The Importance of Building a Credible Sales Forecast

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Creating an accurate sales forecast, is anything but simple. It involves quite a bit of research, data collection and analysis, and it can be a very time consuming process.  However, a credible sales forecast can be an extremly helpful tool for any company.

What is sales forecasting?

Sales forecasting is an educated prediction of how your sales team will perform during a defined time period (monthly, quarterly, etc.). Without having an idea of what your expected sales (and growth) will be, it will be difficult to set your cash flow, expenses, resources and inventory for the upcoming period, which is essential to a successful long-term business operation. A good forecast will not only help you to manage financial expectations for a set time period, but it will also allow you to find opportunities for growth.

Importance of Sales Forecasting

What are the best sales forecast methods?

There are several sales forecasting methods out there, each of which has its pros and cons. Regardless of the sales forecast method you use, it is important to ensure that, along with historical data and probability, variables such as the sales cycle, engagement, momentum, the economy, and more are factored into your sales forecast. Many companies use more than one method to arrive at the most accurate sales forecasts possible.

There are two main types of sales forecast methods to predict future revenue for your business:

1. Qualitative Forecasting

Qualitative forecasting is based on the sales team’s intuition and experience as a prediction of the upcoming year’s income and expenses. These methods rely more heavily on opinions and judgments than they do on data. There are two basic methods of qualitative sales forecasting:

Opportunity Stage Forecasting

When using this type of forecasting, each sales opportunity is labeled with a status or “Opportunity Stage” within your chosen CRM. Each stage represents a milestone that a specific opportunity has reached, which signifies the probability of closing the sale.

Sales opportunity in stage X has a 15% probability of closing, while an opportunity in a later stage of the funnel, stage Y, is more likely to close, and therefore has a 85% probability of closing. Each opportunity in stage X and stage Y, within a specific time period, is then multiplied by the corresponding closing probability to arrive at a basic sales forecast.

Forecast Stages

Unlike Opportunity Stage sales forecasting, some sales teams use “Forecast Stages” instead of using milestones to create their sales forecasts. In this case, the sales representatives are asked to give a subjective prediction of the likelihood of closing each opportunity in their current pipeline. The names for these forecast stages are commonly as follows: 

  • Commit: The salesperson is personally committed to closing this opportunity. They are confident that based on the communication they’ve had, this person is extremely likely to buy.
  • Strong Upside: The salesperson is not 100% confident that this opportunity will close within the given time frame. It is very possible though, if a couple of things fall into place.
  • Upside: It’s not very likely that this opportunity will close within the current period, unless several things fall into place and some compromises are able to be made between the sales team and the customer

2. Quantitative Forecasting

Quantitative forecasting is a more scientific approach than qualitative forecasting, as it uses historical revenue data from both your business and your competitors in the industry, along with additional variables. These methods require a powerful CRM system for tracking data in order to predict future changes based on past trends. There are two basic methods of quantitative sales forecasting:

Pipeline-Based Sales Forecasting
With Pipeline-Based sales forecasting, you start with all of the open opportunities in your pipeline, and determine each opportunity’s individual probability of closing based on your company’s sales operations and additional variables relative to your company. Examples of variables factored into the calculation may be the age of an opportunity, the length of time it has been in a particular stage, the monetary value of the opportunity, etc.

Each opportunity’s forecast is then put into a summary report that shows your forecast for the given time period based upon your current pipeline opportunities.

Historical-based Sales Forecasting
With Pipeline-Based sales forecasting, you instead take a look at how sales has performed in the past in order to determine the forecast for the upcoming period. If your company is in a steady growth state with consistent sales patterns, this method works well. If things don’t always go as planned, and your sales performance is somewhat unpredictable, this method will be less accurate.

Tracking your sales opportunities

So, how exactly are you supposed to predict the future? By tracking your sales pipeline and analyzing the data to forecast future sales. In order to track historical data and measure common variables, it is essential to utilize a powerful Customer relationship management (CRM) system (like Salesforce), which provides a clear pipeline and detailed reporting.

Salesforce is one of the most popular CRM solutions, but there are many software solutions available, which include CRM features. Additional free solutions include HubSpot’s CRM and SugarCRM. It’s up to you to decide which CRM works best based on other software you use, the type of business you’re in, and what ultimately works best for you and your sales team.

Building a credible sales forecast is critical for planning for the successful future of your business. By basing your predictions on historical sales data, past experiences and variables such as sales cycles, engagement, etc., you will arrive at more accurate sales projections. By constantly reviewing your existing sales forecasting process and making changes where needed, your sales projections will begin to more accurately mirror your actual sales data. Click to edit your new post…

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