Which Sales Forecasting Method is Best for Your Business?
Business entrepreneurs frequently get stuck when it comes to forecasting their sales. These entrepreneurs are very sure about how their business will perform, but they are all clueless when it comes to talking about details. Unfortunately, many companies are unaware of the different sales forecasting methods.
Most of them fail to answer questions like:
- How many leads do we need in the next quarter to hit our revenue targets?
- How much will the revenue target be in 2021?
- Do we need to increase our sales team numbers to hit our sales goals?
It’s a terrific task, looking into the future. None of us can predict the upcoming sales.
How to predict what might happen in the future? In this highly competitive marketplace, you need to work one step ahead. Companies are expected to pursue forecasting methods to stay competitive and drive revenue.
Here’s what you will get know in this article:
- What is sales forecasting?
- Benefits of sales forecasting
- Factors influencing sales forecasting
- Steps to forecast sales
- Sales forecasting methods
What is Sales Forecasting?
Sales forecasting determines a firm’s share in the market to understand the future and answer what could happen? The sales forecasting method provides companies with actionable insights. It is used to improve your company’s accuracy and reduce your risk.
Benefits of Sales Forecasting
Sales forecasting has numerous benefits. It allows companies to:
i) Efficiently allocate resources for future growth
ii) Estimate their cost and revenue accurately
iii) Predict their short-term and long-term performance
iv) Helps in overall business planning and risk management
v) Improved decision-making about the future
Factors Influencing Sales Forecasting
I) Internal Factors
Internal Factors occur within the organization and can be changed according to increased sales and forecast.
- Labour problems: If an organization faces any labour problems, then the sales can take a dip.
- Inventory shortage: Due to the lack of products, the organization’s sales forecast will be low.
- Working Capital Shortage: (Current assets-(current liabilities)). Since the production needs day-to-day working capital, its sales forecast will be low if an organization’s working capital is low.
- Price Change: The price of the product plays an integral part in sales forecasting. Any price increase can affect sales.
- Changes in the product: When there is a product change, your sales forecast has a significant impact. These changes can include removing bugs or unwanted features and adding additional features to your product. One can make the most of these changes to minimize the sales cycle and make more sales.
II) External Factors
Factors that occur outside the control of the organization.
- Relative Stay of the economy: The economy’s current state plays a pivotal role in sales forecasting. The economy’s condition has a direct effect on all businesses and markets. When the economy is strong enough, people begin investing and making purchases. However, when the economy is in a poor state, people lose money and are hesitant to spend money.
- Weather Change: Change in the weather can affect the sales forecast figures majorly.
- Natural Calamity: Situations like Covid, which cannot be defined before, can be troublesome.
- Taste and Preference of Customer: If the consumer’s taste and preference change towards the product or a company, it will impact the sales.
- Policy changes: When there are changes in policies or the implementation of new laws and regulations, it can directly affect your business. However, this is not in your control.
Steps to Forecast Sales
In the next part, we will explore the different sales forecasting methods. Right now, let’s look into the different steps involved to calculate the forecasted sales.
#1 Observe your historical trends
Examine sales from the previous quarter and break down the pointers into different categories like price, product, sales period, and other relevant variables. This will form the foundation of sales forecasting.
#2 Incorporate Changes
The most intriguing part comes here. When you are done with your basic variables, you have to modify few things according to the current scenario. So, get some insights on how the numbers will look like for upcoming quarters. Let’s take some example to understand it clearly-
Pricing: Have you changed the prices of any products. Is there a need to change further?
Customers: What about your customer base? Is it expanded? What is the difference between the leads generated?
Product changes: Are you adding any new products to your portfolio? Do you expect the new product to act similarly?
#3 Anticipate market trends
This is the time to project the market trends? How will the market perform? How will your competitors perform? Do you anticipate any acquisitions?
#4 Monitor competitors
You have been doing this from the start, but you need to track it regularly. What are the major players in the space doing? Check if new competitors are trying to enter the market.
#5 Business plans
Add all the strategic planning you have been doing. Have a look at your growth curve. Are things going near your expectations? How all these things will impact your forecast.
