Sales forecasting is the way in which companies predict future sales revenue over a specific period of time. In a nutshell, it helps you predict how your business is performing.
An accurate sales forecast can help drive your entire growth strategy. But most sales leaders don’t feel confident in the accuracy of their sales forecasting — they aren’t sure if they’re using the right metrics, data, and calculations to drive accurate projections.
To accurately and confidently predict business growth, you have to develop a strong foundation for forecasting.
Businesses need to forecast so they can make revenue projections and use the data to increase sales and meet revenue goals. Forecasting helps you predict future performance, mitigate business risk, and better allocate resources where they’re needed.
An accurate sales forecast lets you understand past performance and helps you predict future sales performance. It allows you to plan ahead and make business decisions based on factual data rather than guesswork. You can use sales forecasting to estimate how much of a product or service you’ll sell during the next quarter or year, which teams and individuals will most likely hit or miss their revenue number, or how many qualified leads you’ll generate.
A sales forecast gives you visibility into the patterns and trends in performance, which helps you set more attainable business goals. It helps you plan for growth and identify opportunities that may otherwise be overlooked.
Sales forecasting essentially gives companies a roadmap for the future that can help them make more informed decisions for the business.
Forecasting helps you spot weak areas in your business. Areas that are causing — or have the potential to cause — your business to lose money and other resources.
For example, it will show you if teams and individual people have enough pipeline to hit their goals. With today’s AI-powered forecasting solutions, you can also see deal risks that occur based on what was said in emails and on calls, or whether or not the right level and number of contacts have accepted meeting invites associated with a deal.
You can also identify outlier periods when your sales were particularly high and low. Then, you can use that information to identify why you had high or low sales and, thus, where your strengths and weaknesses are.
When you have those insights into your sales process, you can better assess which resources your company needs to avoid missing quota or revenue goals.
A forecast is often the starting point for annual budget planning and resource allocation. When you compare actual results against forecasts, you can better determine whether you need to adjust your budget to meet declining revenue or changing market conditions. Alternatively, you can use it to determine whether you should invest more in certain areas — like employees or technology.
For example, if your sales forecasting uncovers a lack of conversions from your email marketing campaigns, you can decide whether to allocate more funds or figure out more successful tactics. Or you can decide to reallocate your email marketing dollars to a marketing campaign that has proven more lucrative.
There are direct and indirect factors that can affect your sales forecasting. That is, things you can control and things you can’t control. Therefore, to create the most accurate forecast possible, it’s important to know what can affect it.
The way you structure your sales process can affect your sales forecasting. For example, a poorly structured sales process can affect sales forecasting because employees aren’t clear on how to log specific actions or stages of the funnel, leading to varied data being used in the forecast.
With a well-structured sales process, there are no such issues with data consistency. All sales reps have a general understanding of what information needs to be logged at each step along the buyer’s journey. The structure allows for more accurate sales forecasting.
Create a well-defined sales process where everyone involved in sales activity (e.g., sales reps, sales managers, and customer service reps) follow the same steps. Management has to continually reinforce the sales process through training and coaching.
Pay attention to industry growth rates and factor them into your sales forecasting. Industry trends can help inform your future business strategies and goals.
For example, even if your sales are increasing steadily, if the overall industry or market is in decline, it could affect your sales performance in the long run. Alternatively, if your industry is on a positive growth trend, you should also factor that in when you forecast sales. It can inform your forecasts by giving insight into customer demand and the types of products people are likely to want in the future.
Factor market growth and decline rates into your calculations for projected growth. Research the compound annual growth rate (CAGR) for your market, find out how your direct competition is performing, and talk to industry experts to better predict how trends in the market will affect your sales.
Economic conditions can impact sales and therefore forecasting. Economic conditions, like high inflation or changing interest rates, can affect everything from the cost of raw materials to consumer spending habits and even credit availability, which affects how people spend their money.
For example, the COVID-19 pandemic put a strain on budgets for companies and individuals, which impacted B2B & B2C sales. Companies started being more conservative with their budgets to try and prevent the long-term effects that COVID-19 posed on businesses.
Positive economic trends should be factored into forecasting, too. For instance, if the economy is growing at a steady rate and unemployment is low, people and companies are more likely to have disposable income, creating higher demand for some markets.
Include these trends in your forecasting report as bullet points and how they affected your business in that sales cycle. For example, you could include a blurb like: “CustomerABC downsized due to COVID-19 and paused their spending with us, which made our monthly revenue go down.”
There are several methods for forecasting sales. The method you choose depends on what you want to get from the forecast and how it aligns with your overall business goals. An AI forecasting tool is actually a single tool that incorporate all the factors outlined below.
