All About Sales Forecasting: Definition, Methods, and Tools

Sales forecasting - What is it and why is it important?

Forecasting is a prominent business exercise every company should practice. It not only helps to predict things but also reveals the hidden causes of a particular business problem. The companies which don’t have a proper sales forecast have a vague vision of their revenue and often end up with nonprofit quarters. Sales forecasting is one of the key elements of running a business as it helps in fixing monetary targets.

According to Aberdeen Group’s research, 10% of companies have overachieved their targets with accurate forecasting. If you want to survive in the realm of business, sales forecasting is the main nutrition you should intake.

What is sales forecasting? 

Sales forecasting is the process of predicting the sales amount for a specific period. The prediction is done on a daily, weekly, monthly, quarterly and annual basis. This estimation is calculated based on an individual level as well as an organizational level, based on the teams’ pipeline and companies’ historical data. 

A team manager calculates the sales forecast based on his reps’ pipeline, a DGM calculates it based on all of his teams’ forecast and a VP anticipates the sales based on all departments’ sales forecasts. 

Why is Sales forecasting important?

There are different reasons why sales forecasting is important.

  • Sales forecasting provides a timely alarm to fix the issues.
    For example, the team’s performance is way behind. The issues will grab your attention towards the problem causing this low performance. You will look at the problem and fix the issue early. If you don’t have a forecasting report, you can’t measure the team’s performance on time. If you encounter the problems at the end of the month or the end of the quarter, there will be no time to fix this problem. Last-minute notification will not be effective to fix the issue.

  • It helps to make the decision on hiring, budgeting and resource management in goal setting.

  • It helps to set the targets and track the performance individually.

  • Sales forecasting enables employees to work systematically.

  • It helps to cut down unnecessary expenditures.

  • Sales forecasting is the cause of the given target to all departments. Hence, it provides an opportunity for all departments to work together.

  • It motivates employees to work hard and achieve the targets.

  • Because of the sales forecasting report, all sales reps will be responsible for their targets.

  • It helps the employees to focus on work.

How to forecast sales? 

According to CSO Insights, 60% of forecasted deals don’t close. Hence accurate sales forecasting is as significant as hitting the revenue. Your forecasting will be accurate when you adopt efficient forecasting methods. Here are a few sales forecasting methods that are proven to be accurate.

  • Lead driven sales forecasting
  • Opportunity creation forecasting
  • Opportunity stage forecasting
  • Based on historical data
  • Sales cycle forecasting
  • Pipeline forecasting
  • Multi-variable forecasting

Lead Driven Sales Forecasting

This sales forecasting method is adopted by analyzing the historical data of your leads. The journey of the particular buyer provides a clear picture of whether the prospect will be your customer or not. 

Data from the lead source will provide you a better sense of forecasting. For this sales forecasting technique, three metrics are required:

  • Leads per month for the previous time period
  • Lead to customer conversion rate by  lead source
  • Average sales price by source

This technique provides accurate forecasting reports but it fails to meet the quota if there will be unexpected changes in strategy by the marketing team.

Opportunity Creation Forecasting

This model helps to predict sales based on closed sales. Opportunity can be created by monitoring demographic and behavioral data. 

By looking at the characteristics of the business and their past journey, you can predict the sales. Look at the past journey of your customer and monitor the similar type of industry’s behavior, if it goes in the same direction, you can have a perfect prediction. 

Opportunity Stage Forecasting

This sales forecasting technique is more popular to forecast sales. It helps to predict sales to close based on the position of the prospect in your sales process cycle. In order to implement this method, you need to understand each stage of your sales process and calculate each prospect’s position in it. 

For example, you create your forecast for future sales by multiplying the amount of each opportunity by that opportunity’s probability of closing.

Expected Revenue = Deal Amount * Probability to Close

Forecast based on Historical Data

Though this sounds very easy to forecast sales based on past data, it will not be accurate when other factors come into the picture. For example, every year your business grows 15% and you closed $100K of new business this month last year, this year your forecast will be $115,000 of revenue this month. This year you have a great change in the market or you come up with a new featured product, there is a probability of inaccuracy of your sales forecast. But still, this forecasting technique is widely used.

Sales Cycle Forecasting

This forecasting method depends upon the duration of the prospect’s journey into the sales cycle. If a prospect takes six months of time to become your customer or your average sales cycle of a lead is six month and your sales rep is working on an account for three months, your forecasting should be 55% likely to close the deal.

