Sales forecasting is a core skill for an experienced salesperson. It shows how well they understand their product, customers, and the sales process. Alongside hitting a target, the ability to forecast accurately and consistently indicates whether a sales team is excellent or has areas to improve on.
Forecasts help senior managers to get a sense of how their product or service is faring in the marketplace. It’s also a tool that allows other parts of the business to make their plans as part of a more comprehensive business plan.
So, you want to know how to create better sales forecasts?
Let's look at what goes into a sales forecast. We’ll also discuss the methods and tools you need to deliver an accurate forecast.
What is a Sales Forecast?
A sales forecast is a report, based on informed judgment, of what a company expects to close over the next quarter or year. It’s not a wish list but rather a commitment covering the sales pipeline, the upside deals – the deals that might close in that period – and the deals that will close.
Marketers can also use sales forecasting techniques to assess the addressable market for a product and estimate the potential revenue stream when launching a new product or entering a new market.
What You Need to Know About Accurate Sales Forecasting
A forecast isn’t merely a report highlighting potential future revenues or a list of deals likely to close. It’s the final output of a long line of efforts by the marketing team and the salesforce to engage with customers and prospects. It also involves sales managers who ensure the deals flagged in the forecast are adequately qualified and have a realistic chance of closing successfully. Marketing managers will want to ensure that the market sizing forecasts are similarly robust.
Let's look at what you need to have in place to deliver accurate sales forecasts.
1. Have a Clearly Defined Sales Process
The key to an accurate sales forecast is having the solid foundations of a clearly defined and consistent sales process. For B2B sales, this will be similar to the BANT model: Budget, Authority, Needs, and Timings.
While straightforward to understand, it should spark a series of other questions and conversations that will help clarify a potential project's scale, scope, and viability.
For example, is the product already in this year's budget, or does it require additional spending? Is the person you’re engaged with the final authority, or do they need to put forward a business case for the economic decision-maker? Do you know who that person is, and can you meet with them? What needs is your product addressing? Do the business and the decision-maker recognize these needs? What are the timescales necessary to implement the project? What is driving these? Is there a compelling event?
Without a clearly defined sales process, sales reps will use emotion and gut feel, as much as anything else, to forecast sales. This will hide a whole range of issues that sales managers need to be aware of.
2. Establish Realistic Quotas
Quotas are an essential element in reaching your commercial objectives. While there might be a desire to set them as high as possible, the reality is that salespeople need to feel they’re achievable based on the opportunity they see. Setting unrealistic quotas is asking people to forecast unrealistically, which will create a range of business problems. Instead, carry out some fundamental research of the scale and scope of the addressable market and use it to design quotas and territories. It’s better to hit a lower forecast than miss an unrealistic quota level.
3. Establish Your Baseline KPIs
A consistently accurate sales forecast is a measure of a company's ability to engage effectively with its target market. It understands the market's unique needs and dynamics and can adapt the standard sales process to drive revenue.
A helpful exercise to ensure a company is engaging effectively with its target market is understanding how much work goes into capturing a lead, converting that lead into an opportunity, and closing that opportunity. This has benefits for both marketing and sales teams.
The classic KPI often used in sales is that opportunities should be three times the target. But how many leads are needed to hit that 'three times' number? How many people need to be contacted to create a lead? How many calls and meetings are needed to convert a lead into an opportunity? How many opportunities lead to a deal? How many individuals need to be engaged with at a prospect? How soon do you need to meet the final approver for a deal to be successful?
Capturing these and other metrics can help you establish a 'good sales behavior' baseline that consistently gets results. It can provide an additional measure of how well you’re engaging with the market.
4. Constantly Review Your Sales Funnel
A sales forecast must be a living document. As customers evolve their requirements and preferences over a sales campaign, it needs to be updated. Deals that haven’t progressed since the last review need to be revisited and requalified, if necessary, to ensure the deal remains 'live' or removed as 'closed – lost.' The overall sales pipeline needs to be scrutinized regularly to ensure new leads and opportunities continue to replace deals that come off forecast when they’re closed, one way or another. If necessary, review your marketing pipeline to ensure that a sufficiently large group of the right people are engaged in parallel, ready to close in 6-12 months. The marketing machine needs to be primed as much as the sales machine – it can’t produce leads at the flick of a switch.
The Value of Sales Forecasting
It’s easy to assume that a sales forecast is purely of interest to a company's sales reps, their managers, and the marketing function. While a sales forecast is rarely widely shared in a business, it has value for managers in the wider business.
