Business intelligence, big data, and analytics drive the present sales world. With the right tools, this data can be used to provide insight into the future.
It doesn’t matter what business or industry you’re in. Sales forecasting benefits all. But it's not a business magic ball; a lot of nuance makes forecasting work.
So, whether you’re looking into sales forecasting better business opportunities, improved sales strategies, or planning sales cycles—stick around. In this guide, we’ll cover:
- The basics of sales forecasting
- How accurate are sales forecasts?
- Sales forecasting methods
- Sales forecasting benefits
- How to forecast sales
- Common sales forecasting challenges
What is Sales Forecasting?
A sales forecast gives businesses insight into potential revenue based on a weekly, monthly, quarterly, or annual time frame. Various factors come into play to create these forecasts.
It all depends on the industry or niche you’re in. Factors like pipeline coverage, closing rates, sales cycle length, and past performance data are also considered.
It can be used to make data-driven decisions to improve inventory management, sales strategies, marketing, and lead qualification. But what sales forecasting isn’t is a goal or target.
Accurate forecasts give businesses direction and insights into future sales performance. When goals and forecasts don’t align, sales forecasting can show what went wrong and how to fix it.
But since nothing is set in stone, is sales forecasting accurate enough to provide such valuable insight?
How Accurate are Sales Forecasts?
Sales forecasts can never be 100% accurate. The discrepancy between actual sales and forecasts can be quite immense in most real-world cases.
According to Salesforce, over 50% of sales leaders can get within 10% of their forecasts. With such a huge margin, are forecasts even worth it? The short answer is yes!
As mentioned earlier, forecasts give direction. The gap between forecasts and actual sales increases with the right sales strategies.
There’s a need for a process designed to improve accuracy over time. This can be done by optimizing different sales forecasting methods.
Sales Forecasting Benefits
Forecasting puts your current sales performance into perspective. This provides essential information leaders can use to make the right calls to achieve sales goals. But it doesn’t stop there. Here’s a quick look at the benefits of using sales forecasting:
Better Strategic Decisions
Forecasting outlines your actions to make informed decisions on everything from staffing, inventory, sales, and marketing. Leaders can spot underlying issues and get a headstart on fixing them.
For example, if your sales forecasts and actual sales have high discrepancies despite no major external factors affecting your market, then there could be issues with your lead generation tactics.
Emails might have bounced back, or leads aren’t fully qualified before outreach. Whatever the case, sales forecasting helps you identify these issues and adjust.
Improved Goal Setting
Goals are what your business strives for. But there will be cases where we get too optimistic and set unrealistic goals for our business. Forecasting improves this by giving leaders a range of what to expect for their future sales performance.
Leaders can base targets or goals on estimated sales forecasts. Remember, most salespeople would say that staying within 5% of your forecast is an absolute win. Consider using methods like SMART goal setting or AIDA to ensure the best results.
Should you go aggressive on marketing, put more resources on lead qualification, or fund better sales development training for your reps? Forecasting helps you set a budget for each of these and more.
With forecasting you get insights on costs vs. revenue and allocate budgets accordingly. For example, if inbound marketing gets more leads than expensive pay-per-click campaigns, you’d want to allocate a higher budget to content marketing or strategize your paid campaigns.
Better Prospecting and Qualification
Keeping a healthy sales pipeline is necessary to grow your business sustainably. CRMs can help you forecast how much more time and resources are needed to keep your pipelines in the optimal state.
You can create more efficient sales processes with better prospecting and qualification strategies. This is essential, especially for startups looking into lead generation.
Streamline Resource Planning
Sales, marketing, inventory, and even finance benefit from sales forecasting. The best companies use forecasting to plan resource allocation to these departments,
For example, production and inventory departments can use forecasting to determine quantity requirements, inventory regulations, and supply chain requirements.
Finance uses forecasts to set budgets, create cash flow reports, and determine revenue or losses. HR can use it to determine if more staffing is needed to sustain the business. Marketing uses forecasting to allocate the budget for inbound or outbound efforts.
Sales Forecasting Methods
Sales forecasting helps motivate your sales team by showing a clear path to achieving their goals. But, there are different sales forecasting methods for different scenarios. Here are the most popular ones you can encounter:
Sales Opportunity Forecasts
Monitoring prospects in your pipelines and identifying which ones are likely to convert is essential in sales forecasting. The further down the pipeline, the more likely to convert.
You must pick a time frame for the sales opportunity forecast method. The usual timeframes used are monthly, quarterly, and yearly.
Then, multiply the potential revenue from each deal by the probability that it’ll convert. To determine the probability, you can use lead qualification methods like MEDDIC.
Do this process for each pipeline. Get the sum of each, which will be your sales opportunity forecast. Unfortunately, only two variables are used in this method.
As a result, forecast outputs can be inaccurate. Salespeople need to rely on intuition and qualification methods to make sound judgments on the percentages a deal might close.
Sales Cycle Length Forecasts
If you want a method focused on sales data rather than intuition, try using the sales cycle length forecast. It considers the age of opportunities and when they’re expected to close.
The premise is similar to fine wine; opportunities have better chances of closing with age. For example, a rep booking a demo after the initial call might seem like a sales-ready prospect.
But the cycle length forecast might say otherwise since they’ve only started conversing for a week. Salespeople need to consider the different types of sales cycles and variables.
Enterprise sales prospects take six months to a year before purchasing. Meanwhile, referrals within the B2B industry might take less than a month.
