Sales forecasting is one of the best ways for your team to proactively plan for the future and develop appropriate strategies to overcome potential challenges ahead.
What's inside this article:
- What is Sales Forecasting?
- Why is Sales Forecasting Important?
- Factors that Impact Your Sales Forecast
- How to Build a Forecast
What is Sales Forecasting?
A sales forecast predicts how much a salesperson, sales team, or organization will sell in a unit of time – week, month, quarter, or year. This allows you to estimate future revenue.
Why is Sales Forecasting Important?
At the simplest level, managers can create sales forecasts of sales reps in order to predict the number of opportunities they can close in a period of time. The VP of Sales could create forecasts of the entire sales department to share with key stakeholder and c-suite leaders.
The value of sales forecasts extends far beyond just the sales organization. For example, the Finance team will utilize sales forecasts to plan budgets. Most importantly, the accuracy of forecasts build the foundations of trust between the company and its investors.
Therefore, building an accurate forecast is essential, not only for benchmarking your sales team’s performance to expectations, but for the overall well-being of the business.
Factors that Impact Your Sales Forecast
In order to build a sales forecast, you first need to understand the factors that impact the forecast. These can be broadly broken into internal and external factors:
Things as basic as the number of salespeople or the productivity of the reps can impact your organization’s sales revenue. If you recently expanded your sales team, for example, you can forecast a growth in business. You should keep an eye on productivity metrics to understand if your team has been sized correctly – if your reps average low working hours, you may need to consider either growing your client base or adjusting the team count to the optimal size to maximize revenues.
If your team recently expanded to a new geographical location, you can expect a dip in revenue until your reps are well-acquainted with the region. Alternatively, if your team has expanded its presence in a particular region, you could forecast an increase in revenue.
Your organization can leverage Aptivio’s revenue enablement platform in order to find hidden opportunities across regions. By using tech-enabled solutions, you can hedge against many of the challenges associated with expanding into new territories.
Product and Service
Has there recently been a change in your organization’s product offerings or service? What is the consumer response to the new rollout? Depending on the changes in service or product offerings, there could be a change in revenue growth. For example, if you are in the hotel industry and your hotel recently launched a new partnership with Chase’s rewards program, you could anticipate a growth in the number of Chase tourists visiting one of your hotel branches.
The level of competition in your industry space impacts your organization’s revenue and growth. If your competitor has recently acquired a company in this /space, you could expect a decrease in revenue.
However, through Aptivio’s early warning signals, your organization can anticipate competitors’ moves and build necessary defensive strategies to avoid loss in revenues from competition.
Market and Industry Trends
What trends are impacting consumer behavior? A good forecast should consider the factors that are shaping the broader markets. If a new online delivery service platform has partnered with your organization, perhaps you could expect a growth in business.
Particular industries experience cyclical variation in revenue by season. If your organization is in the hotel services, for example, you could anticipate a growth in revenue during the summer season.
Though certainly not exhaustive, these are some of the common internal and external factors that could impact your business revenue and forecast.
How to Build a Forecast
Now that we have considered some of the major sales forecast variables, we can look into the approach you should take in building out your organization’s sales forecast. One of the most common methods is the bottom-up approach, which begins by aggregating sales data for each product or service offering. From there, you can estimate changes in volumes and prices to reach a revenue forecast for the coming year.
Step 1: Look at historical patterns
Set your lines of sales. You should dig into the sales data for the past 12 months and use that as your sales run rate, which is the predicted amount of sales per period.
Step 2: Adjust for changes
There will most likely been some form of change in your organization, whether it is a new product rollout, price, promotions, channels, and/or customer behavior. Some of the questions you can ask are:
- Are we introducing any new products this year?
- What promotions are we offering, and what is the expected ROI?
- Is our organization expanding into new channels of sales – whether it’s a new territory, brick-and-mortar store, or online?
- How has the customer behavior changed, and what has been the underlying cause? Is our organization positively or negatively impacted by this change?
- How are the changes in the competitive landscape going to affect my organization’s performance?
With these questions in mind, you can modify the basic sales run rate accordingly on each line.
The method could depend on your business model, but this typically ranges from unit sales and service units to recurring revenue (e.g. subscriptions). Alternatively, you could also just aggregate total revenue and forecast as a single value.
Other Methods to Consider
Note, there are additional methods to forecast revenue, such as the top-down approach. Top-down forecasts begin with the overall market size. From there, you can estimate your organization’s market share, and from there, reach the revenue forecast.
There are also online tools that can help you build forecasts including Microsoft Dynamic 365, which uses data to build comprehensive insights.
Regardless of what method you take, it is important that your end safety test meets expectations. Always sanity-check your assumptions and final numbers to make sure that the numbers make sense.
The benefits of an accurate sales forecast could be manifold. For one, your organization could adjust budgets for your sales team in order to reach the targets for the year. It could also help your team quantify the growth expectations and strategize the sales efforts accordingly.
To summarize, forecasting is all about using data and reasonable assumptions to reach a revenue projection. You can leverage tools like Microsoft Dynamics 365 Sales and Aptivio to gather real-time insights about your organization and build reliable sales forecasts. Building a sales forecast could be the first step to laying out your organization’s sales targets and goals for the year.
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