What Is a Sales Forecast?
Sales Forecast Definition
Sales forecast refers to the step-by-step process a company takes to estimate sales revenue for a given period. The period can vary from a month to a year. With a sales forecasting technique, the company determines how much it will sell in the future. With accurate sales forecasts in place, companies can predict short, long term performance.
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:
Annual sales forecast= Total sales last year + (total sales last year x rate of inflation)
Possible sales revenue for the rest of the year= Average monthly sales rate x number of months left in the year
Average monthly sales rate = Total sales revenue so far / number of months so far
Annual sales forecast= Total sales revenue so far + possible sales revenue for the rest of the year
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.
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
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
- 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
- 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.
Accurate forecasting helps companies make informed decisions, allocate resources judicially, and predict short-term and long-term goals.
This forecast has its basis on past sales or current market trends and sentiments.
A sales forecast growth rate is the increase that a company expects to see in its sales figures over a given period.
You must first define sales forecast accuracy and find an acceptable range of sales forecast accuracy.
To measure sales forecast accuracy, you must take the percentage difference between the first-day sales forecast and the cumulative sales results you will receive on the final day of the forecast.
You can check the score you get for the sales forecast accuracy against the below standards:
Good scores:?>+/-5% and ?+/-10%
Sales forecast is the starting point in budgeting because it impacts all the other aspects of its activities. Sales determine revenue and direct costs.
These costs are essential for cash flow and budgeting. Sales forecast also forms the backbone of marketing.