This technique provides more accurate results as it is more dependent on data rather than rep’s word.

When it comes to the referral, the conversion takes less time than the normal time. In that case, this technique works well but you need to track each type of sales carefully to forecast.

Pipeline Forecasting

In every sales organization, all reps are asked their pipelines. They calculate the pipelines based on the opportunities listed to close the deal for the day. For example, your sales team closes the deal in a month between $500K to $10000K and this matches the pipeline they provide, then you can use this data to forecast.

This technique is completely dependent on the ability of your sales rep. Their ability to convert a prospect to your customer provides more accuracy.

Multi-Variable Forecasting

One of the most effective sales forecasting techniques combines various methods to get the forecasting reports. The multi-variable Forecasting method involves productive analytics, statistical methods, trend analysis, etc. It doesn’t consider one method of forecasting, it combines multiple forecasting methods to get accurate forecast reports.

What do You Need for a Sales Forecast?

There are certain things required to forecast a sale for the upcoming year. It is necessary to break down the duration to week, month, quarter and the year. So that the timely issues will be addressed rather than last moment issues. In order to forecast a sale, an organization requires the below elements.

Documented Sales Process

A documented sales process is an essential part of forecasting a sale. Every organization should have the structure of the sales. The sales process makes it easy to accurately predict sales. 

For example, there are different stages of your sales process. In order to know the probable conversion rates, you need to know how many prospects are in which stages. How much probability is there for the conversion. Each stage will provide the idea of accurate calculation for the conversion.

Sales Goals or Quotas

In every organization, the targets are set weekly, monthly, quarterly and yearly. This is an important factor for sales forecasting. Both individual quota and team quota should be considered while forecasting sales. 

For example, a rep has a weekly target of $5000 and s/he fails to achieve it. In that case, the team’s quota will be helpful.

Current Sales Pipeline

Similarly, pipelines are required to forecast sales. The current pipeline will provide you a picture of solid sales. Both team and individual pipelines are important here. Pipelines can provide you the actual sales rate whereas targets or quotas motivate you to achieve more sales.

Database

All reps should use databases like CRM to track the sales opportunity in order to provide an accurate closing sale. It is an essential part of forecasting sales.

Past History

Most of the organizations consider their past history to predict sales for the future. For startups or the organization that doesn’t have past history can take the data of (their type) other industry to predict the sales. In addition to past data, a forecaster can consider the other factors such as future market demand, the introduction of new technology which may impact the sales. 

Types of Sales Forecasting

There are different types of sales forecasting based on different verticals. 

  • Economic Forecast
  • Industry Forecast
  • Long-run Forecast
  • Short-run Forecast

Economic Forecast

Most of the big companies adopt this forecasting. This type of forecasting involves the economic trends from the past five years, the effectiveness of these trends on the same type of industry, etc. It also takes into consideration the root causes of the economic trends whether it is unemployment, any kind of natural disaster or increment of tax, etc. 
This analyses in and out economic conditions of the countries and world that may affect the sales.

Industry Forecast

The future market demand should be estimated based on industry forecasts or market forecasts. Industry forecast includes an expected sales forecast of all industries and the same type of business. The market demand may be affected by controllable price, promotion, distribution, etc. A forecasting executive should consider the above factors while forecasting.
Apart from the economic forecast and industry forecast, there are other two forecasts from the time point of view.

Long-run Forecast

Generally, one year to five years are considered for this type of forecasting. But again it depends upon the firms and organizations. Within the span of 5 years, any seasonal changes are not considered but competition changes, the population changes, economic depression or boom, inventions, etc.are considered.

Short-run Forecast

This type of forecast is more beneficial than other types. A maximum of one year is considered in this forecasting. Again it depends upon the types of firms. Sometimes the forecasting is done weekly, monthly and quarterly as well. This is utilized for providing working capital, setting up sales quota, estimating stock requirements, etc. It also helps management to improve the process and implement the new strategy for the next quarter for better results.

Challenging factors to consider to accurate sales forecasting

Your sales forecasting will be accurate when you consider the following factors.

  • General Economic Condition

    Considering the economic condition during forecasting provides a more accurate forecast report. Thorough knowledge of economic trends – inflation or deflation helps a forecaster to forecast as the economic condition affects a business massively. Past behavior of the market, individual income, national income, the revenue of the affected business should be considered for forecasting.