To get the most accurate forecasts, you must monitor when and how leads enter your pipelines, how they engage with your nurturing campaigns, and the average sales cycles.
In some rare cases, skills and experience might be enough to predict the outcome of a sale. A salesperson can use intuition to determine if a lead is qualified and when they will buy.
Intuition-based forecasting works best when reps fully understand a prospect. Unfortunately, this can only be done manually for a handful of leads. You can’t scale this method.
It mostly works during the early stages of the sales pipeline, where you can’t rely on historical data. This is where intuition and experience come in.
Veteran sales reps might have dealt with similar leads during their years in the industry and could quickly identify if a lead is ready to buy.
Historical forecasting is one of the fastest methods you can use. It relies on historical data and assumes future results will be more or less the same.
It doesn’t factor in changes in dynamic markets, evolving customer needs, or seasonality. But, if you can be sure you’re in a stable market or economy (which is rarely the case), historical forecasting can work.
For example, if you’re a retail store selling school supplies, historical forecasting can predict that certain months leading to a new school year show sales spikes.
As the name implies, multivariable forecasting considers several factors to produce accurate sales forecasts. These variables differ between industries, but most would include the following:
- Customer demographics
- Performance of inbound and outbound campaigns
- Economic indicators
You’d need capable forecasting software to analyze all these factors. Correlations between these factors help leaders make data-driven decisions on how to improve sales strategies.
You need a CRM that can track customer data, behavior, patterns, and trends for the best results. At the same time, you need to track the opportunity types and performances of each salesperson on your team.
Because multivariable forecasting is more accurate and tailored toward specific variables, you can easily improve sales negotiation standards across your organization.
However, this type of forecasting also demands using sales enablement methods like the Five Forces model to understand internal and external factors that can affect the forecast.
How to Forecast Sales
There are various methods of sales forecasting you can use that are tailored to your business. But, no matter what method you choose, the fundamentals of how they work remain the same. Here are the steps necessary to ensure accuracy and consistency in your sales forecasts:
Create a Standardized Sales Process
Standardizing sales processes across multiple departments is crucial for ensuring accurate forecasts. You need a unified system for each stage of the buyer’s journey from acquisition all the way to conversion.
Define Individual and Team Targets
There will always be salespeople who excel beyond the rest. But you can’t solely rely on these reps to generate revenue for your business. Everyone on your sales team needs to have a baseline for sales performance.
We can do this by setting individual and sales quotas and objectively measuring them with data from CRMs and other analytical tools. This is necessary for benchmarking actual sales performances compared to forecast results.
Leverage Customer Relationship Management (CRM) Solutions
CRMs provide context to volumes of sales data. With the right CRM solutions, you get more accurate forecasting results. If you want a centralized platform combining outbound marketing and CRM, try Instantly’s Dealflow CRM. You don’t have to spend extra resources on third-party tools for email marketing campaigns.
Opt for an Appropriate Sales Forecasting Approach
There isn’t a one-size-fits-all approach to sales forecasting. You need something that merges well with your business. To determine the right forecasting method, consider your sales process, goals, and CRM used to analyze and predict outcomes. Leaders must also factor in business size, data quality, and customer behavior.
Evaluate Previous Sales Forecasts
Sales forecast optimization aims to close the gap between actual sales performance and forecasted performance. To do so, you need to evaluate previous forecasts and current data.
Identify areas with the most discrepancies and figure out solutions to underlying issues. Doing so enables leaders to improve both sales and forecasting processes.
Ensure Communication and Accountability in Sales
Being too optimistic about sales results can end up hurting your business. Hold sales leaders, reps, and executives accountable for sales performance to avoid this.
Remember to maintain clear and consistent communication with your sales teams. Hold sales reps accountable for quotas and benchmarks. But always provide avenues for feedback and communication.
Common Sales Forecasting Challenges
Even when things go exactly as planned when forecasting, sales teams can face unexpected challenges that can throw them off their game. These challenges include the following:
No Sales History
Startups or newer organizations don’t have much data to work with. Without enough data, your CRMs or sales forecasting software can’t accurately predict future performance. This is when you’d have to use methods like intuition-based forecasting or research competitors.
Lack of Research
Another option for startups without volumes of sales data is to research competitors and compare benchmarks against them. Unfortunately, this is often an underutilized strategy, as some companies would rather focus on internal strengths.
Poor Data Quality
Even when using CRMs to automate data collection, there will always be times when human error can’t be avoided. For example, a lack of manual lead qualification can result in unhealthy sales pipelines with erroneous lead information. This could heavily affect forecasting accuracy.
Lack of Context
Data is just a set of numbers and figures without the proper context. You need to convert data into useful information first to help you contextualize sales forecasts. Doing so helps you avoid discrepancies and inaccuracies.
Not Standardizing Sales Funnels
There must be a standard for every system in your overall sales process. One of the areas where this is needed most is in your sales funnels. Without standards for prospecting and qualification, you’re left with unhealthy sales funnels that can result in forecast discrepancies.
Sales forecasting is a powerful tool businesses can use to improve their sales process. Here are some best practices to remember to ensure you’re getting the most accurate forecasts:
- Sales forecast methods include sales opportunity, cycle length, intuition, historical, and multivariable forecasting.
- Before forecasting, standardize sales processes, use CRM tools, and ensure consistent communications with your sales teams.
- Improve data quality and contextualize sales data for the best possible results.
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