How to create the ultimate sales forecast
Creating an accurate and reliable sales forecast can be a daunting and time consuming process, do you agree?
Being able to estimate the future sales for your business is key to its success and growth – so why do we often struggle with this process?
To help, we’ve put together a complete guide on the how, what and why of sales forecasting, which will hopefully help improve the way your business creates a sales forecast – for the better!
Why does sales forecasting matter?
Reliable sales forecasts help your business to plan ahead and play an important role in other key areas of your business planning, including:
Budget tracking – the sales number is often the most important figure in a business’s budget. Reliable sales forecasts help businesses ensure they are keeping on track to achieve growth and/or profit.
Cash-flow planning – sales forecasts are used to make sure businesses have sufficient and timely cash inflows from their customers.
Resource planning – most businesses need to flex their resources, including increasing or decreasing headcount. Sales forecasts allow businesses to plan ahead to meet the changing demands of their customers.
Sales forecasting methods
There are a few different approaches to sales forecasting which depend on how you want to build your forecast:
Historic forecasting – based on your past sales data
Basic pipeline forecasting – based on only raw data taken straight from your sales pipeline
Enhanced pipeline forecasting – a combination of both the above, where data is collated from different sources and combined to make one report
Whichever method you chose should be right for your business and the requirements of for your sales forecast. Here’s a run down on the different methods of building a sales forecast.
Historical Forecasting is where future sales forecasts are extrapolated from historic sales performance. In its simplest form this would be taking the sales for the previous month and applying a +/-% variance.
+ Quick & simple method that can be updated relatively easily.
+ Easy to incorporate seasonal trends.
+ Easy to create annual forecasts (rather than monthly or quarterly).
– Only suitable for established businesses with predictable revenue streams.
– Won’t work for new, fast growing or project-based businesses with a significant one-off income.
– Forecasts are not granular, so actual results and forecasts are only comparable at a basic level.
Suitable for: This is for you if you’re a high volume transactional business with predictable income streams or if you’re a business without a sales pipeline (e.g. cash retailer).
If your business varies a lot month-to-month or you’re worried about the next 3-6 months, then this method almost certainly isn’t for you. Ultimately, historical demand should be used as a benchmark rather than the foundation of a sales forecast.
Basic Pipeline Forecasting
Basic Pipeline Forecasting is the processing of forecasting from a business’ raw sales pipeline. In its simplest form, this would be a list of deals under negotiation with customers and prospective customers.
+ Provides granular forecast data, which can be integrated, and sense checked.
+ Better for businesses with lots of monthly variances.
+ Better for businesses with project and one-off income.
+ Same data can be used for sales team management – e.g. tracking projected team performance against targets
– Rarely effective for long-term (post 6 months) forecasting.
– Requires reliable and up-to-date data, which can be time consuming to update.
– Probability weighting assumptions can be complex to calculate from scratch.
Suitable for: Businesses using a CRM that are solely focused on the next 1-3 months of sales and don’t need projections going further out.
If you track your business’ sales pipeline in a CRM and only care about the next 3 months, then this is probably the approach for you. If you’d also like to look beyond 3-months, then look at Enhanced Pipeline forecasting method below.
Enhanced Pipeline Forecasting
Enhanced Pipeline Forecasting combines basic pipeline forecasting with intelligent sales velocity modelling to extend forecast predictions beyond the immediate pipeline and improve the level of accuracy.
+ All the advantages as Basic Pipeline Forecasting; plus:
+ Also works long-term forecasts beyond the immediate sales pipeline.
+ Incorporates sales velocity metrics into calculation.
– Requires up-to-date CRM pipeline data, although the QuarterOne app also includes a suite of automated reports to make this as painless as possible.
Suitable for: All businesses using a CRM that would like reliable long and short term forecasts.
If you have a sales team and really care about forecasts, try out QuarterOne’s enhanced pipeline forecasting today. It takes less than 4 minutes to get started.
There are a few other things to consider when creating the ultimate sales forecast, such as sales velocity, sales team management and sales process. Here’s a few tips on each:
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