New entrepreneurs frequently forget about an important thing: sales forecasting. Some of them are too optimistic and believe they won’t face any difficulties related to product sales whereas others underestimate the importance of forecasting methods for sales. Often, entrepreneurs have not the slightest idea of how to calculate the sales forecasts. Let’s take a look at this question in greater detail.
What Is Sales Forecasting?
It is a number-one component of business planning. Simply put, its main objective is to predict how much your company can earn within a given timeframe. Modern companies use this tool to make business decisions such as hiring plans, budgets, marketing strategies, etc.
Remember that when there’s no clear picture of sales outcomes, the budget and growth strategies can fall apart. As a result, you may experience profit losses or bankruptcy in the worst-case scenario.
When a company properly predicts sales forecasts, it is much easier for them to manage resources and find potential issues at an early stage.
Why Is Sales Forecasting Important?
Just like any other business process, sales forecasting is very important for any business. In other words, it is the foundation of any business. When you make a sales forecast, it will be easier to control your business. You’ll have the information about your cash flow, profit or loss statement at hand.
When you make a complete financial forecast, it will be easier to set goals and achieve them. A powerful sales forecast will help you answer the following question:
- What does your company hope to achieve?
- How much do you plan to spend?
- How many clients will you have next month?
- How much a potential client will spend when buying your products or services?
It allows you to properly calculate how much you should spend on marketing to attract new clients to your business.
The Key Benefits of Sales Forecasting
Here are a few crucially important benefits that will persuade you to use effective techniques to forecast sales:
- You can plan for the future. A sales forecast is not a magic wand but it allows you to get an accurate presentation of your future plans. You’ll be able to plan the budget and prevent a variety of problems.
- Assess sales performance. It allows you to check whether your sales team is effective enough.
- Set the right goals. When you know how many sales you expect, you can set the right team goals and be confident that you can achieve them.
- Control budgets. An informative report allows you to make sensible investments and avoid bankruptcy.
A Simple Sales Forecast Example
Now that we have covered the theory, it is time to move on to examples.
Look at this image and you’ll see how a startup sales forecast looks like. The owner of this cafe doesn’t consider the type of sales. This person analyzed the previous year and creates a month-by-month estimate for the upcoming year.
How Detailed Should You Be?
The first thing you should do is to identify the main purpose of your forecast. It is ineffective to build sales forecasts for the entire company, you should be more specific. However, where is the right balance? How to do a sales forecast that will help your company grow?
Let’s have a look at a simple example. If you want to open a cafe, there’s no need to make forecasts for each position in your menu. It will be more effective if your sales forecast focuses on such categories as lunch, dinner or supper. When you want to open a shop selling kids’ clothes, you should focus your forecast on casual wear, outerwear, etc. A lot depends on the product or services that you sell.
How Far into the Future Should You Forecast?
If you are a newbie in this niche, you should forecast every month. Later, you can plan your forecast for one, three or five years. Too proactive planning is not always effective. The world is constantly evolving and your business will also change. So you’ll have to update your forecast to keep up with the times. And remember, your forecast is just that: a forecast!
Sales Forecast Elements to Consider When Choosing the Right Tool
Before we start discussing the best sales forecasting methods, we should consider the main elements any business owner should be aware of:
- Your needs. Be realistic and keep in mind that you should cover your forecasting needs. Identify the main priorities and functionalities that are crucially important for your business.
- Accessibility. You should be able to access your sales forecasting tool from any device and being anywhere in the world.
- Adaptability. When you choose a tool to predict the sales forecast, you should make sure that it can adapt to your business needs.
- Collaboration. Forecasting can’t be done without the integration of clients’ feedback. So before you choose the right tool, you should make sure that it incorporates the right functionality for you.
- Pricing. If your budget is limited, you can choose the software available in SaaS. The majority of these solutions offer monthly and annual subscription plans.
- Data security. A good sales forecasting tool must be safe for users. So make sure it is secured by an HTTPS connection.
The General Factors That Affect the Sales Forecast
Here are the main variables that could influence sales projections:
- Personnel fluctuations. Employee turnover can influence your sales outcomes. For example, if a very important sales rep leaves, in all likelihood, your sales fall.
- Economic conditions. One of the main crucially important factors to consider is the economic climate. A booming or slowing economy influences your sales cycle differently.
- Product changes. Statistically, product changes usually promote much better sales. However, you should make sure that every member of your team is informed of these changes.
- Competitor changes. Always analyze the competitive market because changes in it can influence your sales forecast.
How to Calculate Sales Forecast? The Best Methods
Opportunity stage forecasting
When talking about the main sales forecasting methods, this one is the most popular solution. Thanks to this method, you can predict the probability of closing a deal. However, a lot depends on where your prospect is in the sales process. But you need to know the exact average sales cycle of your company. Here’s the list of the main deal stages that you might use in your sales process:
- Meeting scheduled;
- Qualified to buy;
- Delivering the presentation;
- Delivering the contract;
- Closed deal.