1. A Forecast is Your Early Warning System
Whether it covers the next three months on the next 12 months, a sales forecast is an early warning system. It highlights how sensitive a business is to the changing needs of a market and how its customers are receiving its products and services. It also shows how well the sales and marketing teams are following best practices or whether shortcuts are creeping in here and there.
A robust sales forecast can guide whether marketing campaigns and initiatives are producing leads with committed prospects or merely expressions of interest from the curious. It can also show the impact of external business issues, such as a change in the law or the COVID pandemic. It helps managers decide whether these issues can be safely ignored or whether a powerful response is necessary.
2. Enhanced Recruitment and Resource Management
Accurate sales forecasting can also help other departments develop plans to respond to marketplace changes, armed with accurate information from the market.
If a forecast or pipeline suggests that more staff are needed, or product production needs to be ramped up, it can give them time to make plans, contact the HR department, or engage with suppliers. There’s always a lead time to accelerate business processes; the more time they have based on an accurate and robust sales forecast, the better.
Similarly, these plans can be put on hold if deals slip for whatever reason. A forecast should indicate why deals slip, whether it be slowing business conditions or changes in customers' businesses.
3. Enhanced Business Performance
Something about the term 'forecast' makes salespeople sit a little straighter in their seats and listen more attentively to their manager or customer. In the absence of deals closing – and usually, salespeople don't have deals closing every week, or even every month – a sales forecast is all they have to show for their efforts until their next deal closes. Salespeople, therefore, put in that extra effort to ensure they’ve covered all the bases to justify deals they have in their forecast, upside, and pipeline. Equally, they want to ensure that deals in their forecast close on time, as bid to their manager. It demonstrates competence and skill in managing the sales process and the complexities of closing deals.
For marketers, the challenge is different. They’re responsible for identifying the scale and scope of the target market and prospects with the greatest propensity to buy a product or service. Their role is to develop campaigns, initiatives, and strategies that drive leads for the sales team.
Like sales, the validation of their skills and expertise comes from achieving results, but in the meantime, rely on accurate forecasts, again robustly scrutinized, to demonstrate that their campaigns and initiatives are firmly grounded in commercial reality.
Methodologies for Sales Forecasting
There are various elements involved in assessing a sales forecast. A forecast model will vary from company to company, sector to sector, and will depend on issues such as the length and complexity of the sales cycle and whether the commercial buyer is the final end-user or consumer of a product.
1. Forecasting Based on Leads
Some companies base their forecast on the number of leads they receive. This is ideal for low-value, high-turnover products, especially in the consumer sector. Using sales data from previous sales periods, you can determine how many leads you need to close business to achieve a target level of revenue. You can extrapolate results looking forward based on the number of leads currently being generated. This works most effectively when a company has a large volume of leads and short sales cycles.
2. Forecasting Opportunity Stages
In more sophisticated sales environments, especially with long sales cycles and multiple decision-makers, the sales process is broken down into various stages. Progress through these stages can be reported in the sales forecasting system. A standard measure for progress is to show how a deal is progressing in percentage terms, laid down in a sales guide, based on the pipeline, upside, and forecast model. For example, initial interest might have a score of 10%, while making the final two options before a decision might rate 70% with a verbal commitment rating of 90%.
It’s not unusual for sales managers to use these weights to assess their overall sales pipeline value and determine the sales coverage they need to hit targets. This won't necessarily be the 'forecast,' but it helps provide an extra element of judgment.
3. Predictive Modelling
A more sophisticated approach to forecasting, based on predictive models, may be necessary for large sales operations where millions of dollars are at stake. This could include manufacturing, production, and distribution facilities.
These models can capture quantitative historical sales information, data from e-commerce systems, and macro-economic data such as GDP growth or population changes. Detailed qualitative data, exploring changing consumer tastes, preferences, and attitudes might also be included to assess market opportunity and revenue potential for a product or service.
While by no means foolproof, these models help senior managers make an informed judgment about a business opportunity and determine whether they should proceed with a product launch.
4. Forecasting with Test-Market Analysis
Another form of forecasting is assessing future large-scale sales based on the results of promoting a product in a test market. Test markets provide real-world feedback on a product or service. Combined with a detailed analysis of customer feedback, companies can adapt their offer, refine their pricing model, and change product features or functions before full market rollout.
It would be wise not to extrapolate directly, but this approach does provide a useful guide about what the potential is for a new product, especially when combined with other analytics.
5. Historical Prediction
Historical sales data analytics can provide a useful perspective on forward-looking forecasts. These analytics help you understand the main drivers in a market and the extent to which they influence sales growth or decline. You can understand what the impact of a new product launch might be and what the impact of a sales promotion or special discount might be.
