The Importance of Sales Forecasting
Sales forecasting is a critical business exercise that creates sales projections and business forecasts for the future. Accurate sales forecasts help business leaders make important decisions about budgeting, hiring, goal-setting, marketing, and other actions that impact cash flow.
Inaccurate sales predictions and revenue forecasting can leave businesses vulnerable and sales staff struggling. Therefore, companies must understand how to project sales and how to create a sales forecast.
This post will look at what sales forecasting is, discuss some sales forecasting variables, and outline the importance of sales forecasting in business.
Sales Forecasting: Understanding the Basics
Sales forecasting is the process of predicting sales revenue for a specific period. Organizations use historical sales data and other variables, such as sales pipelines, CRM software data, user surveys, and revenue funnels, to predict future sales accurately.
It requires solid market research, and you must use accurate data to make worthwhile predictions. No matter how much time and effort you put into creating a sales forecast, it will be useless if your data is unreliable.
A sales forecast is used to estimate the number of goods or services you will realistically sell over a forecast period, the cost of these goods or services, and the estimated profit.
Typically, a sales forecast works by:
- Listing the goods and services to be sold.
- Estimating the number of each good/service to be sold.
- Multiplying the price per unit by the number of goods/services to be sold.
- Calculating the cost of each good/service.
- Multiplying the cost of each good/service by the estimated number to be sold.
- Subtracting the total costs from the complete sales estimates.
If your organization stocks a large variety of items, it may be easier to condense unit costs/sales into categories.
If you’re wondering how to forecast sales, you need to know how to forecast revenue, too. Some companies use these terms interchangeably. In reality, though, they are two different things. Forecasting revenue involves analyzing finances for the company at large, while forecasting sales revenue is strictly devoted to the sales department. Keep in mind, the sales forecast will inform the revenue forecast.
Sales Forecasting Methods
There are several popular methods used to forecast sales and revenue. These include:
Historical forecasting uses sales data for the same period from the previous year or years. Using this information, many businesses predict their revenue and sales for the upcoming year.
This popular approach to sales forecasting allows you to identify trends over time and use historical data to plan ahead. The downside to historical forecasting is that the process assumes that sales figures will stay the same. As we have seen from the recent COVID-19 disruptions, this isn’t always the case.
Intuitive sales forecasting relies on your sales team’s gut instincts to predict what lies ahead for your business. Although this approach isn’t 100% reliable, this method can be useful if you work with an experienced sales team.
Often, efficient sales staff can use their instincts to predict future revenue with great success. If you have a more novice team or don’t want to leave your sales forecast to intuition, you can take an alternative approach by leveraging your sales data (calls, emails, sales leads, etc.). Using this information, you’ll have more accurate data on which to base your forecast predictions.
Photo by Austin Distel on Unsplash
Sales Forecasting Variables
Sales forecasting has many limitations, and several factors can impact the accuracy of this process. Any outside influences that affect the industry, community, or company can impact sales forecasting.
Some of the most common internal and external factors that influence sales forecasting include:
- Budget allocation
- Marketing spend
- Customer satisfaction
- Weather and climate
- Economic conditions
- Political conditions
You should consider each of these variables to ensure an accurate sales forecast. These factors will also help you understand any shortcomings of an already-drafted forecast.
Why Sales Forecasting is Important
Sales forecasts can save businesses a lot of time and money. They are important because:
- Sales forecasting helps companies to allocate sufficient resources for future growth while managing their cash flow.
- Sales forecasting can help your business make smarter decisions. These predictions assist with business planning, risk management, and budgeting.
- Sales forecasting can help your business estimate revenue and costs accurately, allowing you to predict short and long-term performance.
- Sales forecasts help sales teams to hit their targets by identifying problems in their pipelines and giving them a chance to correct issues before it’s too late.
Many companies use sales forecasting to drive the majority of strategic decisions, as it impacts nearly every department in a business. For example, HR uses forecasting to align their hiring plans, the financial department uses forecasting to estimate their budgets, and product managers use it to assess product demand.
In the face of the ever-changing business landscape during the pandemic, the ability to forecast accurately is more important than ever. Our expert-crafted financial modeling and scenario analysis tools can help you utilize data to make smarter financial decisions. Try Synario today.