Sales Forecasting Methods
There are various ways to forecast sales for your business. The method you pick depends on your business needs.
Most businesses use two or more sales forecasting techniques at the same time to get more forecasts. Doing so can present you with the best-case scenario and the worst-case scenario.
Let’s dive right and figure out few sales forecasting methods.
I) Length of Cycle Sales Forecasting
Forecasting by the length of your sales cycle helps to predict the probability of a deal going through. This particular sales forecasting method supports the algorithm.
Knowing the mean length of the sales cycle can introduce a level of predictability into your sales forecasting.
If you get a specific number of leads, you will know what the predicted sales figures will likely be in one month or even a few months down the line.
How to calculate?
Average sales cycle=Total no of Days to Close Deals / No of Closed Deals.
To have a detailed understanding, let’s take an example.
Suppose you have four deals that you recently closed. Calculate the number of days it took to close each one?
- 1st Deal: 62 days
- 2nd Deal: 60 days
- 3rd Deal: 59 days
- 4th Deal: 55 days
- Total: 236 days
Divide the total by the number of deals to get the average sales cycle; here, the avg comes to 59 days. Approx. 2 months.
Based on your average sales cycle length of two months, you might forecast that there is a 50% chance of closing the deal.
This sales forecasting method is suitable for companies that track prospects entering the sales pipeline. It is therefore essential for the sales and marketing team to be on the same page.
The Length of Cycle Sales Forecasting method is objective, and you can apply it to different lead sources to get a precise forecast.
The drawback with this particular method is that your sales cycle will differ based on who you are selling to. It will be longer when you are selling to enterprises when compared to SMBs.
Also, you would need to track data carefully because a tiny error can change your prediction.
II) Opportunity Stage Forecasting
As the term suggests, opportunity stages forecasting is a forecasting technique where the sales team breaks down the pipeline into different stages.
By breaking it down, you can accurately predict the chance of you closing a specific deal.
Businesses can break down their pipeline into different stages like prospecting, qualified, demo, quote, closing, etc. If the prospect reaches the bottom of the stage, there are more chances of closing the deal.
To forecast your subsequent sales, you need to analyze the past and current performance. However, despite being a data-driven prediction, the results might not be that accurate.
The advantage of this forecasting method is that it is pretty simple and highly objective.
The major drawback of this method is that it does not consider characteristics like age and deal size. Also, when the data is inaccurate, your forecasts would not be accurate.
III) Historical Forecasting
This sales forecasting method is quite popular, where organizations take the past sales data for a particular time. It assumes that your sales will be equal to that or maybe more significant than that.
Historical forecasting is a simple and easy method to implement. The results are almost accurate when the market does not undergo significant changes.
However, there are some issues with it.
It doesn’t account for seasonality as the markets are dynamic.
Though the method is easy to implement, it still has some drawbacks like the changing demand of the environment.
IV) Intuitive forecasting
It is all about predicting the future state through a good sense of intuition. The salesperson applies their experience and intuition to predict the probability of getting the deal closed.
This technique is most valuable in the very early stages of a business when there is close to zero historical data. In that case, Intuitive forecasting comes into play.
The only disadvantage of this method is that you cannot scale this method or check the accuracy. Since there is no historical data present, every member can have their estimates.
Another problem is that it is difficult to verify the forecast apart from looking at the client and sales rep’s interactions, which is a tedious job.
This forecasting method is suitable for new companies and doesn’t have any previously existing sales data.
However, if you are confident in your sales team experiences, intuitive forecasting on newer leads can help you get early predictions. It allows managers to make informed decisions and set realistic goals with the team.
V) Multivariable Analysis Forecasting
As the term suggests, it is an analysis through multiple variables. Multivariable analysis forecasting is one of the most precise and sophisticated forecasting methods. It has elements of other forecasting techniques such as sales cycle length, opportunity stage probability and individual rep performance.
The different variables involved in this forecasting are-
i) The performances of your representatives
ii) Types of opportunities
iii) The length of your sales cycle
It solely depends on your data. Since the solution is data-driven, it requires a tool for analytics. It would be best to make sure that the budget is not less as it requires an analytical tool for this.
