What is Sales Forecasting & How to Set It Up

Table of contents:

• What is Sales Forecasting?
• Why Good Forecasting is So Important?
• Benefits of Having an Accurate Sales Forecast
• Sales Forecasting Methods
• Keys to Success in Sales Forecasting
• Key Sales Forecasting Challenges
• Company Forecasts Across the Enterprise
• Key Features of Effective Sales Forecasting Software
• How Can Automaly Experts Help You with Sales Forecasting?
• Conclusion

Sales experts in the past relied on seasonal trends, recent sale activity, and shallow metrics to foresee how much they could sell. However, today, things have changed. With the aid of technology, sales forecasting now involves analyzing your customers’ buying habits and keeping track of your company’s past performance and current market conditions to establish your future sales objectives. 

Unfortunately, many companies are yet to crunch the numbers efficiently and develop accurate sales forecasting strategies. The statistics below prove just how difficult the sales forecasting journey was – and still is – for most sales teams:

• 67% of companies do not have a formally structured sales forecasting approach
• Less than 20% of sales experts have confidence in their company’s sales forecast accuracy
• Budget constraints cripple sales deals, says more than half (55%) of marketers.

Failure to develop accurate sales forecasts automatically puts your company at risk of reacting too late to changing market conditions, over-producing inventory, or under-producing and running out of stock. The good news is that there are several ways to circumvent the issue with accurate sales forecasting. In this article, we’ll cover the sales forecasting definition and benefits, go over a few sales forecasting examples, and how to set it up.

What is Sales Forecasting?

So what is forecasting sales? Sales forecasting is the process of predicting how much your company can sell based on a variety of indicators and historical data. The resulting sales forecast report is then used to inform other business operations, including your marketing campaigns, supply chain, and inventory management. 

Sales forecasts provide additional information about your customers: 

• The number of customers you expect to buy your product
• When they are expected to place their order
• How much they plan to spend
• How big of a market share can your company grab. 

All in all, effective sales forecasting will allow you to plan ahead and avoid being caught off guard by sudden changes in market conditions. 

For example, if you can predict a sudden drop in demand for a product, you can reduce the number of products produced and avoid having too many unsold units sitting in your warehouse.

Why Good Forecasting is So Important

Sales forecasting is an essential part of the sales process that can greatly impact how effective your sales team and company are. Because your sales forecast feeds into so many other business functions, from inventory to staffing, a poor forecast can have a negative impact on the entire organization and result in wasted resources. 

For example, you want to avoid keeping too much inventory in storage. On the other hand, if you produce too little inventory, you risk losing sales opportunities and upsetting customers who can’t buy due to shortage.

Benefits of Having an Accurate Sales Forecast

It’s easy to think of sales forecasting as an exercise in futility. After all, how can anyone accurately predict what will happen tomorrow — or even a couple of weeks from now? With so many variables, unforeseen events, and unplanned roadblocks, it’s difficult to anticipate which way the market, your company, and its products might go in the near future.

Adopting an effective sales forecasting process is your best defence against unanticipated circumstances. 

Here are more benefits of having an accurate sales forecast:

Benefit #1: It Helps You to Meet Customer Demand

One of the biggest benefits of having an accurate sales forecasting strategy is that you’ll be able to anticipate demand as well. By forecasting demand, you’ll ensure that you meet customer needs and have the correct inventory levels to meet future needs.

Benefit #2: Effective Inventory Planning Based on Your Forecast

Sales forecasting enables you to plan your inventory based on future sales expectations. This is important because it will help you to manage your inventory levels more effectively and avoid over-ordering or under-ordering stock. 

A common challenge businesses (especially those in the e-commerce space) face is maintaining the correct inventory levels. Having too much or too little inventory can result in unnecessary costs of storage and lost revenue. 

With accurate sales forecasting, you will be able to estimate the amount of inventory you need in case of sudden changes (such as natural disasters) that could weigh down your sales activities.

Benefit #3: It Gives You an Understanding of the Company’s Performance

An accurate sales forecasting strategy will help you make strategic decisions that will be better aligned with the performance of your company. 

