What sort of objectives need to you make for your sales crew for the upcoming quarter? Set attainable sales targets that push your salespeople to improve.
Sales forecasting can help with it. It can help your business grow sustainably while maintaining the morale of your staff. Everyone, from sales executives to managers to sales reps, can make wise company decisions with the aid of accurate sales predictions.
However, predicting is a challenge for the majority of businesses. That’s because they employ intuition rather than data to calculate their numbers. Less than 50% of sales leaders and salespeople reported having great confidence in the accuracy of their forecasts, according to a recent Gartner survey.
In this post, we’ll cover the fundamentals of forecasting as well as methods for enhancing precision and resolving typical problems.
How does sales forecasting work?
Sales forecasting entails predicting your potential revenue from sales for a given time frame. It is based on past data, industry norms, and the state of your sales funnel right now.
It aims to forecast how much a business, group of employees, or salesperson will generate during the following month, quarter, or year.
Conduct forecasts at least once every three months if you want your forecasting models to be accurate. Although you can compare your performance to past sales, you need also consider seasonality and other aspects (which we’ll explore later in the post).
For sales leaders, a CRM can simplify reporting. Its opportunity funnel report can examine the condition of your pipeline and demonstrate the potential amount and timing of revenue. Additionally, it can display statistics such as your total win rate, sales velocity, and conversions. You can also project sales forecasts based on the open deals you have.
The importance of sales forecasting
Accurate sales forecasting aids in future planning, market adaptation, and risk mitigation for your business. They can be used by several departments to support your business decisions. Additional advantages of precise sales forecasting include the following:
- Forecasts can be used by sales leaders to create difficult (but doable) quotas for their managers and SDRs. By establishing weekly sales targets based on forecasts, you may inspire your SDRs. You can act sooner to fix a problem if your team performs worse than they do.
- Contribute to the budgeting process for your company’s employment, labor management, marketing initiatives, etc. Does your forecast call for more opportunities in the upcoming quarter? Then perhaps you could begin hiring fresh customer success agents to look after those connections.
- To manage your cash flow, enhance your technology, and make other business decisions, plan ahead. Are you likely to have financial difficulties next year? Perhaps you need to reduce the number of freelance jobs you take on or cancel your subscription to that software. You can better prepare for a surplus or decrease in funds if your sales forecasting is accurate.
Keep in mind that there is some leeway for error in your sales estimates, but not too much. Let’s examine the elements that influence the accuracy of your projections in the following part.
Factors Affecting the Accuracy of Sales Forecasting
Data-driven sales estimates are the best. However, both internal and external variables, like those listed below, can affect their accuracy.
- The caliber of historical information (on your past performance)
- Alterations to your goods or services
- Market trends
- Allocation of funds
- Expenditure on advertising
- Economic circumstances
- Consumer contentment
- Political environment
Every forecast has limitations, therefore you need to be aware of the factors that affect how accurate your forecast is.
For instance, newly launched enterprises may not have the benefit of historical sales data. As a result, they may rely their projections on market patterns or even informed estimates, which may result in less precise predictions. (We’ll examine the various techniques for sales forecasting later in the essay!) Let’s first examine the sales forecasting procedure.
Process for Data-Driven Sales Forecasting in 5 Steps
Here is a forecasting method you may use to make predictions about the sales for the upcoming month rather than just going with your intuition.
Infographic on the sales forecasting process
Step 1: Set objectives for sales forecasting
What goals do you hope to accomplish through forecasts? You could wish to set goals for a certain product line if your company is established and has a variety of offerings. Startup sales predictions, on the other hand, can emphasize showcasing your fresh sales to entice investors for your subsequent funding round.
Step 2: Compile and Review Your Sales Performance Information
What were your total sales last year (or during the chosen projection period)? Assuming your growth rate stays constant and then computing your revenue based on it is a simple method to begin predicting.
The accuracy of such estimates, however, can be significantly impacted by elements like seasonality and market conditions. As a result, modify your forecasted figures accordingly. When you’re prepared, think about moving up to a more scientific strategy (which we’ll cover in the following phase).
Step 3: Decide on a Sales Forecasting Approach
Top-down and bottom-up forecasting are the two main types. In the first, the business calculates the revenue by dividing the anticipated number of units sold by the anticipated cost per unit. With the latter, you start with the TAM (total addressable market size) and calculate the share your company can obtain.
In general, a bottom-up method is recommended since it yields granular data. It focuses on the unique unit economics of your company, and your estimates can swiftly change in response to modifications in factors like the size of your team, the price of your product, etc.
Your technique is typically determined by your business model, the age of your company, the size of your sales team, the habits of your sales reps about data tracking, and other things. Later on in the article, we’ll look at a few effective strategies.
Step 4:Create a forecast.
Sales leaders (VP, Director, CRO), managers, and SDRs can all create their own forecasts, depending on the structure of your sales team and the requirements of your company.
Depending on the salesperson’s level of seniority, the numbers they report and are held responsible for may vary.
