Sales Forecasting Methods To Predict Accurate Revenue

Sales Forecasting Methods To Predict Accurate Revenue

Business entrepreneurs frequently get stuck when it comes to forecasting their sales. These entrepreneurs are very sure about how their business will perform, but they are all clueless when it comes to talking about details. Unfortunately, many companies are unaware of the different sales forecasting methods

Most of them fail to answer questions like:

  • How many leads do we need in the next quarter to hit our revenue targets?
  • How much will the revenue target be in 2021?
  • Do we need to increase our sales team numbers to hit our sales goals?

It’s a terrific task, looking into the future. None of us can predict the upcoming sales. 

How to predict what might happen in the future? In this highly competitive marketplace, you need to work one step ahead. Companies are expected to pursue forecasting methods to stay competitive and drive revenue.

Table Of Contents

What Is Sales Forecasting?

Sales forecasting determines a firm’s share in the market to understand the future and answer what could happen? The sales forecasting method provides companies with actionable insights. It is used to improve your company’s accuracy and reduce your risk.

Benefits Of Sales Forecasting

Sales forecasting has numerous benefits. It allows companies to:

1. Efficiently allocate resources for future growth
Once you create a precise sales forecast, you will know how your sales will be for the upcoming year. This way, you can not only plan your stock and inventory but hire employees as per your need. You would know beforehand what it would take to grow, which is quite beneficial.

2. Estimate revenue accurately and plan investment
You would need funds to allocate resources, and with an accurate sales forecast, you can find out when your business will get enough funds for the investment you are planning to make.

3. Discover issues in the work process
Sales forecasting enables you to spot the problem as soon as it starts. When something unusual takes place, you will come to know and take the required action. For example, if your ROI is 20% lower than what was forecast, it means that there is a problem somewhere in the work process, and it requires your attention. You can spot the issue early on and handle it better than waiting for it to get complicated.

4. Plan overall business goals
With continuous sales forecasting, you can allocate resources and hire a workforce and find problems and manage risk. This way, you can work towards strategically planning your business goals.

4. Improve decision-making and facilitate growth
With forecasting, you can see the red flags before they turn into monsters eating away the fabric of your business. By doing sales forecasting accurately, you are more likely to grow as an organization.

Factors Influencing Sales Forecasting

I) Internal Factors

Internal Factors occur within the organization and can be changed according to increased sales and forecast.

Labour problems: If an organization faces any labour problems, then the sales can take a dip.

Inventory shortage: Due to the lack of products, the organization’s sales forecast will be low.

Working Capital Shortage: (Current assets-(current liabilities)). Since the production needs day-to-day working capital, its sales forecast will be low if an organization’s working capital is low.

Price Change: The price of the product plays an integral part in sales forecasting. Any price increase can affect sales.

Changes in the product: When there is a product change, your sales forecast has a significant impact. These changes can include removing bugs or unwanted features and adding additional features to your product. One can make the most of these changes to minimize the sales cycle and make more sales. 

II) External Factors

Factors that occur outside the control of the organization.

Relative Stay of the economy: The economy’s current state plays a pivotal role in sales forecasting. The economy’s condition has a direct effect on all businesses and markets. When the economy is strong enough, people begin investing and making purchases. However, when the economy is in a poor state, people lose money and are hesitant to spend money.

Weather Change: Change in the weather can affect the sales forecast figures majorly.

Natural Calamity: Situations like Covid, which cannot be defined before, can be troublesome.

Taste and Preference of Customer: If the consumer’s taste and preference change towards the product or a company, it will impact the sales.

Policy changes: When there are changes in policies or the implementation of new laws and regulations, it can directly affect your business. However, this is not in your control. 

Sales Forecasting Challenges

There are a few factors that can hamper forecasting and they include the following,

1. Sales History

To create an accurate sales forecast, you need the complete data of sales that took place recently. However, when a business is new, there is hardly any sales history available, and it can pose a challenge for sales forecasting.

2. Research    

Lack of sales history can get compensated with the help of thorough research of competitors, audience, your business vertical and much more. Even if there is enough sales history, you should still do lower level research. In both scenarios, there is expenditure for research activities which is not ideal.

3. Accuracy Of Data

Sales reps may record data inaccurately and enter it into the CRM or EPR, Learn more about the difference between erp and crm resulting in an erroneous sales forecast. Any planning done on its basis can’t get you desired outcomes. 

