In order to build your budget, you need to forecast sales, and well. After all, a three per cent increase in forecast accuracy can increase profit margin by two per cent. With that in mind, how do you create an accurate sales forecast?
Established businesses have it easier than recent startups, as the math involved in forecasting is more straightforward and based on previous figures. Consider past sales figures, new sales contracts, contracts that are going to expire, and predictions for changes to your market share and the economy. Newer businesses can conduct market research and analyze the sales of their competitors.
Once you’ve created your forecast, you can make better strategic decisions, calculate how profitable the boom time must be, and identify the best time to take a vacation. Additionally, you’ll be able to find the drivers behind sales and connect the dots between sales and related expenses. Use your forecast to manage the difference between planned and actual results and learn where you can improve future forecasting. To learn more about sales forecasting, including how to review and edit your forecast, check out the infographic below.
Why is Sales Forecasting Important?
- Forecasting future sales is one of the keys to creating a strong budget.
- It’s vital in every sector and every business.
- An AMR Research study found a 3% increase in forecast accuracy increases profit margin by 2%
- Base your figures on past sales and well-researched assumptions to help predict future performance.
- Effective forecasting requires a reliable overview of your organization.
- How do you use historical data to project future sales levels?
- Will changes in your market alter customers’ levels of demand or types of requirements? (For example, seasonality?)
- Accurate sales forecasts can inform many areas of your business, including:
- Staffing levels and overtime
- Stocking and inventory
- Raw materials
- Supply chain management
- Warehousing
- Transportation
- Sales territories for sales teams
- Cost of sales and cash flow
Use Technology for Accurate Sales Forecasting
- Accurate forecasting can be difficult.
- For established businesses, the math involved in sales forecasting is straightforward because you can use previous sales figures.
- Assuming all things are equal, the same numbers as last year should be hit
- Predicting growth can be more complicated.
- Set a growth target based on historical data
- This gives you a goal
- Ask yourself questions:
- What needs to be done to achieve the growth we want?
- Where do we need to invest?
- What do we need to streamline?
- Many businesses find it hard to source and sift their data to find this kind of information. This is where forecasting software helps.
- Salesforce Cloud Demo
- Get a view of your entire business with comprehensive forecasts
- View your entire pipeline and business
- Get updates that help management make decisions faster
- Apply your judgment to forecasted amounts
- View details about previous adjustments while leaving the underlying opportunity data intact
- Track top performers
- Use real-time leaderboards to see which reps are on track to beat their targets
- Set goals with a flexible performance chart
- Easily forecast for complex sales teams
- Overlay Splits allow you to credit the right amounts to sales overlays by revenue, contract value, and more
- View forecast by overlays to see how they’re contributing to your number
- Get a view of your entire business with comprehensive forecasts
- Salesforce Cloud Demo
Best Practices and Tips for Sales Forecasting
- When developing your forecast, consider:
- Past sales figures
- Broken down by month
- Find trends and patterns
- New sales contracts
- Contracts that will expire
- Predictions for changes
- The size of your market
- The economy as a whole
- Past sales figures
- If you create a forecast for a new business
- Conduct market research
- Analyze the sales of similar businesses in the area
- Forecasting can help you:
- Make strategic decisions (e.g., when to introduce a new product)
- Calculate how profitable the boom time must be
- Identify the best time to take a vacation
- Use sales forecasting to:
- Connect the dots between sales and related expenses
- Find the drivers behind sales
- Track results
- Observe changes and trends
- It’s not about being accurate months in advance
- Once a forecast is set, watch it for interruptions and fluctuations
- Even when it’s done right, you’ll have to revise often
- Time and other factors affect your predictions
- Find a manageable aggregation and summary level
- Don’t forecast sales as:
- One number, in dollars
- 100 detailed lines of sales figures
- Find a level of sales groups you can manage
- Too much detail can make it difficult
- But you should break data down so you can glean insights
- For example, break sales down into:
- Units and price per unit
- Natural divisions, such as channels of distribution or major product categories
- For example, break sales down into:
- Don’t forecast sales as:
- Find what works best for you
- Each business is unique, so there are no hard and fast rules
- Match your accounting
- Much of the benefit of sales forecasting comes from the management of the difference between planned and actual results
- To ensure worthwhile projections, organize the forecast in:
- Rows
- Items
- Groups
- The way you organize the forecast should match the tracking methods your accounting or bookkeeping team uses
- If you’re planning for a startup business, coordinate the bookkeeping categories with the forecasting categories
- Reference your last Income Statement as you develop your future projections
- If you have fewer than twenty rows of sales, costs, and expenses
- Make the rows in the projected statement match the rows in your reports from accounting
- If your accounting software summarizes categories for you
- Use the summary categories in your business plan
- Accounting needs detail, while planning needs a summary
- If you have fewer than twenty rows of sales, costs, and expenses
- Look for sales drivers
- Most businesses have drivers that lead to sales
- Common examples of drivers include:
- Foot traffic
- Web traffic
- Downloads
- Lead generation
- Leads
- Presentations
- Closes
- Use the measurements of sales drivers to improve your forecast
- Drivers can help you to better track and manage your business
- Review and edit your sales forecast
- At least once per month, schedule a time for a review
- Compare the forecast to actual results
- Look for surprises and outliers
- Reward those who influenced positive results
- Research what caused any data points that fall below expectations
- Revise sales and marketing programs
- Take advantage of what’s working well
- Correct what isn’t
- Look for surprises and outliers
Conclusion
Use this guide to better navigate the complicated waters of forecasting. Effective and accurate sales forecasts are extremely beneficial to your company and are worth the time and effort necessary to create them.
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