The VP can lay out the parameters for forecasting and base his or her prediction figures on what the downward leadership anticipates.
Directly reporting sales representatives will receive guidance from the managers on how to create their own predictions. They’ll then compile all of the forecasts from the salespeople to create their own.
You should incorporate input from the marketing, product, finance, and HR departments into your forecasting process in addition to taking historical sales data into account. They can help you develop a more thorough prediction by offering insightful information about each party’s unique strategy.
Step 5: Check Your Forecasts’ Accuracy
Last but not least, be careful to compare your estimates to actual figures at the conclusion of the quarter (or other time period of your choice) and assess accuracy over time. The inconsistencies should be noted, and their causes should be looked into. Did your salespeople fall short of quotas and produce less? Were your predictions overly optimistic?
You want to refine your forecasting method over time, be open and honest with your team about your accuracy, and work to make better predictions. The leadership will be able to make better business judgments regarding the budget and spending if they have a clear understanding of your revenue.
How to Increase the Accuracy of Sales Projection
Your sales forecasting’s value depends on how precise it is. Here are some tips for making precise income forecasts:
Expect Changes in Conversion Rates
Do you think a recession is coming? Perhaps your rival is buying a business or planning to go public. Alternatively, your marketing team may have attempted a fresh lead generation strategy and found it to be effective. Your conversion rate will be impacted by each of these variables.
As a sales leader, it’s important to be aware of any changes in the market environment, keep an eye on the competition, and ideally be able to re-project based on shifting demand or market conditions.
The Sales Forecasting Process Faces Challenges
You require a strong sales forecasting process to produce a sales plan that is impenetrable. But these are the difficulties you can run with as you work toward improving your predictions. Beware of the following difficulties:
Personality of Sellers
Although seller instinct might be useful in some circumstances, opinions about potential deals can affect your accuracy.
Are the sales representatives in your company relying more on lead scoring and objective data or on their gut feelings about opportunities? You must train your team to adhere to a systematic, analytical method.
Low Level of Cooperation
To create precise estimates, sales leaders must work together and solicit information from various sales positions and territory.
It can result in errors if you base your forecasts solely on Excel sheets (or if your company’s CRM has a low adoption rate). Your teams for product development, sales, marketing, and finance must likewise follow a standardized methodology.
Knowing about these difficulties will enable your team to handle them with assurance and provide reliable estimates.
Best Sales Forecasting Techniques (and Examples)
Numerous sales forecasting techniques can be used, however some are more accurate than others. Here are a few techniques you might use to forecast your future income.
1. Relying on the judgment of your sales team
Trusting the suggestions of your sales representatives is one of the most popular methods for developing projections. You enquire from them regarding the potential value of a deal and the anticipated time of its closing. Reps are the most likely to be aware of conditions on the ground since they make an effort to maintain constant connection with prospects.
Salespeople, however, frequently overshoot sales projections. So accuracy is a given when using a technique that is inconsistent and solely based on intuition.
1. Utilizing Deal
When using deal stages for forecasting, you give each stage of your sales process a likelihood of a deal closing. To calculate the expected sales revenue, multiply that probability by the size of the opportunity.
For instance, you might estimate a 2% chance of closing if you obtain a response to your initial cold email if you are selling training webinar software packages to large organizations.
If your prospect consents to a product demonstration, you may increase it to 50%, and you can increase it to 75% if you schedule a meeting to present your pitch deck to the company’s top decision-makers.
Deal phases for sales forecasting have a number of drawbacks, one of which is that time is not taken into account. Despite the fact that the likelihood of these two deals closing is very different, it doesn’t matter whether you gave a prospect a presentation three weeks ago or just yesterday.
3. Forecasting the length of the sales cycle
In comparison to traditional deal stages, this alternative forecasting technique helps to give a more accurate image. This strategy considers the age of the sales opportunity rather than the probability when evaluating the strength of a certain pipeline.
You contrast the length of time a deal has been in the works with the average amount of time needed to consummate a contract. The total number of days it took to close recent deals, divided by the number of deals, is the formula for determining the length of the sales cycle.
projecting the length of the sales cycle
The ability to use sales cycle forecasting for a variety of sales cycles is a benefit (depending, of course, on the source). For instance, contacting a prospect by cold email could take three months but contacting a client through a referral could take three weeks.
To more accurately anticipate how likely the deals are to close, you will need to construct separate sales cycles if you operate a major company like Wix or Shopify that deals with many sales cycles (or multiple items).
Since this approach needs correct data, it is especially helpful to businesses that meticulously manage every detail regarding how and when a prospect enters the sales pipeline.
The good news is that the right CRM makes it simple to log all the data accurately and quickly without forcing the sales representatives to enter a lot of information.
To generate a variety of sales predictions, many organizations combine two or more forecasting approaches. They get the best-case and worst-case possibilities as a result. You can start with one of the aforementioned techniques or think about even more complex ones, including multivariable analysis forecasting, which we discuss in the article on startup sales forecasting.