Length of sales cycle forecasting
When you forecast by the length of your sales cycle, you’ll be able to predict when your deal is likely to be closed. The main benefit of this technique is that it makes assessments based on the deal age. That’s why your sales team should know how long the average sales cycle is.
The main benefit of this method is that it allows you to create algorithms based on different types of deals.
This method allows you to enhance the accuracy of forecasts, improve your planning, decrease inventory costs and save your precious time, money and effort. Simply put, it allows you to generate the forecasts on the basis of different forecasting models and your usage data. The data is usually processed by intuitive planning models in order to understand your demands.
However, it is more art than science. For example, a sales rep may have been working with a particular client for a few weeks or months and now, they are sure that the deal can be closed this month. But to use this process you need to be sure in your sales reps.
Being a simple and easy sales forecasting method, it allows business owners to get precise insights based on previous performance over a certain period of time. To understand how it works, let’s take a look at a simple example. If you want to predict sales for the future three months, you need to check the sales for the previous three months. Or, if you want to predict sales for September, you should check the numbers from the last September.
It is also called regression analysis. The main distinctive feature of this method is that it is considered to be the most accurate technique used for sales forecasting. However, it is also mathematically focused.
What do you need to know about this strategy? You should always use predictive analytics in order to identify revenue. This method usually involves individual rep performance metrics and length of sales cycles. However, a forecaster should be trained in statistics or math to conduct it.
Pipeline forecasting means forecasting from a sales pipeline of your business. This method is the most time-consuming one, especially if you don’t use the required software to make all your calculations. It depends on your ability to provide informative data. If you use incorrect data, you won’t get precise forecasting. So before you start using this method, you should make sure that your sales reps always enter the data correctly into a CRM tool.
The purpose of this method is to check every opportunity in your pipeline and calculate all the chances of closing a deal.
If you want to use this technique, you need to have a properly-defined sales process. All activities that are necessary for closing the deal should be properly defined. As soon as you define the main deal stages, it will be easier for you to identify an opportunity to close the deal. In such a scenario, the use of a good CRM tool might be the right solution.
Great Tips on How to Make a Sales Forecast
It goes without saying that sales forecasting is an integral part of any business. Let’s review the basic tips to follow on how to make a detailed sales forecast for new and existing businesses.
Sales forecasting for new businesses
It is really hard to predict sales for a new business. This process usually involves the necessity to research your target audience, competition, and target area. There’s no need to try to reach perfection. Your goal is to make the most detailed guess.
- Always use trade publications. Before you start working with figures, you need to explore your industry. First, you need to identify your trade group and after that, you should study the massive amount of data that will help find out more about your business niche.
- Consult small business development centers. Experts from these organizations know every trick of starting a small business. So they will help you gather more information about your business niche.
- Talk to people who work in the same area. You won’t get detailed financials from them but some of them may be glad to share some tips with you.
- Forecast your expenses. You should know everything about your fixed costs.
Sales forecasting for existing businesses
When your business is established, it is much easier to make a sales forecast because you already have a baseline of past sales. You just need to analyze incomes for the previous months and combine them with modern industry trends. If your business has standing customers, this analysis will help you find out whether they will continue to buy in the future.
A Few Ways to Improve Your Sales Forecast
Following the below-listed tips will definitely make your business sales forecasting more effective:
- Make sure your sales forecasting is realistic. Be honest with your resources, your experience in the niche and your budget. By setting unrealistic goals, you won’t achieve success.
- Check whether you know your sales cycle length. You should bear in mind that bigger deals usually take more time to close than smaller ones.
- Use the most consistent model. Remember: it is impossible to find one method that can meet the needs of all business owners. But data accuracy is the main key to accurate sales forecasting.
- Use the data of real prospects. If you see that your sale isn’t moving forward, it would be more effective to spend this energy on sales that are more likely to close.
- Always reward sales reps for great results.
When using these recommendations, you’ll definitely improve the accuracy of your sales forecasts.
What Is a Sales Forecast Template?
It is an editable document that allows you to plan future sales for the whole team. In other words, it is a customizable spreadsheet that requires constant data updating and annual upkeep.
When browsing the web, you’ll find a variety of either free or paid tools, but most of them are for Google Sheets or Excel. That’s why it would be more effective if you use a good CRM tool that can automatically make projections for your company. All of them are designed for different needs.
Nimble CRM is one of the best tools that can help make the most accurate sales forecasts. Being a simple smart CRM, Nimble can meet a variety of requirements. It’s a superb tool that can help business owners update contacts and manage sales deals. This solution can save your precious time because it automatically builds contacts.
When using this tool, you can finally organize your work because Nimble can store information about your customers intelligently. All reports and dashboards will be clearly visible, allowing users to customize reports, view statistics and check real-time data updates. Moreover, thanks to this solution, you’ll be able to build precise sales forecasts.