How to Create a Sales Forecast
Sales forecasts are one of the most essential tools that businesses use to plan for the future.
A sales forecast is an estimate of future sales based on past sales and current market trends.
The problem is, it can be incredibly difficult to get it right.
And even if you manage to get it right, there’s a high probability that as your business grows your forecasting methods will need to evolve.
Whatever the case may be, the fact still remains: You must be able to effectively execute when it comes to forecasting.
Creating a sales forecast can help you to:
- Plan for upcoming expenses
- Make sure you have enough inventory on hand
- Track your progress toward sales goals
- Adjust your marketing and sales strategies
There are several different methods you can use to create a sales forecast.
The most important part is to use a technique that makes sense for your business and provides accurate results.
Here are 8 steps to creating a sales forecast:
- Define the goals of your forecast
- Determine your average sales cycle
- Get buy-in from other departments
- Formalize your approach
- Use historical data
- Factor in timing
- Choose the right method
- Test your forecast and update it regularly
But first, let’s start with a baseline understanding of what a forecast is:
What is a Sales Forecast
A sales forecast is an estimate of future sales, based on past performance and current market trends. businesses use sales forecasts to make decisions about inventory, marketing, and production.
To create a sales forecast, businesses analyze historical sales data, research industry trends, and develop realistic assumptions about the future.
Sales forecasting is an essential tool for businesses of all sizes, as it helps to ensure that resources are allocated efficiently and that revenue goals are achievable.
An accurate sales forecast can be the difference between a successful business and one that struggles to meet its financial objectives.
For this reason, businesses should put significant time and effort into creating their sales forecasts.
As anyone in business knows, forecasting is an essential part of effective decision-making. After all, you can’t make informed decisions about the future of your business if you don’t have a clear idea of what’s going to happen.
That’s where forecasting comes in.
Forecasting is the process of making predictions about future events, based on past experience and current trends.
In the business world, forecasting is used to make decisions about everything from inventory levels to production schedules to marketing budgets.
Now that we know what a forecast is, let’s dive into the 7 steps. Starting with…
Define the goals of your forecast
The first step in creating a sales forecast is to define the goals of your forecast.
What information do you need to make decisions about your business?
Do you need to know how many logos/products you need to produce/sell and how many you need to renew?
Do you know how much money you need to set aside for marketing expenses?
Once you know what information you need, you can determine what forecasting method best suits your needs.
Determine your average sales cycle
The second step is to determine your average sales cycle.
On average, this is the amount of time it takes for a customer to go from initial contact to purchase.
Knowing your average sales cycle will help you to estimate future sales better.
Get buy-in from other departments.
The third step is to get buy-in from other departments.
If you’re making decisions based on your sales forecast, other departments must be on board with your forecast.
This will help to ensure that everyone is working towards the same goal.
Formalize your sales process
The fourth step is to formalize your sales process.
Every member of the sales team should be taking the same defined steps and moving opportunities through the pipeline in a uniform way consistently.
This will help to ensure that the data in your CRM is accurate and that your sales forecast is based on real data.
Use historical data
The fifth step is to use historical data.
This data is used to create a baseline for your forecast. You can then adjust your forecast based on current market trends.
Some critical forecasting metrics are:
- Average annual contract value (ACV)
- Conversion rates
- Average deal cycle
- Quota
- Attainment
- Sales pipeline
- Sales linearity
- Deal slippage
- Pipeline coverage
- Sales Activity data
- CRM Score
Factor in timing
The sixth step is to factor in timing.
This includes things like seasonality and holidays.
You can adjust your forecast accordingly if you know that sales always slow down during the summer.
This can also include big trends or events in the market, as well as broader economic and world events.
Choose the right method
Methods can vary from business to business, but there are some general consistencies across the board and widely used techniques.
Four of the most common way to forecast are:
- Top-down
- Bottom-up
- Qualitative
- Quantitive
Top-down
The top-down forecasting method is when you begin with the total market size and then break it down into segments.
This method is best used when you have a good understanding of the overall market but need more information on the specific segments.
Bottom-up
The bottom-up forecasting method is when you start with the individual segments and then add them up to get the total market size.
This method is best used when you have a good understanding of the individual segments but need more information on the overall market.
Qualitative
Qualitative forecasting methods are based on expert opinions.
This can be helpful when there is little historical data to go on.
It can also be helpful in cases where the market is rapidly changing and historical data may not be as relevant.
Quantitative
Quantitative forecasting methods are based on historical data.
This is the most common type of forecasting method as it can be the most accurate.
However, it is important to note that this method can only be as accurate as the data that is available.
Test your forecast and update it regularly
The final step is to test your forecast.
This can be done by running a simulation or creating a “What if” scenario.
Testing your forecast will help to ensure that you have accounted for all the variables and that your forecast is as accurate as possible.
Conclusion
When it comes to forecasting, there is no one-size-fits-all solution.
The best way to forecast is to use a combination of methods and to constantly test and adjust your forecast as new data becomes available.
By following these steps, you can create a sales forecast that will help you to make better decisions and achieve your sales goals.
