A sales forecast is an estimate that provides an overall view of the number of future sales for your business over a specific period. It can be defined monthly, quarterly, half-yearly or annually.
A sales forecast is not a sure and certain source, it is a way of getting an idea of what may happen in the future based on past data.
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Building a sales forecast: what for?
- Identify potential problems : Using a sales forecast will allow you to identify potential problems in advance. With this visibility you will have enough time to act accordingly and thus reduce or circumvent these difficulties. For example, it will be easier for you to understand a drop in sales from your salespeople by analysing your forecast and imagining that you are seeing a lack of leads generated by your marketing department. In this way you can focus on the department concerned and help your staff to develop a positive dynamic.
- Manage hiring and resource management: With your sales forecast and the vision you have of your business over the year, it will be easier for you to analyse your human or material needs. You will be able to anticipate your decisions regarding hiring or stock/resource management by quickly noticing that at a given period you will have an increase in demand, for example. On the other hand, if your company’s activity is expected to decline, you will know that it is necessary to pause your hiring but that it will be appropriate to concentrate on other projects for a possible increase in sales.
- Boost performance: Having planned your sales, human needs and resources you will know where you are going and where to focus. Your sales forecast will guide you to know what your main objectives will be so that you can focus on what is essential for your business. As a kind of vision board, your forecast report will help you stay on track by encouraging your sales people to achieve their goals. Making a sales forecast can be an excellent motivator.
4 methods to build your sales forecast
#1 Sales cycles
The first method is to base your forecast on the length of the sales cycle.
This method will use the age of an opportunity to assess its likelihood of closing. On this basis, let’s take the following example: if a sales cycle lasts six months on average and a prospect has already been in your pipeline for three months, the probability that this prospect will convert into a paying customer is 50%.
The sales cycle forecasting method is based on objective data rather than on the subjective feelings of the sales team. This technique also has the advantage that it can be applied to a variety of sales cycles depending on the source of the lead: a lead that comes in on a referral may become a customer in one month, while a lead that is reached at a trade show may take more than eight months.
Advantages / Disadvantages
- This is your method if you closely monitor when and how your prospects enter the sales pipeline. Your sales and marketing teams should then work hand in hand.
- Your sales team needs to be very aware of the data in order not to make mistakes and disrupt your forecasts.
Find out how to align sales and marketing
#2 Probability & Lead scoring
Using leads is one of the best sales forecasting techniques if you have a sales force.
You can build a sales volume estimate by taking into account the opinion of sales people but also the lead generation capacity of your company. This method involves analysing each lead source and assigning a value based on past conversion rates of similar leads.
In other words, let’s imagine that to sell your product or service your sales representatives phone prospects and negotiate an appointment, they go there and try to get the prospect to sign. To develop your sales forecast, you can estimate the number of prospecting calls your salespeople make in a day and deduce the number of appointments obtained by taking into account the average success rate of a call. You can then apply a conversion rate to obtain a sales volume forecast. This method will be very theoretical as you will be basing it on data that is likely to change depending on the lead generation strategies adopted.
While this method has the advantage of taking into account the opinion of the sales people, who know the prospects best, it cannot be 100% reliable because the optimism of the sales teams can overestimate the probability of a conclusion.
Advantages / Disadvantages
- For newer companies that do not yet have historical sales data on which to base their sales forecasts…
- Subjective method. Salespeople may be over-optimistic about their chances of closing.
#3 sales funnel
When building your sales forecast from the analysis of your buying paths (or sales funnel) you will need to look at where your prospects are and what the chances of conversion are for each prospect. The different stages of your tunnel allow you to analyse your lead directory according to the criteria of progress in the sales funnel.
In general, the further along the sales funnel your prospect is, the greater the chance of converting them into a customer. The advantage of this method is that you can build on your past performance and get a good estimate of success rates for each stage of the buying journey. However, as this analysis does not take into account all the individual data and characteristics, but only the overall data, the data will not be completely accurate.
A 60 year old man will not react in the same way as a 20 year old woman at the same stage of the sales funnel.
Advantages / Disadvantages
- Objective method and simple calculations
- Does not take into account individual characteristics
Find out how to boost the effectiveness of your sales funnel
#4 Sampling
Conducting market research using sampling is a method that will allow you to understand the life cycle of a product or service across a certain group of people based on their segmentation in that market.
In the example, you can start selling your product in a defined geographical area and analyse how well it sells and then make a forecast of how it will develop over a wider area. This method is useful for both large companies and start-ups who want to launch gradually and hope to increase brand awareness. It is also interesting if you offer several types of products. Updated regularly, you can estimate the performance of each product.
However, this approach needs to be qualified because not all markets are the same and what will work in one market may not work elsewhere.
Advantages / Disadvantages
- Understand the market response and resolve issues before the final launch.
- Not all markets are the same.
Build your own sales forecast
In making your forecast, it is necessary to rely on real and past data to estimate your seasonality and quantify it.
The pattern of your forecast at the monthly, quarterly or annual level is drawn by looking at your data for the same period in the past, assuming the same or better results according to your predefined targets. For example, you can build on the recurring monthly revenue results in your historical forecast by adding an average annual growth rate.
Beware that this method does not always take into account the continuous evolution of the market. For this, competitive market intelligence is necessary. For example, if your direct competitors have launched a promotional campaign for their product, you will probably see a drop in sales. It is also important to take into account the growth of your company during the current year. If your staff has doubled recently, chances are your results will be much better.
- Finally, the construction of a forecast becomes relevant when it represents the basis of your sales forecast.
Conclusion
There is no magic formula to consider when creating your forecast. The objective is to build a tool that is unique to each structure, depending on the sales objectives of each one. However, a melting pot of each approach should enable you to get as close as possible to reality. This will enable you to identify the growth levers and actions to be taken to improve sales performance.