4. Lack Of Reasoning 

At times there are only numbers in sales data without explaining the reason for the changes. It can be challenging to predict how customers behave without explanations, making the sales forecast less accurate. 

5. Difference In Sales Funnel

The sales funnel of two organizations need not be the same. The funnels used by sales reps within the same firm can be different. There has to be a method to eliminate this disparity, or you will have misleading information that can affect the sales forecast. 

Forecast Sales Steps

In the next part, we will explore the different sales forecasting methods. Right now, let’s look into the different steps involved to calculate the forecasted sales.

Examine sales from the previous quarter and break down the pointers into different categories like price, product, sales period, and other relevant variables. This will form the foundation of sales forecasting.

#2 Incorporate Changes

The most intriguing part comes here. When you are done with your basic variables, you have to modify a few things according to the current scenario. So, get some insights on what the numbers will look like for upcoming quarters. Let’s take some examples to understand it clearly-

Pricing: Have you changed the prices of any products. Is there a need to change further?

Customers: What about your customer base? Is it expanded? What is the difference between the leads generated?

Product changes: Are you adding any new products to your portfolio? Do you expect the new product to act similarly?

This is the time to project the market trends? How will the market perform? How will your competitors perform? Do you anticipate any acquisitions?

#4 Monitor competitors

You have been doing this from the start, but you need to track it regularly. What are the major players in space doing? Check if new competitors are trying to enter the market.

#5 Business plans

Add all the strategic planning you have been doing. Have a look at your growth curve. Are things going near your expectations? How all these things will impact your forecast.

8 Sales Forecasting Methods

There are various ways to forecast sales for your business. The method you pick depends on your business needs.

Most businesses use two or more sales forecasting techniques at the same time to get more forecasts. Doing so can present you with the best-case scenario and the worst-case scenario.

Let’s dive right and figure out a few sales forecasting methods.

I) Length Of Cycle Sales Forecasting

Forecasting by the length of your sales cycle helps to predict the probability of a deal going through. This particular sales forecasting method supports the algorithm.

Knowing the mean length of the sales cycle can introduce a level of predictability into your sales forecasting.

If you get a specific number of leads, you will know what the predicted sales figures will likely be in one month or even a few months down the line.

How To Calculate?

Average sales cycle=Total no of Days to Close Deals / No of Closed Deals.

To have a detailed understanding, let’s take an example.

Suppose you have four deals that you recently closed. Calculate the number of days it took to close each one?

-1st Deal62 days

-2nd Deal: 60 days

-3rd Deal: 59 days

-4th Deal: 55 days

-Total: 236 days

Divide the total by the number of deals to get the average sales cycle; here, the avg comes to 59 days. Approx. 2 months.

Based on your average sales cycle length of two months, you might forecast that there is a 50% chance of closing the deal.

Pros

This sales forecasting method is suitable for companies that track prospects entering the sales pipeline. It is therefore essential for the sales and marketing team to be on the same page.

The Length of Cycle Sales Forecasting method is objective, and you can apply it to different lead sources to get a precise forecast.

Cons

The drawback with this particular method is that your sales cycle will differ based on who you are selling to. It will be longer when you are selling to enterprises when compared to SMBs.

Also, you would need to track data carefully because a tiny error can change your prediction.

Length of cycle sales forecasting method - Pros and Cons

II) Opportunity Stage Forecasting

As the term suggests, opportunity stages forecasting is a forecasting technique where the team breaks down the sales pipeline into different stages.

By breaking it down, you can accurately predict the chance of you closing a specific deal.

Businesses can break down their pipeline into different stages like prospecting, qualified, demo, quote, closing, etc. If the prospect reaches the bottom of the stage, there are more chances of closing the deal.

How to calculate?

You can create your sales forecast by multiplying the amount of each opportunity by the probability of closing of that opportunity.

Expected revenue – deal amount * probability to close.

Pros

The advantage of this forecasting method is that it is pretty simple and highly objective.

Cons

To forecast your subsequent sales, you need to analyze the past and current performance. However, despite being a data-driven prediction, the results might not be that accurate.

The major drawback of this method is that it does not consider characteristics like age and deal size. Also, when the data is inaccurate, your forecasts would not be accurate.

Opportunity stage sales forecasting method - Pros and Cons

III) Historical Forecasting

This sales forecasting method is quite popular, where organizations take past sales data for a particular time. It assumes that your sales will be equal to that or maybe more significant than that.

How to calculate?

Here’s an example :

If the revenue were $50,000 in September, using historical forecasting methods, you would expect it to be at least $50,000 in October too, isn’t it?

