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We all want to be able to magically predict the future. To see the months or years ahead and understand how our business will grow.
Today, we have what it takes to do that. Except there's no actual magic involved. Just processes and tools that allow us to get an accurate reading of future revenue and growth.
Sales forecasting is an important part of that process.
An accurate sales forecast is key in building organizational growth and understanding your future business needs. It can help guide your sales direction and product releases, and impact all parts of your business—from hiring to budgeting. That means it impacts departments across the organization, whether it be sales and marketing, HR or finance.
So what exactly is sales forecasting and what's the best way to approach it? This guide will explore those key questions.
Businesses use sales forecasting to estimate future sales revenue. Whether you're looking at the month, quarter or year ahead, a sales forecast helps you predict how much your company will sell during the specified time frame, and lets you plan accordingly for those future sales. Different from your sales target—which is what you hope to make in a specified time period--the sales forecast looks at what you expect to sell.
Not surprisingly, then, the best sales forecasts are those that are the most accurate. Accuracy is critical for businesses trying to use their forecast to make decisions around hiring, compensation, inventory, marketing and more. And accomplishing accuracy means having the right inputs and approach.
Your sales team and product managers will play a big role in getting your sales forecast right, making sales projections based on the sales pipeline, historical data and your product release schedule. The overall size of the available market and your organization's share of it will also inform your final forecast.
Forecasting is a critical part of your sales operations, but it can also impact your entire organization. It ensures you have the right resources in place—from product inventory to the appropriate staff at every level of your business—and helps you set the right quotas and keep your costs aligned. All of which ensures you're making the most impactful business decisions and the best choices to meet your organizational goals.
An accurate sales forecast, in other words, takes the guesswork out of your decision making--enabling you to address any challenges, make tough choices and schedule your product development to meet demand.
While the exact roles responsible for your sales forecast will vary from organization to organization, they usually consist of any or all of the following:
Managers and sales executives have a big picture view of their sales team and operations—meaning they understand the kinds of numbers each sales representative can drive and the territories they're best suited to take on.
Sales representatives can offer data on their personal sales pipeline and historical success rate, contributing to your overall sales forecast and demonstrating current and future trends and opportunities.
Your product leaders can offer input on when new products will be released and new inventory available—informing when new potential sales will be ready to be made.
Sales forecasting can benefit your business in a multitude of ways. Here are eight benefits accurate sales forecasting can bring to your business:
Getting the most out of your sales operations starts with setting quotas and planning out territories for your sales team. But how do you know who to assign where, and how much to realistically expect from them? An accurate sales forecast can help, giving you a better idea of what territories need the attention of your best sales associates and how to segment them most effectively to meet your targets.
Sales forecasting doesn't just help you set better, more realistic goals for your business—it puts you in a stronger position to attain those objectives. An accurate forecast lets you better understand where growth is possible and where to hedge your bets—allowing you to create sales targets that are challenging but reachable.
When you know what to expect in the year or quarter ahead, you can better understand where to allocate your budget. As cost and revenue estimates become more accurate, you better understand when you need to allocate additional resources and plan for future income flow.
When you know what to expect ahead, you can also hire or reallocate the team you need to support those plans. Whether it's marketing staff, customer support or new sales associates, you can ensure you have the right people in place to meet market demand and make your goals happen.
By looking at gaps in your customers' product usage and identifying where they would benefit from additional enhancements or services, your sales forecast helps you better stay on top of the needs of your customers—and identify potential upsell and cross-sell opportunities.
An accurate sales forecast lets you look ahead to identify not just where your business has the most growth potential, but also where the biggest obstacles lie in attaining that growth. And by identifying problem areas early, you can correct your course before those issues affect your growth goals.
7. It Empowers Your Continuous Planning Efforts
By allowing you to better allocate resources, hire more effectively and budget better, your sales forecast will help fuel your continuous planning efforts and manage risk along the way.
Finally, with better data at your fingertips, your team will know where to prospect for new business and do a better job of keeping the sales pipeline moving at every stage.
There are a variety of sales forecasting approaches your business can use—or you can opt to combine methodologies depending on the sales processes and inputs you have in place. Some of the most popular methods include:
With historical forecasting, your sales forecast pulls on historical data to make predictions for the time period ahead. Past data can help you understand the rhythm your sales take—how they change through the seasons and where demand for new products might fall. All of which can help you discern future trends. Just keep in mind that the past isn't the future and adjust for market changes.
Example: If traditionally you've seen sales volumes grow $150,000 per year and sales revenue was $1 million this year, next year you might forecast sales of $1,150,000.
