Are you wondering how to create an accurate sales forecast? I will let you into a secret, that was me a few years ago when I took a ‘fake it until you make it’ approach when I landed my first sales role.
Now that I’m out of the other side, I aim to bust any myths or dark art science when creating accurate sales forecasts.
Considering 93 percent of sales leaders are unable to forecast revenue within 5 percent, even with two weeks left in the quarter, there is work to be done across most sales teams. [Source: Intangent]
I will share my 5 steps, top tips, definitions, forecasting methods, and examples along the way, so you can begin to nail sales forecasts, every time.
Firstly, let’s cover some of the basics, and then we will get into the good stuff.
What is a sales forecast?
A sales forecast is a projection of future sales based on past performance, current trends, market insight, and sometimes plain old intuition.
This can be done for an individual salesperson, a team, or an entire company. The purpose of a sales forecast is to give sales managers and leaders a glimpse into what lies ahead so that they can make informed decisions about how to allocate resources and budget for the upcoming period.
A sales forecast can be used to predict things like how many new customers a company will acquire, how much revenue will be generated, and how many products will be sold.
Why is a sales forecast important?
A sales forecast is important because it provides a roadmap for the sales team. It gives managers and leaders visibility into what is achievable and what isn’t. A sales forecast also allows companies to track progress toward their overall sales goals.
It is also important as it provides a data point to pivot the go-to-market strategy. Sometimes things change but we can’t see them until it’s too late and when in business, that could be the difference between surviving or not.
Having a sales target and forecast that tracks that, allows for the identification of slower-than-expected sales early on so that the root cause can be found and solved before it’s too late.
What factors should you consider when creating a sales forecast?
There are a number of factors that should be considered when creating sales forecasts.
Some of the most important factors to consider include:
- Historical sales data
- The economy
- Industry trends
- Population changes
- Competitor activity
- Changes in the sales team (e.g. new hires, attrition, etc.)
A good sales forecast process will allow for identifying these trends and importantly the trends from month to month, quarter to quarter, and year to year.
All of these factors should be considered no matter which sales forecasting method you use.
What are some common methods for sales forecasting?
There are a number of different sales forecasting methodologies that can be used to make sales forecasts.
The most common methods include:
- Trend Analysis
- Opportunity cycle
- Deal Probability
I have included a detailed explanation at the bottom of this article if you want to read up on these.
5 steps to create an accurate sales forecast
Creating an accurate sales forecast doesn’t have to be complicated. It can be difficult to get it right but always remember, a 100% accurate forecast, every time, wouldn’t be a forecast and that isn’t what ‘great’ sales forecasting is about.
This is something I really struggled with when I first started out. Yes, it needs to be good, it needs to be great in fact but it doesn’t have to be right, every time.
According to Gartner, less than 50% of sales reps and sales leaders have high confidence in the forecasting accuracy that they put forward.
So here are the 5 steps you can take to create a more accurate sales forecast that you can stand behind.
Step 1: Choose the right method(s)
When considering which method to use, it should be based on how much data you have available, how accurate you need the forecast to be, and how much influence the internal and external factors might have.
Do you need a forecast for a specific product or service? A specific market? What kind of timeline will you be using (weekly, monthly, yearly)? Answering these questions will help you focus on the right sales forecasting method and data points for a more targeted approach.
E.g. it wouldn’t make sense for a used car dealership to try and track sales with the pipeline method and ask their sales reps to update a CRM. They would be far more suited to a trend analysis method taking the factors into account that affect selling cars.
By considering these criteria, you can make an informed decision on the best sales forecasting method to adopt that will position your business for success. And remember, nothing is forever. If you are new in business and have no data, I am sure you will revisit your method after your first few months of trading.
Step 2: Gather the data you need
Now that there is a clear sales forecasting method decided, it’s agreed with leadership down to the sales team and the metrics you need to track are clear to everyone, it is time to gather the data. This is the most fundamental step to getting an accurate sales forecast.
- Analyze Your Historical Data: Analyzing past trends in your sales data can provide valuable insights into potential future performance. Consider which factors have had the biggest impact on your past performance, such as seasonality or promotion cycles, and how they may affect your sales forecasts.
- Monitor Competitors: Keeping an eye on competitors’ activities can help inform your own strategies and give you an idea of what’s happening in the marketplace at large. Monitor competitor prices, promotions, product launches/updates, etc., to get an idea of how they may impact your own sales numbers over time.