This renders it impractical for startups and small businesses who have a limited budget.
Also, the sales reps have to track activities to make sure that the results are accurate.
VI) Pipeline Forecasting
Pipeline forecasting is the process of forecasting from a business’s sales pipeline (deals under negotiation with customers and prospective customers).
It looks at every opportunity in the pipeline and carries out an analysis of it based on several factors such as age, type of the deal and the stage of the agreement.
It is quite a complex method as the calculations are extensive. You need to have a program in hand to handle such calculations. To get deeper insights, you need to track your sales pipeline regularly.
There is no worth of using this method if you are not regularly updating your sales numbers. Make sure you never mess with incorrect numbers. Else, the whole prediction model goes wrong.
VII) Test Market Analysis Forecasting
It is one of the most popular sales forecasting methods as it records consumers’ data to check the acceptance of new products. Businesses select their target audience and collect data from there to predict the sales revenue.
It is commonly used for large businesses at the time of product launch to check the product’s acceptance among their target audience.
This forecasting method helps them to get good insights on how the product will react after launch.
It would help if you made sure that you chose the right market to penetrate your audience.
The advantage of this forecasting method is that you can learn the market’s response and fix the problems before you proceed with the launch. Also, startups can offer early access to their product and create curiosity around the product.
The major drawback with this forecasting method is that releasing a beta version can be an expensive affair. Also, you have to understand that not every market is the same. What takes place in one may not necessarily take place in another.
VIII) Lead Driven Forecasting
Lead driven forecasting is a type of forecasting where you analyze each lead source and assign a value based on what the same kind of leads did previously and create a forecast based on the source value.
When you assign each lead source a value, you can understand how probable it is for each lead to become a paying client.
The metrics you need for this method are:
- Leads per month for the earlier time period
- Lead to customer conversion rate (by source)
- Avg sales price (by source)
There can be changes in this forecasting method. For instance, if your team happens to change the lead generation strategy to match the current trends, it can change the number of leads from various sources. This will change the lead to customer conversion rates.
You can minimize the variation on the results by staying abreast of the latest changes and considering them while forecasting.
Invest in a Customer Relationship Management (CRM) tool
After listing down all the necessary actions, there comes a CRM tool that will immediately improve the accuracy of your forecasts and at the same time make your forecasting process more efficient. It keeps the different functions of the business integrated and checks the dependency of different verticals.
The use of CRM with sales forecast reports can help sales teams tweak their sales strategy a bit. Sales reps will be able to find out how far they are from fulfilling their quotas, and sales managers will manage their resources better.
Accurate sales forecasting forms the basis of a successful sales strategy.
Watch out for the most influential industry tool to get the best trend analysis of your business. It helps functional leaders to make better and more informed decisions by providing the most accurate forecasts.
Here are the ideal features in CRM that you must look for:
- Enable generating reports on demand so that you can take a look at the projected sales and see how much sales the team has made to date, how many current deals are in the pipeline and so on.
- Allow adjusting the pipeline estimates based on lead confidence to get accurate results.
- Help in identifying top lead sources and resource allocation.
Going in for automation with sales forecasting is advantageous from every angle. When you have the technology to help you out in simplifying tedious and complicated tasks, you should leverage its power. The time and efforts you save can be put to better use, mainly for strategic decisions requiring your attention.
To improve your sales forecast accuracy and the efficiency of your sales forecasting methods, you need to understand the business drivers well. The sales forecasting model has already transformed the businesses exceptionally well. This will help teams to be better prepared for the future.
Also, to get accurate results, you have to be data-driven. There will be better control of operations, and you will be able to avoid problems easily. In this age, data-driven sales forecasting will help in improving your business.
The use of CRM will help make complex tasks easier and enable salespeople to track progress in every vertical.
Sushant is the Founder SalesBlink. He has an eye for everything tech and marketing.
If he is not found hunting for new gadgets to buy, he will be building or buying some SaaS!
Hit him up for new ideas over coffee.