  • New Competitor’s Entry

    Future sales are massively affected by the offer your competitors (especially new competitors) provides. The arrival of the new company to the market provokes customers to go with the offer they provide. This is the huge area of losing customers if your competitor wins. Hence, this area also should be considered while forecasting sales. 

  • Industrial Behaviours

    If you closely observe the market, there are a lot of industries where the same products are sold. The difference between the products may be some features or less price against good. Understanding the upcoming strategy of your competitors and having an accurate analysis of it will provide you a rough idea of market demand down the line of one year. Understanding industrial behavior is another crucial part of sales forecasting.

  • Internal organizational Changes

    This is an internal factor in the organization to be considered for sales forecasting. It includes hiring and firing employees, team shuffling and change of sales process.
    Hiring often new employees slows down sales. Starting from day one to getting sales takes a month on average for a new rep. Sales also get affected when the management implemented new strategies by shuffling the team. Again it takes time for a rep to get adjust with the new team. Apart from these, the process change also affects the sales for a while until the sales reps get adjusted with the new process. In the later stage, it may provide you good sales but initially, expect the dip before picking up again.

  • Product Changes

    As explained above, the impact of product change is similar to the process change. Initially, it will slow down the sales until the sales reps get used to the new product. Understanding the new product, learning about it, getting unexpected questions from the customers’ side and getting trained to answer those questions take a certain time. Until then expect the poor performance of the sales reps. This is one more challenging factors to be considered.

  • Marketing efforts

    While forecasting, consider the marketing effects you have done in the previous year. Check the effect of marketing that is still impacting your business and consider it while doing business forecasting.

  • Seasonal Demand

    The picture of seasonality is there in every business. It depends upon the type of business. For instance, if you are into the apparel business, you can expect a spike in your sales and revenue in the festive season. Seasonal demand can be considered based on previous years’ demand. 

Sales Forecasting tools

There are a lot of sales forecasting tools that help organizations to forecast their sales. We have mentioned a few tools here for your reference.

  • Zoho CRM
  • Microsoft Excel
  • Forecast Pro
  • IBM Planning Analytics
  • Mo-Data

Zoho CRM

Zoho CRM helps all types of organizations ranging from small to large-sized companies. It has a feature of a complete customer relationship lifecycle management solution. It helps to manage organization-wide Sales, Marketing, Customer Support & Service and Inventory Management in one system. Apart from these, it has other features such as Correlation Analysis, Dashboard, Exception Reporting, Graphical Data Presentation, Modeling & Simulation, Performance Metrics, Sales Trend Analysis, Statistical Analysis, etc.

Microsoft Excel

Excel is used to track the data. In order to forecast the sales with Excel, you need to have past sales data and other factors that affect your sales. Excel’s Forecast function can be used to forecast future sales numbers. It is more useful for startups and for the company that has a few products.

Forecast Pro

This is specially designed for the business forecasters. This has sophisticated forecasting techniques that are powerful, accurate and easy to implement. It enables organizations to manage the activities starting from hierarchies to sales and operations. Apart from these, it has other features like Dynamic Modeling, Exception Reporting, Graphical Data Presentation Modeling & Simulation, etc.

IBM Planning Analytics

It is an on-premise and cloud-based that helps manage the planning, analysis, scorecards, budgets, and forecasts. With a powerful calculation engine, this helps you move beyond the limits of spreadsheets, automating the planning process to drive faster, more accurate results. It has different features like Statistical Analysis, Dynamic Modeling, Dashboard, Competitor Analysis, Graphical Data Presentation, etc.

Mo-Data

It is exclusively designed for the sales forecasting and is a fully automated sales forecasting platform for high-growth teams looking to scale. It provides a detailed insight into the past, present, and future for your sales. It also tracks the quota of each rep and indicates which rep needs more pipelines. Apart from these, it has features like Correlation Analysis, Dynamic Modeling, Graphical Data Presentation, Performance Metrics, Statistical Analysis, Modeling & Simulation, Sales Trend Analysis, etc.

Conclusion

There are a plethora of sales forecasting tools getting launched every year with new features. While forecasting and using tools, you need to be more careful with the data you are integrating. Wrong data may lead to the inaccuracy of the forecasting report.