- Leverage Market Research & Surveys: Market research surveys can provide valuable information about customer needs and preferences that could be used to shape your strategy going forward.
In addition to surveys conducted directly with customers or prospects, look into industry reports or studies conducted by third-party research firms – they often contain data points that are not immediately obvious but could still be incredibly useful when creating future sales forecasts.
- Use The Sales Reps: Sales reps are often the most valuable source of information to make an accurate sales forecast. They can report on current customer trends, buyer behavior, product feedback, competitor analysis, and individual deals. Sales reps also offer invaluable information regarding how customers feel about a company’s products or services.
All this data can be used to build more realistic sales forecasts that are based on real customer feedback and market trends. Additionally, sales reps provide insight into prospective deals and likely close rates so that teams can plan accordingly for upcoming sales and marketing campaigns.
- Software and Automation Tools: Automation tools like AI-powered software can save immense amounts of time and effort when gathering data from multiple sources (internal systems, websites, etc.).
These tools enable quick analysis of large datasets by pulling together disparate pieces of information from across various sources quickly and accurately – something which would otherwise require considerable manual effort and human oversight if done manually instead!
This won’t be for every business but starting with a CRM as early as possible will be hugely beneficial in the long run. There is a wide range of powerful sales automation tools on offer at extremely affordable prices that will make the gathering of data a breeze.
By taking these steps and leveraging both internal (customer databases, employee feedback, etc.) and external (market research insights, seasonality) sources of data you should have enough information available to make a first draft of your sales forecast and get your first glimpse at what your future sales will look like – significantly improving the accuracy of your sales forecast in the process!
Step 3: Use a template
A template forecast ensures forecasts are consistent across the business. This is fundamental for consistent sales forecasting and business planning.
Whether you have sales forecasting software or just a basic Excel sheet, it is imperative that sales forecasting is consistent. The expectation of the sale team to complete their forecasting consistently must be fully communicated from leadership right down to sales reps.
Templates can be found online which will speed up the process but make sure you find one that aligns with all the data and factors that you have identified in Step 2. Make tweaks as needed to get a finalized template that will work for your business and sales reps. Don’t forget to run some scenarios and ensure all is working as you would expect.
Step 4: Create your forecast
The next step is to create your sales forecast. If you are using sales forecasting automation tools then this should be quite straightforward based on how the system is set up and the data you collected. It should just be a case of adding in the data that you gathered in step 2 and then waiting for the numbers to be crunched.
For manual sales forecasting then you will want to ensure the following:
- Use the draft template – this should include all necessary metrics, such as revenue by product, market share by product, customer acquisition rate, and churn rate. It should also include the periods you have determined to forecast as well as the target to track and past sales forecasting periods;
- Bring in all your research and data sources – Now is the time to ensure that all your hard work gathering the data doesn’t go to waste and has a place to sit to impact the forecast. If it’s seasonality then make sure you add your percent increase/decrease across the low and high periods to adjust the forecast automatically; if you are tracking individual deals then plug them in across the time periods selected; if you are tracking product classes then get your numbers in for each product.
- Verify the accuracy of data inputs – double-check all data inputs before finalizing the sales forecast.
Step 5: Review, Revise and Share
Once you have created your forecast, it’s important to review it and make sure it makes sense. This is where you can make necessary adjustments to ensure accuracy.
This is extremely important if you are collating individual sales reps’ forecasts. As a sales manager, you may disagree with a rep’s judgment or deal analysis and want to discuss this with them.
Be sure to track any changes made and log these in a suitable location so they can be referenced later on. This is fundamental for forecasting analysis in the next periods to get even more accurate forecasts next time round.
Once it’s completed, it’s time to share the forecast with management and take a deep breath!
Tips for creating an effective sales forecast
There are a number of things you can do to create an effective sales forecast. Here are some tips to get you started:
Tip 1: Know your data.
The first step is to know your data inside and out. This means understanding things like your historical sales data, customer behavior, seasonality, etc. that will effect your business and sector
Tip 2: Use multiple methods if appropriate
Don’t always just rely on one method to forecast sales. Use a combination of methods to get the most accurate picture possible.
Tip 3: Be realistic
It’s important to be realistic when forecasting sales. Be careful not to inflate your numbers or make unrealistic assumptions.