If you assume the growth rate to be 10%, it would be $50,500.

Pros

Historical forecasting is a simple and easy method to implement. The results are almost accurate when the market does not undergo significant changes.

Cons

It doesn’t account for seasonality as the markets are dynamic.

Though the method is easy to implement, it still has some drawbacks like the changing demand of the environment.

Historical sales forecasting method - Pros and Cons

IV) Intuitive forecasting

It is all about predicting the future state through a good sense of intuition. The salesperson applies their experience and intuition to predict the probability of getting the deal closed.

How to calculate?

There is no calculation involved in this method, but a sales rep will decide what amount they would bring in a specific period. For example, John plans to bring $xxx in n number of days. 

Pros

This technique is most valuable in the very early stages of a business when there is close to zero historical data. In that case, Intuitive forecasting comes into play.

Cons

The main disadvantage of this method is that you cannot scale this method or check the accuracy. Since there is no historical data present, every member can have their estimates.

Another problem is that it is difficult to verify the forecast apart from looking at the client and sales rep’s interactions, which is a tedious job.
This forecasting method is suitable for new companies and doesn’t have any previously existing sales data.

Intuitive sales forecasting method - Pros and Cons

However, if you are confident in your sales team experiences, intuitive forecasting on newer leads can help you get early predictions. It allows managers to make informed decisions and set realistic goals with the team.

V) Multivariable Analysis Forecasting

As the term suggests, it is an analysis through multiple variables. Multivariable analysis forecasting is one of the most precise and sophisticated forecasting methods. It has elements of other forecasting techniques such as sales cycle length, opportunity stage probability, and individual rep performance.

The different variables involved in this forecasting are-

i) The performances of your representatives

ii) Types of opportunities

iii) The length of your sales cycle

How to calculate?

There is complex math involved in this forecasting method.

For instance, two reps are working on the same account. The first rep has done a demo for a deal worth $20,000.

If there is a 25% chance of closing the deal, the amount forecasted is $5000.

If the second rep has a smaller deal of $8,000 and a 65% chance of closing the deal, the predicted amount is $5200.

The total forecast is $5,000 + $5,200 = $10,200

Pros

Multivariable analysis is quite accurate as it is based on data.

Cons

It solely depends on your data. Since the solution is data-driven, it requires a tool for analytics. It would be best to make sure that the budget is not less as it requires an analytical tool for this.

This renders it impractical for startups and small businesses that have a limited budget. 

Also, the sales reps have to track activities to make sure that the results are accurate. 

Multivariable analysis sales forecasting method - Pros and Cons

VI) Pipeline Forecasting

Pipeline forecasting is the process of forecasting from a business’s sales pipeline (deals under negotiation with customers and prospective customers).

It looks at every opportunity in the pipeline and carries out an analysis of it based on several factors such as age, type of the deal, and the stage of the agreement.

How to calculate?

It is quite a complex method as the calculations are extensive. You need to have a program in hand to handle such calculations. To get deeper insights, you need to track your sales pipeline regularly.

Here’s an example,

If your sales team usually closes deals ranging from $5,000 to $8,000 within 60 days, there are high chances of the deals in the pipeline getting closed. With data, it is possible to determine your monthly or quarterly forecast. 

Pros

Pipeline forecasting is quite accurate as it is based on data. It also considers the unique factors of each deal.

Cons

There is no worth of using this method if you are not regularly updating your sales numbers. Make sure you never mess with incorrect numbers. Else, the whole prediction model goes wrong.

Pipeline sales forecasting method - Pros and Cons

VII) Test Market Analysis Forecasting

It is one of the most popular sales forecasting methods as it records consumers’ data to check the acceptance of new products. Businesses select their target audience and collect data from there to predict the sales revenue.

It is commonly used for large businesses at the time of product launch to check the product’s acceptance among their target audience.

This forecasting method helps them to get good insights on how the product will react after launch.

It would help if you made sure that you chose the right market to penetrate your audience.

How to calculate? 

Using this method, you have to divide the market into two regions when you introduce your product or service. The market is called a test market where you bring the product without advertising it. The market where you advertise the product is the control market. After analyzing the difference between both the markets, it is possible to forecast the product’s future sales. 

Pros

The advantage of this forecasting method is that you can learn the market’s response and fix the problems before you proceed with the launch. Also, startups can offer early access to their product and create curiosity around the product.