For instance, if your sale volume is lower than anticipated, you will be able to identify the problem in your sales or marketing strategy. Perhaps your message is not reaching your target audience, or maybe, there are issues with your product or service.

Once you’ve identified the problem, you’ll be more equipped to look for the solution and ensure that your sales forecasting efforts are directed in the right way. 

Benefit #4: It Helps Establish Benchmarks for Future Forecasting

An accurate sales forecast will help to establish benchmarks for future forecasting and allow you to better prepare for changes in the business, like the end of the holiday season and the beginning of the new year, when there are fewer sales. This way, you can avoid over-ordering or under-ordering and be more strategic in the changes that you make within your business.

Benefit #5. Reduce Waste

Finally, sales forecasting will help you to eliminate unnecessary waste. Having an accurate sales forecast will help you to purchase the right amount of inventory and only what you need at the right time. 

By forecasting your sales and having an accurate sales forecast, you will be able to avoid excess products in your warehouse and unnecessary transport and storage expenses by ensuring that you aren’t purchasing more than you need. It will also help you to avoid purchasing too little, which can lead to missed opportunities.

The scope of your responsibilities as a sales forecaster may fluctuate depending on the size of your company and its needs. But, regardless of what position you hold, there are some universal methods of forecasting your business can benefit from. 

Sales Forecasting Methods

There are several sales forecasting methods that businesses can use to help predict future sales volume. Unfortunately, none of these sales forecasting methods is 100% perfect, but each can provide useful insights with the right inputs.

• Bottom-up sales forecast – The bottom-up sales forecast method calculates expected sales units multiplied by the average cost per unit. This sales forecast is helpful for the product or service-specific industries such as technology, where the same customers often purchase the same products year after year. 

• Top-down sales forecasting – The top-down sales forecasting calculates expected sales based on macro-level data, such as economic indicators and demographic trends. While top-down forecasts are helpful for industries with a high level of variation, such as B2C, they can also be too general and provide only a rough forecast.

• Sales cycle forecasting – Sales cycle forecasting is the process of measuring and projecting sales performance metrics over time. It’s a way to measure the length of your sales cycles, identify variations in performance by stage, and use that information to strategically plan for the future. Sales teams have powerful tools at their disposal – their CRM can be used to gather information about deal times and length of activities to project future sales.

• Opportunity stage forecasting – Opportunities are the potential for profit that exists when a company identifies a gap between its current position and a desired future state.  An opportunity forecast is a prediction of the likelihood that a particular opportunity will materialize in the future based on current conditions and trends.

Keys to Success in Sales Forecasting

Sales forecasting is more than just making a prediction. It’s about understanding and analyzing your company’s past performance, current market conditions and future objectives to create actionable insights for your sales team. 

There are so many variables that go into sales forecasting; market trends, competitor analysis, inventory management strategies, and more. Fortunately, there are some straightforward steps you can take to create a solid sales forecasting strategy. 

Know Your Customers and Market Trends

When it comes to sales forecasting, you need to know the market trends and the buying behaviour of your customers. This will guide you on how many units you should produce and also inform your marketing strategy. Staying on top of market trends can start with subscribing to business newsletters and monitoring your customers’ preferences, their demographics, and what they respond to.

Define Your Forecasting Metrics

Another important step in creating a sales forecasting strategy is to define your forecasting metrics. For instance, you’ll want to focus on how many units you’ve sold in the past 12 months, the number of units you need to have on hand at all times to meet demand, CRM score (the likelihood of the customer to buy), just to mention a few.

Use Technology to Your Advantage

Sales forecasting wouldn’t be complete without considering how different sales forecasting tools can streamline this process. There are many sales forecasting software solutions that can help you collect and organize your data. If data is your thing, you may want to consider sales forecasting software that specializes in data visualization. 

Data analysis sales forecasting tools can help you make sense of the information you’ve collected and create a visual representation of that data.

Make a Commitment to Accuracy

Accuracy is key when it comes to sales forecasting. This means that you need to make sure you’re relying on reliable data, eliminating any guesswork, and knowing exactly where you’re getting your information from. Ideally, you’ll want to get your sales data from multiple, relevant sources, including your sales forecasting software, CRM, historical account records, marketing data, and sales reports from your company.