Sales forecasting is important. This is a fact that has been drilled into the head of any sales manager and business owner. The problem is that, as important as a sales forecast is, it’s incredibly hard to get right. Many businesses don’t know how to do a sales forecast. And then when you look at the businesses that do know how to do a sales forecast, many of them are inaccurate.
So, the challenge is to make sales forecasting readily available to your sales team and make it accurate — easier said than done, to put it mildly. Fortunately, sales technology and software have continued to evolve over the years, making accurate sales forecasts a more realistic prospect. Still, even with software in hand, you need to know what makes up a sales forecast and how to ensure your forecasting leads to success. Read on to learn more about sales forecasting and how you can effectively implement it in your business.
What Is a Sales Forecast?
First, let’s make sure we have a solid grasp of what a sales forecast is and why it’s important. A sales forecast is meant to tell you the projected sales revenue of a certain period of time. In order for a sales forecast to be useful, it needs to be accurate. Typically, historical data is essential to make these reports. The main metrics that are considered are the number of customers and the average value that a customer brings in purchases. However, more advanced systems will take other metrics into account for a higher degree of accuracy.
Why Forecasting Sales Is Important
Forecasting sales is important for several reasons. Primarily, when businesses are looking at their sales forecast, they can determine how much they can grow in the coming year and when they can invest in that growth. When a business has a sales forecast that indicates significant growth, it can feel confident investing revenue and resources into bringing the company to the next level. On the flip side, if the forecast reads conservative, the business can make sure to save funds for maintaining the company and encouraging growth at a future time.
This is why inaccurate forecasts can be so dangerous. An overzealous projection can lead a business to spend money that it doesn’t have. A forecast that projects under the mark can cause a company to hold back when it should be pushing forward, delaying its growth. Accurate forecasts need to be the norm if a company wants to make smart, data-driven decisions.
Define Your Sales Goals and North Star KPIs
To make your sales forecasts as actionable and insightful as possible, you need to clearly outline your sales goals and your North Star key performance indicators. Your North Star KPIs will be especially crucial because they will help your team see in detail the targets they need to hit to make a sales forecast come to fruition. Sales forecasts can only do so much, and they’re only accurate if your sales team is guided well and if they know what goals they should be reaching for throughout the quarter, year or whatever time period you’re making your forecast for. Below, we’ve outlined some of the key metrics you might want to consider when defining your goals and KPIs.
Metrics to Consider
- Average annual contract value
- Sales activity
- Sales pipeline
- Conversion rates
- Deal slippage
Consider the Typical Timeline of a Sales Cycle
When you’re building out your sales forecast calculations, you need to pay close attention to the timeline of your sales cycle. This is an incredibly important consideration, because this is going to vary from company to company. Depending on your product or service, you could be dealing with long sales cycles with big contracts that take months, or you might be dealing with quick turnaround and weekly sales goals. Just using a general timeline that isn’t specific to your business will make your sales forecast inaccurate and unreliable. You’ll either overestimate or underestimate your sales revenue potential, which is not the ideal scenario in either case.
Understand the Buyer’s Journey (or Journeys)
Similar to considering your sales cycle, you also need to understand the buyer’s journey to make an accurate sales forecast. Think about the different stages the buyer goes through before purchasing. How long does each stage take? What’s the time between discovery and conversion? When building out an advanced sales forecast formula, you have to consider every angle. Leaving out important numbers can be detrimental when you attempt to finalize your forecast results.
Examine Historical Sales Data and Establish Your Sales Run Rate
The more historical sales data you can pull from the better. Even if you just have one year or a few quarters of data, you can start to establish your sales run rate. Of course, if you have many years of sales data to analyze, you’re going to get a more accurate sales run rate overall. When you combine your historical data with the other metrics we’ve listed so far, you’ll be well on your way to creating a sales forecast that you can actually use for data-driven growth decisions in your company.
Modify Your Run Rate Based on New Factors
Historical data plays a part in your run rate, but when you’re forecasting for the following year, make sure you include calculations for any new factors you plan to implement. For instance, if you increase prices and have more sales staff, it’s likely that you’ll sell more products in the following year. But you have to factor in the pay and benefits of that new sales staff, so that needs to be considered as well.
For a good starting point, here are some of the main factors to consider when you’re modifying your run rate:
Factors to Consider
- Sales staff
- Channel expansion
- Evolving products
Consider Big Picture Market Trends
When putting together a sales forecast, it can be easy to fall into the trap of only looking at your business on the micro scale. Don’t forget to zoom out and look at the industry on a macro scale as well. Market trends inevitably are going to affect your sales forecast one way or another. For instance, if you’re in a down economy and the product or service you sell isn’t considered a necessity, revenue might be down in the following year.
Analyze Your Competitor Ecosystem
Consider using your competitor ecosystems as a frame of reference when creating your sales forecasts. By looking at the experiences of your closest competitors, you’ll be able to compare your own results and see how close the margins are. Obviously, you don’t need to base your entire forecast solution on what your competitors are doing, but it can help you see if you’re on the right track.
Update Your Forecast on an Ongoing Basis With New Data
Remember, a sales forecast isn’t a stagnant thing. As you take in new data, you need to be able to relay it into your sales forecast calculations and adjust your reports as necessary. If you just look at your forecast at the beginning of the quarter and don’t continue to update it, your sales team won’t be able to make adjustments on the fly. Updating your forecast on an ongoing basis ensures you’re always informed and prepared for what your revenue might look like at the end of your chosen timeframe.
Track, Analyze and Anticipate With the Right Sales Tools
If you want to create the best and most accurate sales forecasts possible, you’ll need to make sure you have the right sales analytics tools. That’s where Flockjay comes in. Flockjay is a comprehensive sales elevation platform that allows you to create high performing sales teams through peer-to-peer learning.
If you want to have the most effective sales team possible, then Flockjay is the right solution for you. Get in touch with us today to learn more about the Flockjay platform.