Cons

The major drawback with this forecasting method is that releasing a beta version can be an expensive affair. Also, you have to understand that not every market is the same. What takes place in one market may not necessarily take place in another.

Test Market Analysis Sales Forecasting Method

VIII) Lead Driven Forecasting

Lead-driven forecasting is a type of forecasting where you analyze each lead source and assign a value based on what the same kind of leads did previously and create a forecast based on the source value. 

When you assign each lead source a value, you can understand how probable it is for each lead to become a paying client. 

The metrics you need for this method are:

a. Leads per month for the earlier time period

b. Lead to customer conversion rate (by source)

c. Avg sales price (by source)

There can be changes in this forecasting method. For instance, if your team happens to change the lead generation strategy to match the current trends, it can change the number of leads from various sources. This will change the lead to customer conversion rates.

You can minimize the variation in the results by staying abreast of the latest changes and considering them while forecasting. 

How to calculate?

You require the average sales price per lead that you can get by simply looking at the customer database. For instance, website leads close at $500 per customer, and the ones requesting a demo close at $1,000 per customer. 

The next metric is the average lead value per source that you can get by multiplying the average sales price by the source’s average close rate. 

Average lead value = average sales price x average close rate of that source

Here’s an example:

If leads from a website spend $1000 with us and convert at a rate of 10%, the lead value of every lead would be $1000 x 10% = $100 per lead. 

Next up, we have to calculate the total number of leads which you can do by dividing the total revenue goal by the average lead value. 

Number of leads needed = Desired revenue / Average lead value

As per the example, if we assume the sales team’s target to be $100,000 and our average lead value is $100, you need to generate 1000 leads to achieve the goal. 

Pros

It is possible to get an accurate sales forecast with the lead value of each source.

Cons

As there are several factors in this forecasting method, there are higher chances of variance in the results. 

Lead Drive Sales Forecasting Method - Pros and Cons

Sales Forecasting Tools

1. CRM

After listing down all the necessary actions, there comes a CRM tool that will immediately improve the accuracy of your forecasts and at the same time make your forecasting process more efficient. It keeps the different functions of the business integrated and checks the dependency of different verticals. 

The use of CRM with sales forecast reports can help sales teams tweak their sales strategy a bit. Sales reps will be able to find out how far they are from fulfilling their quotas, and sales managers will manage their resources better. 

Accurate sales forecasting forms the basis of a successful sales strategy. 

Watch out for the most influential industry tool to get the best trend analysis of your business. It helps functional leaders to make better and more informed decisions by providing the most accurate forecasts. 

Here are the ideal features in CRM that you must look for:

1. Enable generating reports on demand so that you can take a look at the projected sales and see how much sales the team has made to date, how many current deals are in the pipeline, and so on.

2. Allow adjusting the pipeline estimates based on lead confidence to get accurate results.

3. Help in identifying top lead sources and resource allocation.

Going in for automation with sales forecasting is advantageous from every angle. When you have the technology to help you out in simplifying tedious and complicated tasks, you should leverage its power. The time and efforts you save can be put to better use, mainly for strategic decisions requiring your attention. 

Here are the other tools that you may need for sales forecasting,

2. Excel

For small businesses, it is quite feasible to use the good old Excel sheet to build the forecast. It is flexible, affordable and easy to use. However, it won’t work when your organization is a large one. 

3. Sales analytics tools

You need a sales analytics tool to get deep analytics. They help you stay in the know all the time as you can take an in-depth look at the sales pipeline and the employee performance. If there are any loopholes, you can know about them. 

4. Lead scoring tools

You can identify the promising prospects with a lead scoring tool. Such tools let you score the leads based on certain factors. You can find out who is pursuing and who is not. The tool can help determine how interested the prospect is in your product or service.

5. Project management tool

With these tools, you can ensure that your team has what it needs to complete the project. You can reduce manual tracking when you use a project management tool. It is easy to find out what has been done and left. In addition to that, you can integrate with teams better.

6. Accounting software

You might have to use your accounting software for creating accurate sales forecasts. 

Conclusion 

To improve your sales forecast accuracy and the efficiency of your sales forecasting methods, you need to understand the business drivers well. The sales forecasting model has already transformed businesses exceptionally well. This will help teams to be better prepared for the future.

Also, to get accurate results, you have to be data-driven. There will be better control of operations, and you will be able to avoid problems easily. In this age, data-driven sales forecasting will help in improving your business. 

The use of CRM will help make complex tasks easier and enable salespeople to track progress in every vertical. 


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