What Is Sales Forecast? Definition and Formula

What Is a Sales Forecast?

A sales forecast estimates a company’s future sales or revenue based on various factors such as historical sales data, market sentiments, the performance of other products, etc.

An accurate sales forecast helps a company allocate the right amount of funds for a product, organize the workforce, manage resources, territory and quota planning, and so on. 

Sales forecasting might be easier for longer-running businesses than for startups due to more accurate data. In contrast, startups generally rely on generic data available in the public domain. 

How To Calculate Sales Forecast for a New Business?

In about five steps, we will discuss how to calculate the sales forecast for a new business.

Track the business data

Track your business’s financial data for every product every month.

Determine the sales cycle and other categories

Now figure out the period and sales cycle you would like to measure.

Depending on your business definition of the sales period, it can be monthly, quarterly, or yearly.

Then choose what you plan to forecast. Don’t forecast the entire company or only one product. 

For better results, you must make categories of products.

Choose a sales forecasting method.

Look at the purpose and process of each sales forecasting method and accordingly decide which one is best for your business.

Some of the sales forecast methods are:

• Historical forecasting
• Multivariable analysis
• Bottom-up approach
• Opportunity stage forecasting
• Intuitive forecasting
• New business approach

Use the sales forecast formula.

One of the simplest sales forecast formulas in calculating the annual sales forecast. For this purpose, you can use a year as your period.

You can use the below formulas:

Look for the factors that may influence your sales forecast.

Finally, don’t forget to look at the factors that may affect your sales forecast.

How to Accurately Do a Sales Forecast?

Define Revenue Streams

Companies have to mark the revenue streams and break them based on various key factors such as demographics. 

You must define the revenue streams to align with your accounting setup. This data would make it easier to determine the difference between predicted and actual sales.

Analyze past data

An essential part of any sales forecast is to analyze the available past data accurately. 

Analyzing past data is probably the most invaluable resource for sales forecasting. 

Taking relevant data, economic trends, and conditions into account while forecasting will help any company create an accurate sales forecast preventing any wastage of available resources.

Compete for your product against others

For any brand-new product, sales forecasting can be a relatively tougher job. However, reading into the performances of similar products available in the market can make this forecasting process much more manageable. 

What Is the Importance of Accurate Sales Forecasting?

Below are some points that show the importance of accurate sales forecasting:

• Companies can efficiently allocate resources for future growth and manage the cash flow with an accurate sales forecast.

• An accurate sales forecast conveys confidence to the management team and the board members that your business has a reliable forecasting machine that can scale well sometime in the future.

• A sales forecast can facilitate strategic planning. Therefore you will know the dates for execution and implementation of your plans.

• With sales forecasting, leaders can course-correct early on. It will also set the benchmark for future trends.

• Revenue leaders will be able to align revenue expectations and sales quotas. Thereby optimizing for more wins.

What Are the Sales Forecasting Techniques?

There are three types of sales forecasting techniques. 

Qualitative techniques

The qualitative technique of sales forecasting uses qualitative data. Businesses mainly use it when the data available is limited.  When you are uncertain about the market penetration rates and market acceptance of products, use the qualitative sales forecasting technique.

Pro tip: Build products that sell with product management software like Chisel. 

Five qualitative techniques are:

• Delphi method
• Panel consensus
• Buyers expectations
• Market research
• Salesforce composite technique 

Time series analysis and projection

The time series analysis focuses on patterns and pattern changes. 

With time series analysis, you can understand the following:

• Growth rates of trends
• Cyclical performance patterns
•  Systematic variation

Casual models

The causal model uses specific information of system elements.

Use the causal method when you have enough historical data about products and analyses.

Causal methods will show more sophisticated sales forecasting models.

What Factors Influence the Sales Forecast?

A significant number of factors influence or affect a company’s sales forecast. Therefore companies must keep an eye out for any changes that may affect the sales forecast.

Below we discuss some of the most important factors influencing the sales forecast.

• Constantly changing market conditions
• General conditions
• Socio-economic factors
• Conditions within industry
• Marketing plans
• Internal policies
• Competition
• Infrastructural composition
• Foreign trade factors
• Product mix

How To Improve Sales Forecast Accuracy?

The sales forecast is an essential process for your business to grow.

Research shows a 10% chance of increasing income and a 7% chance of hitting the targets with sales forecast accuracy.

However, most companies sit without an accurate sales forecast even at the end of the year.

Below are some ways you can improve sales forecast accuracy for your business.

Accurate and complete sales data is a must.

Firstly you must have the sales data from the previous year ready with you. However, just having that data is not enough. You must have complete and accurate sales data. 

And that is because it will serve as a good starting point for you to draft a new sales forecast.

An effective sales management system is better.

With sales management software, you can manage your sales pipelines better.

Before reaching the end stage, you can also monitor each process.

Remember to conduct some research before you get the sales management software.

Keep an eye out for the factors that impact your sales forecast.

Before you predict the sales for the future, there are certain internal and external factors that you must consider.

 Some of the internal factors are:

•  Displacement of location
•  Hiring and firing of sales reps
• Internal policy changes

Some of the external factors that may impact your sales forecast are:

• Economic conditions
• Market changes
• Competitive changes
• Seasonality
• Legal changes

Demand is vital, not supply.

When you start with sales forecasting, don’t just focus on the supply of your products. Keep more focus on demand. 

Doing so will help you to get the right kind of inventory.

You can save money by preventing both the excess and shortage of inventory. 

Sales reps are a must when you conduct the sales forecast.

Who better than the sales reps to understand your consumers? 

Therefore it is necessary to have them on board when you start with the sales forecast.

Ensure that sales reps add the necessary data related to the marketing summaries and other sales progress in the CRM software.

You can also ask them to get going with sales strategies for the next term based on their clients’ suggestions.