Sales forecasting is a crucial business exercise. Accurate sales forecasts allow business leaders to make smarter decisions about things like goal-setting, budgeting, hiring, and other things that affect cash flow.
Meanwhile, an inaccurate sales forecast leaves sales managers guessing whether they’ll actually hit quota. As a result, they may not be aware of any problems in the sales pipeline in time to fix them. So, let’s look at what sales forecasting is, and some of the basics you need to get it right.
What is a Sales Forecast?
A sales forecast is a prediction of future sales revenue. Sales forecasts are usually based on historical data, industry trends, and the status of the current sales pipeline. Businesses use the sales forecast to estimate weekly, monthly, quarterly, and annual sales totals.
Your team should view your sales forecast as a plan to work from, not a firm prediction. Sales forecasting is also different from sales goal-setting. While a sales goal describes what you want to happen, a sales forecast estimates what will happen, regardless of your goal.
Steps for Sales Forecasting
- Setting Goals – The sales manager should decide the goals for sales forecasts. These may include the determination of a sales publicity program, marketing methods, quota determinations, estimation of working capital requirements, estimation of income and expenditure, etc.
- Determining the Factors Affecting Sales – The controllable and uncontrollable factors affecting sales must be identified. The controllable factors may be marketing policies, advertising policies, organization structure, manager viewpoint, etc. The non-controllable factors are related to the external environment. These include social systems, political activities, cultural changes, seasonal fluctuations, etc. Data related to these factors must be analyzed by scientific methods to know their effect.
- Selection of Techniques – A suitable method(s) or technique(s) for forecasting sales must be selected while also keeping the sales objectives, time intervals, and nature of the product in mind. Managers should also ensure that the information they are basing their decision on is sufficient and collected from reliable sources.
- Collecting Data – During this step, managers collect various kinds of information related to the future demands for a product or service–i.e., market research. Who buys the product? Who uses it? Why do they buy the product?
- Analyzing Data – Having identified the potential buyers and their buying behavior, the next step is to analyze the data collected. This involves selecting the market factors associated with product demand. Then eliminating those market segments that do not contain prospective buyers.
- Forecasting Sales – Once the analysis is done, sales projections can be made based on them. From there a company can take a forecast for an entire product line or individual items within a line.
- Industry Forecast to Company Sales Forecast – Many companies forecast both their own sales and the sales of the industry. The general practice is to forecast industry sales early and from it derive a company sales forecast. Doing so requires an appraisal of the company’s strengths and weaknesses against those of competitors.
- Creating an Operational Program and Budget – After the sales forecasts have been made, the business determines the requirements for various operational activities. Everything is keyed to the level of expected sales activity. Meaning the sales forecast provides the basis for developing company operating plans. If the forecast is wrong, the resulting budgets will have to be revised often to reflect actual sales results.
- Derivation of Sales Volume Objective – A sales volume objective is the hoped-for outcome of a company’s short-range sales forecasting process. The sales forecast estimate does not necessarily become the company’s sales volume objective, but it provides an orientation point for management’s thinking. The sales volume objective should be consistent with management’s profit aspirations and the company’s marketing capabilities. It must be attainable at costs low enough to permit the company to reach its net profit objective, and the company’s marketing process must be capable of reaching the objectives set.
- Revision of Forecasts – Before submitting forecasts to higher management, sales executives evaluate them carefully. Every forecast contains elements of uncertainty. All are based on assumptions. So, the first step in evaluating a sales forecast is to examine the assumptions on which it’s based. If the company finds that sales forecasts are significantly different from actual sales in the period, it should undertake a review of the sales forecasting process before making any more forecasts.
For more on sales and sales forecasting check out episode 69 of our talent, sales, and scales podcast. If you’re more interested in why sales fail, check out one of our past blog articles here.