To understand the impact and significance of sales forecasting, let’s take a look at sales forecasting statistics. For instance, among businesses that invest in the implementation of leading sales forecast methods, around 97% reached their sales quotas. In contrast, among those companies that didn’t pay the required attention to sales forecasting, only 55% achieved the quotas. Isn’t this enough to start learning more about sales forecasting?
So, let’s deal with some key questions about sales forecasting: what is sales forecasting?
How to sales forecasting? What is revenue forecast and how does it differ from sales forecast? Why are sales forecasts important? What are the key sales forecasting statistics? How to forecast sales growth? How to do an accurate forecast? How to calculate sales projections? What are the best sales forecasting methods and techniques? What are sales forecasts examples and templates?
Let’s begin.
What is sale forecast?
Sales forecast is a document that includes the sales forecasting calculations that allow sales teams to forecast the expected sales rates for the future term, in most cases, for the next month, quarter, or longer term.
Another word for sales forecasting is sales projection, or sales estimation (sales estimating is also widely used). Even though some experts do argue about the meanings of those terms and try to differentiate sales projection from sales forecasting and vice versa, in 99.9% of cases if you hear someone saying “sales projection” or “sales estimation”, it is about sales forecasting.
Sales forecast is created by using historical data, including historical sales rates, industry trends, marketing forecast, current pipeline progress for ongoing deals, and other data sources that help sales managers understand the tendencies that influence sales process and sales performance. There is even a term for historical forecasting, as historical forecasting refers to the use of historical data within one time period.
The definition of sales forecasting, on the other hand, refers to specific practices and techniques that are used to create sales forecasts. In other words, sales forecasting is a process of making sales forecasts.
What is the difference between sales forecasting and revenue forecasting?
There is no precise and generally accepted opinion on the relationship between these two terms. From one point of view, forecasting sales is the same as forecasting revenue, as revenue is generated by sales mostly, and there is no reason to differentiate these two definitions. The same is true with financial goals (revenue goal for future revenue, etc.) and sales goals - they seem to be the same.
Another point of view states that there is a difference, as business generates revenue not only from sales, even though sales are the main revenue-generating source. To forecast sales, you have to predict how many sales you will generate within the selected period of time, while to forecast revenue or to forecast profit, you have to predict how much money you will earn within this period. This isn’t the same - as we have already mentioned, a business can generate revenue in other ways than direct sales of the products or services - for instance, a business can also sell its property or other resources that have nothing to do with sales - if a business sells land or real estate, this data will never be included in any sales forecast, but it will be included in a revenue forecast.
So, how to project revenue? First of all, the company has to look at all potential sources of revenue within the projected period - as we have already proven, it can include not only sales, but other sources of income. To answer this broad question in detail, we have to write another article, so let’s first finish with sales forecasting.
Why is sales forecasting important?
Forecasting in a business plays a significant role, but still, let’s describe the measurable benefits of sales forecasting.
Problem-solving
Sales forecast is a forecast, and when it is created, sales managers analyze tons of data, including current market trends and tendencies that influence the entire industry. So, if there are market trends that point to a potential decrease in sales rates, you will be able to acknowledge these changes before they influence your business. To put it simply, you will learn the issue before it harms you, so you will have time to make informed decisions to reduce the harm or even use it in your favor.
Revenue forecasting
Yes, we did state that revenue forecasting is different from sales forecasting, but sales forecasting is still about sales revenue. Sales revenue is the revenue you generate from sales, so sales forecasting is the easiest way to learn how much will you earn during the forecasted period. Obviously, this will help you predict the achievement of sales quotas, and also help to plan your budgets as revenue directly influences your ability to allocate budgets of certain value.
Resources management
Sales forecasting is the key to resource management, especially when it comes to human resources. When sales forecasting points to sales decrease, you can decide to reassign their focus to other tasks, change the sales strategy, or even make changes to pricing policy to try to change the situation. Also, if you work with different types of marketing and sales, for instance, with inbound and outbound sales, and you see that one of these sales types shows growth, you can power that exact sales team up with additional resources to help them save and boost current sales scores.
Sales growth planning
With sales forecasting, your sales strategy will get additional fundamental elements to stand on. Sales forecasting will be your powerful argument to convince stakeholders during budget negotiations or any other internal negotiations that will define your resources for the future. Also, sales forecasting will show you which ones of your sales tactics work better and keep the charge. Another example of sales forecasting influence on your business - imagine you see a 50% increase in sales, and what does it mean? It means you have to hire new sales specialists to deal with the demand.
Team motivation
Sales forecasting also helps you in communication with the team, including all team members - sales reps, sales managers, and others. Your sales teams will see not only what are they expected to do, but what is going to happen in reality - under the totality of factors that influence the situation. It is a direct path to demotivation if you set sales targets and expected sales KPIs for your sales reps, but they are unreachable because of factors that can’t be eliminated by the sales team. Sales forecasting, on the other hand, helps sales agents to see what awaits them shortly - so they can also decide how to react and what should they do to balance the future sales goals from the sales plan and the sales forecast itself.
Methods to forecast sales
To forecast sales, you have to use specific sales forecasting methods, as those sales forecasting methods have certain sales forecasting formulas and sales forecasting calculations that you just can’t use without learning them. Any sales forecasting that is processed without those sales forecasting methods will be highly inaccurate - for instance, 93% of sales executives have trouble with doing sales forecasting reports with a margin of error within 5%. 80% of businesses that do sales forecasting do sales forecasting with an accuracy of lower than 75%. 55% of sales managers state they feel a lack of confidence in their own future sales forecasts accuracy.
