What is Sales Forecasting?

Compliments of our partner from HubSpot

 The sales forecasting process plays a major role in a business’s success. As the senior director of global growth at HubSpot, I know firsthand how important accurate forecasts are to ensure realistic growth projections, improve decision-making, and boost motivation.

What is a Sales Forecast?

A sales forecast is a prediction of what sales will be for a set time in the future. The best sales forecasts are in-depth reports that include metrics for what a salesperson, team, or company will likely sell weekly, monthly, quarterly, or annually. Most sales forecasts draw from historical sales data and take demand fluctuations into account. While these can be created manually, most firms use some type of sales forecasting software to help automate the task.

Why Sales Forecasting is Important

The goal of sales forecasting is to provide you with information that you can use to make informed business decisions. Sales forecasts impact financial planning, sales targets, marketing strategies, and even staffing. I’ve seen sales organizations without detailed forecasts, or with sloppy forecasts, file for bankruptcy when their cash flow predictions failed. Some had to lay off a huge chunk of their staff just to remain operational. Let’s go over some of the main benefits of a sales forecast:

• ·         Boosts motivation. A sales forecast is a powerful motivational tool. For example, I update my forecasts quarterly and compare them to my team’s progress. If the team is crushing it, we can celebrate and acknowledge high performers.

• ·         Highlights potential issues. With sales forecasting, my team and I have been able to spot potential issues early, giving us enough time to avoid or mitigate them with new sales strategies.

• ·         Hiring and resource management. Forecasting allows informed decisions regarding hiring and resource management. For example, if my forecast predicts a 70% uptick in holiday demand, I might need to hire seasonal staff and order production supplies early.

• ·         Investment planning. Having a strong sales forecast helps plan your cash flow. If I have good data on my cash flows, I can better plan for investments without overextending and know when I might need a cash infusion from a loan.

• ·         Enables investor relationships. I’ve seen firsthand how forecasting future sales can help you forge partnerships with potential investors. Investors and other stakeholders will want to see if your company can provide a return on investment, and detailed sales forecasts as part of a strong business plan help justify sales revenue estimates.

Common Sales Forecasting Challenges

"While sales forecasting offers many benefits, it also comes with its own set of challenges, such as an inaccurate pipeline. It can be very difficult to forecast if deals in the pipeline do not have accurate ARRs assigned to them or if they are at the wrong stage. 

Other challenges include:

• ·         Lack of sales history. If you’re a new business or a startup, you won’t have much past performance data to work with, which can make it difficult to forecast sales accurately. That said, you can use sales data from industry benchmarks and market research to create initial forecasts.

• ·         Inaccurate data. If the data used to create revenue estimates is inaccurate or imperfect, your sales forecasts will also be inaccurate.

• ·         Lack of collaboration. A lack of collaboration between sales and other departments, such as marketing and finance, can lead to inaccurate sales projections.

• ·         Seller subjectivity. Relying on your salesforce’s gut feelings and emotions rather than objective data will result in inaccuracies.

• ·         Technology limitations.  Businesses use an average of 10 tools to close a sale, but often there’s no integration, making it challenging to gather all the information needed to produce accurate forecasts.

Sales Forecasting Best Practices

I’ve developed a set of sales forecasting best practices over the years. These best practices help me stay consistent and produce accurate forecasts for sales planning.

• Use technology like AI.

• Implementing AI in sales forecasting can help your sales reps close more deals. AI gets a lot of negative press for bad art and poorly written text, but it’s an effective sales forecasting tool. According to a HubSpot report, 85% of salespeople using AI reported that it makes their prospecting efforts more effective. You can also use AI to analyze customer sentiment (how people feel about your brand) and incorporate this data into your forecasts.

• Review and update forecasts regularly.

• You should review and update your forecast regularly to ensure it remains accurate. After all, things like market trends and economic conditions are subject to change. How frequently you do so depends on your industry, but we recommend reviewing your forecasts at least once every month.

• Account for internal and external factors.

• Internal and external factors like policy changes and economic conditions can influence your forecasts. If you create a forecast in a vacuum without accounting for company policies and market conditions, the forecast will fail.

Factors That Can Impact Your Sales Forecast

I mentioned the need to consider how internal and external factors can influence the accuracy of a sales forecast. Let’s take a look into some of the most common factors that impact sales forecasting.

• Hires and Fires

• When reps leave your company voluntarily or are terminated, revenue will decrease unless you have a pipeline of potential hires. Conversely, a large increase in reps joining the company in a short time should increase your sales forecast after a reasonable training period.

• Policy Changes

• Company policy changes also impact your forecast. For instance, if you introduce a policy where discounts end after the 15th of each month, you’ll likely see a shift in higher close rates in the first two weeks of the month, followed by fewer sales than normal.

• Territory Shifts

• If your company enters a new territory, it can take time for the sales reps to get familiar with the area and build their pipelines. Likewise, if a rep moves to a different established territory it will take time to settle in. Your forecast should reflect an expected dip in closing rates to account for those changes.

• Competitive Changes

• Whatever the competition is doing will impact your win rate. For example, if they slash their prices, introduce a new product, or ramp up their marketing efforts, your reps may need to discount more aggressively or risk losing business.

• Market Changes

• If there are supply chain disruptions, raw material shortages, or even new discoveries of raw material, it affects everything from the bottom up. Market changes significantly impact your sales performance and should also be included in your forecasts. Likewise, market changes for your customers also affect your bottom line. If there’s a shock to the market your buyer is in, it will certainly affect how your prospect views a buying decision.

• Economic Conditions

• The state of the economy often has a large effect on your forecasts. Upswings and downturns both have impacts. Whether it’s a recession, inflation, or bull market, it will change the spending power of your clients and their comfort level with investments.

• Legislative Changes

• New laws and mandates can either help or hurt your business. Sometimes, they create demand for your product, such as security software sales improving after a mandate for stronger customer data security. Likewise, new regulations for emissions controls could make prospects reluctant to buy equipment that may need modifications soon to be in compliance.

• Product Changes

• I’ve also seen how product changes can impact a business’s sales forecasts. These changes could be rolling out a highly requested feature or removing a feature that doesn’t live up to expectations. Your team members can leverage these changes to shorten their sales cycle and close more deals.

• Seasonality

• Some items have seasonal demands based on the nature of the product. Others might be in higher demand due to holidays or because your customers are more likely to be taking vacation at certain times of the year. Sales forecasts should account for seasonal swings in demand.

Dr. Millicent Brooks and the Elite Shedload Collective believe that it is through increasing profits – NOT REVENUE – is the single biggest factor in crushing the competition. 

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