You can look at historical data from previous sales cycles to evaluate future performance. Historical forecasting focuses on overall growth potential rather than a specific stage of the funnel.The historical approach is a backward-looking approach that uses data from previous sales cycles to evaluate future performance. This method can be relatively easy because much of the groundwork has already been done for you. But it does require a strong process for recording data so that you can easily pull it for your forecast.Historical forecasting will also work if you want to evaluate your progress through a specific stage in the funnel and see if it’s working. For example, if you’re trying to move more people from email sign-ups to sales, this type of forecasting can help you determine whether your current email follow-up process is producing results.This type of forecasting works best when you have a few years’ worth of data to draw from. You’ll want to break down each year by quarters so you can compare seasonal sales and investment patterns. If there are any major spikes or dips, consider why and what it might mean for future performance.
Opportunity stage forecasting helps you figure out the probability of whether you can close a deal based on where the prospective customer currently is in your funnel or sales process. The further along in your sales funnel, the more likely they’re to purchase or convert.Opportunity stage forecasting gives you an idea of how much time and effort you’ll need to invest in order to get them from the early stages of awareness to paying customers. You’ll have to compare current data to previous years so that you have a benchmark to measure against.Create a list of all the stages in your sales funnel or process and assign each stage a probability based on historical sales data.
Most businesses assign prospective customers to a stage using some iteration of this list:
Then calculate the percentage of people that have converted to customers from each stage in the cycle. To calculate this, you’ll have to know the stages at which each prospect dropped off.
The length-of-sales-cycle forecasting method uses the “age” of your prospective customers, or the length of time they’ve been in the sales pipeline. The main difference between this method and opportunity stage forecasting is that instead of helping you identify whether a deal will close, length-of-sales forecasting helps you predict when a deal is most likely to close.You’ll have to compare current data to previous years so that you have a benchmark to measure against.For this method, you’ll need to calculate the average sales cycle. The average sales cycle tells you how many days it takes your reps to close a sale. To do this, add up the total number of days it took to close all sales during a given sales cycle (i.e., the previous quarter or the previous year). Divide this by the total number of deals closed during that same cycle.Once you’ve calculated the average sales cycle, you can make projections for next quarter and next year for the prospective customers in your current pipeline.
The lead-driven forecasting method looks at all leads generated during a specific period and assigns a value to each lead based on what other leads have historically done. The value is a percentage that represents the likelihood that a lead will convert. Leads with the highest value are more likely to convert.
To use a lead-driven sales forecasting method, you’ll need:
The scale on which you rate them is dependent on the criteria you include — if there are a lot of variables in the rating system, you may consider a larger scale (1–100) to better evaluate their value. But if you don’t have a lot of variables, you can use a small scale (1–5).
The exact steps of your sales forecasting process will depend on the method you use. But there are a few steps you can take to help you prepare to run your forecast.
The forecasting method you pick should align with your overall business goals and objectives. If you have lead-driven goals, then a lead-driven forecasting method makes the most sense. You should also consider individual sales team and rep goals. Use forecasting to identify how often or the likelihood that your reps meet their quota for each sales cycle.
Review the different types of forecasting listed above and identify the one that aligns with your overall sales strategy and goals. If the four methods we’ve listed above don’t work, try a combination of different types. Some sales teams have a lot of variables and need to use elements from several different forecasting methods.
Gather all relevant sales data from your sales teams. Include data for individual sales reps and whole teams. Gather information on leads, revenue, and the channels you use to generate leads. Collect data from other departments that can offer insights like marketing, product, and finance. For example, marketing likely has more insights than sales into how social and email channels are working to produce leads.
You’ll need a customer relationship management (CRM), a spreadsheet, or another reporting tool to calculate. If you have a revenue intelligence tool, you can pull data from it to get deeper insights into revenue opportunities and risks.
To predict future sales performance, you need to compare past sales data to look for repeating patterns or trends. For example, if you compare your numbers on a year-over-year basis, you may find a decrease in sales around the winter holiday months.
Put this data together in a report. Many businesses use visual aids, like charts, tables, or graphs, to show past, present, and future (predicted) sales data.
Forecasting sales is essential for sustaining your business and understanding how much revenue your business will make in a given time period. If you’re not sure where to start, start small and continue to build out your forecasting model.
First, identify how your forecasting will align with overall sales goals and start by calculating the most important metrics. For example, if one of your sales goals is to increase opportunities by 25%, you can use opportunity stage forecasting to see how likely your current pipeline of customers is to convert during the upcoming sales cycle.
Through forecasting, you can identify your revenue opportunities and even adjust your goals or objectives based on your performance.
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