As you can see, sales forecasting is a challenge alone, and doing sales forecasting without understanding some vital practices is just a useless waste of time.
Opportunity Stage Forecasting
This is the easiest sales forecasting method ever, as the only thing you need to do is your current sales pipeline. It is also known as pipeline forecasting. You can use a sales funnel as well. Let’s consider your sales pipeline to include the following stages:
Sales prospecting>Lead qualification>Product demo>Negotiation>Close of deal>Unsuccessful close of a deal (if lost)
For each sales pipeline stage, there is an exact possibility for the successful close of a deal. For instance, in the first stage, it may be 10%, and in the negotiation stage, it is 80%.
After you assign the likelihood of a successful deal for each stage, you have to multiply this likelihood by the potential value of the deal.
For example, if you have a deal that costs 5000$ and it’s in the negotiation stage, then you have 4000$ for your sales forecasting.
Pros and cons
Pros: one of the easiest examples of sales forecasting, quite accurate.
Cons: highly relates to historical data, depends on accurate choice of probabilities for each sales pipeline stage.
Length of Sales Cycle Forecasting
There are examples of sales forecasts that rely on one single parameter of your typical sales cycle, and this one works this way.
You have to research what is the average sales cycle duration for each type of your sales leads - it relates to previous sales periods. For instance, most of your sales leads who come from your website - let’s consider those who come as organic traffic - will have an average sales cycle of 6 months, while for leads who come as referrals, it will be 2 months, and for leads who come from offline events it is 7 months, and so on - the segmentation depends on you and your current business data and sales management processes.
Also, this sales forecasting example allows you to avoid mistakes in some situations, like those, where new lead quickly goes through sales pipeline and this can point to the successful close of a deal in short terms, but the fact is that even when client comes and says “I want demo”, it doesn’t guarantee that the sales cycle will be significantly shorter in this case.
So, it works simply: if you have a deal that is in progress for 2 months, and the average sales cycle is 8 months, you have a 25% of probability closing this deal.
Pros and cons
Pros: reliable results, easy use
Cons: isn’t flexible to forecast sales, doesn’t measure opportunity types and sizes, doesn't measure economic trends and conversion rates.
Intuitive Forecasting
Why is this sales forecasting method called so? Well, because it relies on reps’ feedback and their opinion on sales prospects and sales process. In other words, you have to ask your sales reps about how they evaluate the probability of each single deal being closed within the forecasted time frames.
First, there is one huge issue with this method - you can’t check out whether the sales reps are providing you with realistic feedback. You can listen to all the calls though and check tons of other data, but still, there is no exact formula to check out the real probability for such a sales forecast to happen. The only option to use this sales forecasting technique is to use it when there is no historical data to analyze - so startups and new companies can use it as a temporary solution.
Pros and cons
Pros: the sales reps communicate with prospects directly, so their opinions are valuable enough
Cons: unscalable method, provides a poor inaccurate forecast, can’t be checked out, difficult to interpret by business leaders.
Multivariable Sales Forecasting
This is the most advanced sales forecasting method, at least because it includes all the influential factors, both internal factors and external factors, you can measure in the sales forecasting calculations. In short, it includes opportunity size, opportunity type, value, impact of each rep’s individual performance, sales pipeline stage, product lines, cash flow, advanced and basic sales metrics, and so on.
As it is obvious, this sales forecasting method seems to be the most accurate and reliable sales forecasting methodology. Nonetheless, there is nothing in this world that has only advantages on its side - though this accurate sales forecasting method has its downsides.
First of all, it is challenging to do such calculations without specific sales forecasting tools, so you are unable to do multivariable sales forecasting manually - not because you are weak in math, but because it is impossible to gather all the needed data manually and track it regularly.
How does it work? Well, imagine you have two reps working with the same deal - consider its value of 2000$. You have to compare the stage of the sales pipeline for each lead of these two, individual rep performance to include it in calculations, duration of the sales cycle, type of lead, and some other factors to get clean data.
As you could guess, there is even no single sales forecasting formula for this case, as variables can differ for each single sales forecasting process and also for different industries, businesses, sales management models, and so on. To forecast sales by using this technique, you need specific tools.
Pros and cons
Pros: provides the highest sales forecasting accuracy, allows you to see differences in marketing team performance and sales operations
Cons: highly relies on data clearance, is complex, and requires certain tools for sales prediction
Sales forecasting challenges
Marketspash conducted a survey among sales executives to learn the biggest sales forecasting challenges:
Subjectivity - over 40% of sales executives rely on their intuition when accomplishing sales forecasts, and this leads to high inaccuracy in sales forecasting. This may harm future sales performance.
Lack of data - over 25% of sales organizations state they feel a lack of data, especially predictive data when it comes to the capabilities of their CRM software or other business tools.
Lack of data transparency - sales organizations state they use over 10 tools for sales forecasting on average but still feel a lack of integration functionality to track this data accurately and transfer it between tools to do accurate prediction.
Sales management rigor - over 30% of respondents stated they feel a lack of rigor in sales management, which also leads to non-accurate forecasting.
Conclusion
Sales forecasting is important, especially if you really want your sales quotas to be achieved. Sales forecasting isn’t an easy task, and as many managers do it intuitively, the results are shocking - the lack of accuracy is over 75%. Business owners rarely pay attention to inaccurate sales forecast cases, and intuitive sales forecasting is still popular even among large enterprises. This is a problem, as intuitive sales forecasting can't help you to use each single sales opportunity, predict the efficiency of your marketing campaigns and all other marketing efforts, and learn all historical sales figures and actual sales.
If you want to forecast sales effectively, use the right methods we have provided you with and also the right tools - the biggest matter is the integration capabilities.
