One major factor in your company’s success is sales forecasting. How, what, why, where and when – all is revealed in this blog entry. A recent Aberdeen Group research article showed companies employing thorough sales forecasts were 10% likelier to grow revenue year-on-year as well as 7.3% likelier to hit quota.
Despite the advantages, various sales leaders struggle in creating sales forecasts being anywhere near reality.
Let’s understand sales forecasting and its importance before we can apply sales forecasting to your business.
What is a sales forecast?
This is what predicts the number a team, company or salesperson will sell in a time period – annually, weekly, monthly, daily etc.
Managers employ their employee’s individual sales forecasts for estimating the amount of business entire teams closes. Directors employ the same team forecasts in sales anticipation for the entire department. Sales VPs use department forecasts towards sales projection for the entire company.
Such reports are generated to be shared with company leaders, board members or shareholders.
The need for sales forecasting
Sales forecasts help you spot potential issues while there is time left to mitigate them. Example, when you notice your team is trending 35% under quota, you could figure out what exactly is missing and correct it. Perhaps your competitor has begun a brand new heavy-discounting campaign, or the new sales plan has too many loopholes allowing for bad behavior.
Singling out these issues at this moment compared to doing so at the end of the month could deliver a massive impact to your bottom line.
Sales forecast are also in their element for several key decisions – from goal setting and budgets to hiring and resource allocation.
Example – your sales forecast predicts a 26% increase in opportunities. To ensure you’re up to date with demand, you must begin recruiting. When opportunities are predicted to lessen, it could be smart to stop hiring for the time being. Alternatively seeking out higher marketing spend and prospective training investment for your reps could be the way forward.
Plus, a sales forecast can be a great motivational tool!
Example – every week you could update your quarterly sales forecast for your team to be more capable of hitting their target. You might also create a daily forecast for each sales rep laid out on a performance plan to ensure he or she doesn’t fall behind.
The most important point to note here is that sales forecasts need not be perfect in order to be valuable. Each sales forecast will differ from the results. However, wildly inaccurate results can cause problems. However, if you use clean data and have selected the right method, you will have a sales forecast set for growth.
5 different sales forecasting methods
Not all sales forecasting techniques deliver the same results. Here are the five most popular:
1. Historical forecasting
A quick and efficient way of predicting the number of sales each month or time period is by noting the matching time period and assuming equal or greater results. Example – your team sells $80,000 in October, they’d sell $80,000 or higher in November.
The prediction can be more sophisticated through historical growth addition. Example – you’re increasing sales by 6-8% every month. A conservative estimate for the month of November would be $84000. Disparities with this technique pop up with no accountability for seasonality. When November turns into a bad month for sales in your industry, you could end up selling just $70,000.
Historical is mostly used as a benchmark instead of the foundation of your sales forecasting.
2. Multi-variable analysis
This is the most sophisticated forecasting technique. It uses predictive analytics and incorporates many factors like individual rep performance, average sales cycle length, and the probability of closed based on opportunity type. Example – you have 2 reps, rep A meets with Procurement on Friday while rep B gives their first presentation to the buyer. Based on the win rate of rep A at this stage combined with the predicted deal size as well as the total days left in the quarter, a % is calculated towards the closure. Rep B is higher up in the sales process however the deal is smaller with them having a high closure rate. Rep B is as likely to close with a forecast given for the amount.
Clean data is needed. If reps are not tracking deal progress and activities, your results will be skewed.
3. Opportunity stage forecasting
This technique takes into consideration the various stages of the sales process the deal is in. The farther along the sales pipeline, the higher the chances of the deal being closed. Example – prospects are found who are making a demo call to have a 10% chance of becoming customers while those reaching the presentation stage being 30%.
Upon picking the reporting period along with your sales team’s quota, you just have to multiply the deal’s potential value using the probability of it closing.
Once done for each deal in your pipeline, the sum gets you the overall forecast. Such forecasting relies heavily on historical data. If your strategy relies on changing of products, sales processes, or messages your deals are closed at various percentages according to the stage they have previously closed in.
4. Length of sales cycle forecasting
Here the age of individual leads is used to predict the time they’re most likely to be closed. Example – if the average sales cycle only lasts six months with your salesman working the account for three months, the forecast is for 55% most likely for the deal to be won.
Thanks to the technique being solely dependent on objective data versus rep’s feedback, you’re less likely to obtain generous predictions. This technique also contains various sales cycles. Normal leads could take about roughly six months to purchase. However, referrals require just one month with trade shows leads requiring approximately eight months.
5. Intuitive forecasting
A few sales managers request reps to provide likely estimates of closing. A few reps say their customers would buy in 2 weeks with a deal worth X going through. On one hand, this method contains opinions of the salespeople closest to the prospects. Reps, however, tend to be naturally optimistic and tend to offer overly generous estimates. This technique is highly valuable in the company’s early stages or product when zero historical data is present.
Using a CRM such as Hootsuite’s free CRM allows you to stay on top of actual and predicted revenue. It also automatically logs all prospect interaction allowing you to gauge the likelihood of closing deals.