Funnel-based forecasting is based on your sales funnel, which can be a strong indicator of future sales success. With up-to-date data from your associates on the sales they're pursuing, and how far along they are, you can begin to feed your forecast and create a picture of what your future sales will look like.
Example: If you have 300 prospects in the funnel and know you're batting a 75-to-1 ratio—with 75 unqualified prospects entering the sales funnel for everyone that ends up buying—you can forecast for four sales. An understanding of how long it takes a prospect to make it through the funnel will let you know when to expect those sales to happen.
But why choose one single approach when you can take inputs and techniques from both for a more comprehensive look ahead? But while this may offer a more sophisticated look at your sales forecast, it can also become overly complex and hard to manage—so the trick is to find the right balance.
Example: Historical data may lead you to forecast that your sales revenue will rise by $150,000 next year, but your sales funnel will let you know whether you have enough prospects making their way through the funnel at a fast enough rate to meet that goal.
Whatever forecasting approach you take, there are two different methods you can draw from as you put together your sales forecast. You can start from the bottom or go top-down. The method you choose will depend on your business needs.
Let's take a look at each in turn:
With bottom-up sales forecasting, teams start with low-level data such as customer and product information, moving up from there toward revenue. For instance, your team might start a bottom-up sales forecast by looking at your sales volumes over the last few years and the number of orders expected to be placed in the time period ahead. From there, you could look at how much you expect to charge for your products—enabling you to calculate expected revenue.
Top-down sales forecasting, on the other hand, does things the other way around—working downwards toward revenue instead. For instance, you might start a top-down sales forecast by looking at the total addressable market for your product, from there moving down to determine an estimate of your business's market share. With that in place, you can begin to forecast your potential revenue for the year or timeframe ahead.
Once you've figured out your approach and methodology, though, there are other challenges that you might find yourself facing as you try to build the most accurate sales forecast you can. These obstacles can come from inside your organization or reverberate from market and industry changes. Some possible challenges include:
A recession or any kind of economic uncertainty could slow down your projected sales cycle, as customers hold back on spending. Similarly, a shift in the industry—such as a new competing solution or a newfound market need—could also have an effect, good or bad. That's why keeping on top of any changes to the market, industry or economy as a whole will help you create a more accurate sales forecast.
Sales representatives, like anyone in your organization, may choose to leave the business voluntarily—or may be terminated. Whatever the reason for their departure, this can temporarily create a hole in your sales operations or leave the rest of your sales team stretched thin as you work to fill the gap. You may need to alter your forecast accordingly as a result—at least until you've hired someone new and given them a chance to build up their sales funnel.
A sales representative leaving, for whatever reason, isn't the only change that can affect your sales operations and in turn, impact your sales forecast. Shifts in territories can slow down sales as your representatives get to know and build up contacts in a new area. Changes to your commission structure might also have an impact—either positive or negative—as sales associates react to the new incentives. Any shifts like these should be something you consider when putting your forecast together.
Some products will last the test of time, with slow and steady demand, while others will see early interest but fall out of favor more quickly. Others still will have seasonal ups and downs. Factors like these are bound to impact your future sales—as will any changes you've made to your product that may affect demand, from pricing adjustments to technology enhancements. For a more accurate sales forecast, then, these product demand fluctuations and anything that affects them are worth taking into consideration.
The right technology can ensure your sales forecast draws on the best data and considers all of the trends that might get in the way of an accurate estimate of future sales. Vena Budgeting and Forecasting Software can help, with products and features that include:
Try our free, ready-to-use 12-month rolling forecast Excel template to help you get started on your forecasting needs.
An accurate sales forecast is a key tool in setting—and meeting—your future revenue and growth goals. By understanding your future sales expectations, you can better plan for all contingencies, for more accurate hiring, budgeting, quota setting and more.
But building the best sales forecast for your business means choosing the method and approach to sales forecasting that works for you. And to overcome the challenges and create the most accurate sales forecast possible, the right technology is also key.
That's where Vena can help.
Vena's feature-rich financial forecasting software empowers you to make bottom-up or top-down adjustments to your forecast so you can meet those last-minute deadlines--and build budgeting agility with rolling forecasts.
As Senior Director of Content and Communications, Jonathan Paul leads content strategy and execution at Vena, overseeing the development of owned media and content experiences that help finance professionals fuel business health, as well as their personal and professional growth. When he's not dreaming up new ways to offer audiences value through content creation, Jonathan loves to lose himself in an immersive video game with a solid narrative, lose golf balls pretending to be good at golf and lose time dreaming about time travel.