These predictions work best for the most recent periods. For consumer markets, these metrics will become aged quickly. In the B2B sector, technological change means they’re likely redundant after three years.
6. Forecasting Using Multivariate Analysis
Another approach to forecasting is to use multivariate analysis to understand how different variables, which drive demand and customer behavior, are related to each other. For B2B companies, this may include headcount, revenue growth, the number of customer site locations, and other variables. For B2C companies, it could include population size, GDP growth, education levels, number of children per family, and other variables.
These variables can help define market size and assess which target sectors, areas, or populations are most likely to create the best opportunities for a business. This exercise will be most useful when planning a market entry. For example, it can help managers who are trying to estimate the first 12-18 months of revenue. It’s less suitable for assessing what business will close over the next three months.
Tools for Sales Forecasting
Clearly, the ability to forecast over the next three to 12 months has value to a business's management. A range of tools available can help managers consolidate the information they need to create forecasts they can rely on to make the best decisions for the business.
1. CRM Platforms
Customer Relationship Management (CRM) platforms can be the ideal environment for creating sales forecasts. They should contain all the information a company has on the customers and prospects it has engaged with. This information can cover the basic job title, company location, sector information, proposal information, and quote information. It can also track leads, opportunities, and win or loss information.
As such, CRM systems are ideal for quarterly forecasting of revenues, provided that managers carefully scrutinize the opportunities highlighted by their sales teams to ensure they’re properly qualified and listed at the right opportunity stage.
The information contained in CRM systems also has the scope to provide a valuable source of market data for forecasts and market sizing information over the longer term, which can guide investment and market entry decisions.
2. Microsoft Excel and Other Spreadsheets
The Excel spreadsheet is a popular choice for forecasting because it’s widely available and offers robust functionality with little need for special training. Before the widespread adoption of CRM environments, spreadsheets were the most common sales forecasting tool and are still popular today. Even companies that use CRM platforms still use spreadsheets in their forecasting process; it’s not unusual for managers to export data from the CRM systems as a spreadsheet to apply their expert judgment to the forecast.
That said, while flexible, spreadsheets aren’t risk-free. Their lack of change controls means that data can easily be overwritten without anyone realizing it, creating errors in the sales forecasting process.
3. Lead Scoring Systems
Lead scoring systems can provide visibility of sales traction early in the sales cycle. For organizations heavily engaged in e-commerce, lead scoring can be vital in understanding how customers and prospects engage with the business, whether through the website, attending webinars and events, or engaging with business development teams. Lead scoring models allocate points to prospects based on how often they visit pages on a website, whether they watch a video, access an e-book, or attend an event. A lead scoring model can drive automated digital marketing processes and outreach by sales executives. They can also feature in predictive forecasting models, where there’s a correlation between website activity and other engagements – and therefore scoring – and orders and revenue.
4. Platforms for Sales Analytics
Sales analytics platforms can also be a tool in the sales and marketing toolkit by offering capabilities that help make sense of large volumes of complex data.
Senior commercial managers are blessed and cursed by having access to volumes of data unheard of by their predecessors. The challenge is ensuring they have the tools to make sense of it quickly and provide meaningful, actionable insights that can change the business for the better.
This information can come from CRM, e-commerce, finance, and external systems to provide a comprehensive view of a market and its dynamics over time.
This information can tell you which sectors will have the greatest propensity to buy your products or what initiatives, such as a new product launch or unique offers, impact your lead generation and revenue. They can show you which channels will be the most effective and how macro issues like GDP growth or seasonal changes affect your business.
Maximizing the Value of Your Sales Forecasting
It’s fair to say that your sales forecast data is critical to the business - not just sales. That said, there are ways to get more value from your sales forecast data.
The data and infrastructure you use to create your pipeline and revenue intelligence picture to shape your sales forecasts can also help you design the optimal sales territory and quota plans. The optimal quota model will help you maximize the opportunity that is open to you.
The data and infrastructure can help you understand what sales behaviors are most effective in your business. It can help you design the incentive compensation management program that helps drive commercial performance, including accurate forecasts.
While this may sound like a significant increase in the workload of your sales management and sales operations teams, the same architecture can help you make use of AI capabilities. These allow you to proactively monitor many of these sales and marketing dynamics automatically, providing new insights and ideas that can help you better manage your sales and marketing forecast processes.
Learn more on forecasting and some of the critical factors to consider in our eBook, Sales Forecasting With Confidence. Ready to get started? Book your demo now to discover how we can help you achieve your sales performance objectives.