Tip 4: Review and revise
As mentioned earlier, it’s important to review and revise your forecast on a regular basis. This will help ensure accuracy and keep your forecast relevant.
Tip 5: Get feedback
Don’t be afraid to get feedback from others when creating your forecast. This includes sales reps, sales managers, leaders, and decision-makers.
Taking it to the next level: Custom forecasting
For companies that want to take their sales forecasting to the next level, custom forecasting is an option to consider. Custom forecasting involves creating a sales forecast that is specific to your company and your data.
This type of forecast is created by a team of analysts who understand your data and your business. Custom forecasting can be a great option for companies that want to get the most accurate picture possible of their future sales.
This can include things such as sales reps’ performance at specific deal stages, using AI to mine online information relevant to your sector and business and analyzing all past sales data to drive more intelligent insight.
This is however a heavy investment and generally only suited to the most complex of organizations and selling processes.
Sales forecasting methods explained
Good old-fashioned intuition
To use the intuition approach, reflect on previous sales and see if any recognizable patterns emerge. If there’s no clear pattern, don’t worry – just use your gut feeling and best judgment as guidance.
Assemble estimates of total annual revenues, best months, worst months, and average performance during other times – all while jotting down reasons behind these predictions so you can review them later when it’s time to plan again.
Trend analysis is a common technique used in sales forecasting. It involves analyzing past sales data to identify trends and using those trends to predict future sales.
There are many different ways to do trend analysis, but one of the most common is to use a moving average. This is a technique that smooths out data points to better identify trends. To calculate a moving average, you simply take the average of a certain number of past data points.
For example, if you’re looking at monthly sales data, you could take the average of the last 12 months to get a moving average.
Moving averages are useful because they can help you identify trends that you might not be able to see if you just looked at the raw data.
The opportunity cycle method is a time-based sales forecasting approach that uses the length of time it takes to close a deal. This can be helpful for businesses that have a long sales cycle, as it can give a more accurate estimate of future sales.
To create a time-based sales forecast, you will need to track the average length of time it takes to close a deal, as well as the number of deals in your pipeline. This information can then be used to estimate the number of sales you can expect in the future.
If you are new to sales forecasting, deal time-based forecasting can be a helpful tool to use.
A probability sales forecast is a method that can be used to predict the likelihood of closing a deal at each stage in the sales process.
For example, if you’ve got a prospect who has had a demo, loves the solution, and wants to talk contracts then you will have a higher probability of closing the deal than someone who has only just made contact.
Usually, a probability is assigned to the deal stages that you have in your sales process. As the deal moves along the stages, the probability of its closing increases.
For example, if you have a $100 deal that is on a ‘sales qualified’ deal stage and that stage has a probability of 20% then you would forecast $20. If you have another $100 deal at the ‘negotiation’ stage and that stage has a probability of 80% then you would forecast $80.
A pipeline sales forecast is very similar to a probability-based forecast in the fact that it takes the probability assigned to the deal stage into account.
The difference is that it also takes other factors into account that are more dynamic in nature and are typically based on past deal history and trends as well as the type of client, sector, the product being sold, scope, competitors, etc.
This will vary considerably based on what is being sold and to whom but this level of forecast will offer the most accuracy without getting too deep into custom reporting, analytics, and AI.
Say you have 2 reps managing a $1000 deal. One deal came into the pipeline 3 months ago and the other 1 month ago. Both deals are at the ‘proposal sent’ stage. This stage has a 60% probability of closing.
Now, if you know from past data that only 20% of deals close that are over 3 months old, regardless of stage, but 80% of deals that get to the proposal sent stage within 1 month close soon after, would you want to forecast them the same?
The answer is no and this is where pipeline forecasting comes in to provide a far more accurate forecast using all available data.
Wrap-up and my experience in sales forecasting
Creating an accurate forecast is not an easy task. It took me many years to really get a handle on it. It requires careful consideration of the situation, determination of forecasting methods, collection of data, and application of analysis.
While it may still take some trial and error and refining to arrive at a final product, by following these five steps you can be sure that you will have a robust forecasting model which will mean your end result is much closer to the truth than before.
With thoughtful calculation and attention to detail, you can create an effective process for forecasting the future. If your reps are still struggling then maybe they need some sales coaching to get them performing as expected.
Good luck and happy forecasting!