidly near the end. Your forecasts need to take these policies into account.

8. Territory Shifts

If you shift to new territories, expect your revenue to dip before your sales pick up again. Sales representatives will require time to familiarize themselves with new areas before they build up their pace. Make sure to adjust your projections for territorial shifts.

The Problems With Inaccurate Forecasts

A majority of companies struggle to develop accurate forecasts, especially those that use intuition-based forecasting methods. In fact, according to Miller Heiman Group, less than a quarter of sales organizations can forecast with an accuracy of 75% or more. According to a report by Gartner, more than 50% of salespeople admit to having little confidence in their abilities to forecast.     

Inaccurate forecasts can have costly consequences for organizations. For example, if a company overestimates its revenue and is under-delivering, its valuation could be negatively affected. On the other hand, underestimating revenue and over-delivering may not give the company a reasonable length of lead time to arrange hiring or product launches. Inaccurate forecasting can dampen the company morale as it leads to:

  • Over promising on raising budgets, investments, and salaries
  • Delays in planned projects due to not earning expected revenue
  • Unexpected layoffs
  • Increased pressure on employees to meet unrealistic revenue goals

A lowered morale can lead to job dissatisfaction, decreased productivity, and low work output.

Endnote

Accurate sales forecasting is necessary for organizations to stay in control of their future performances. In fact, Aberdeen Group revealed that organizations with accurate projections are 10% more likely to increase their revenue yearly and two times as likely to ace their field.

If you have been forecasting blindly, now is the time to refine your techniques and use statistical methods to attain accuracy. Here is a detailed sales forecast excel sheet to help you build reliable projections and let you identify the gaps in your pipeline.