Making an accurate sales forecast
A sales forecast is a projection of future sales revenue and a prediction of which deals will move through the sales cycle. Sales forecasts drive short-term spending decisions and impact decisions on key deals. A sales forecast, put simply, is a prediction of how a market will react to a company's marketing initiatives.
Why is sales forecasting important?
Sales forecasts have two benefits. One is that you can hire extra workers, buy merchandise in advance, and reduce delays that your company might otherwise have if you can predict that you're going to meet or even surpass your sales target for the given quarter or month. Two, knowing how you're going to perform in a given period will have significant advantages in your organization across job functions. If you run your forecast accurately and see that you might not hit your number, you can proactively execute remediation plans. For example, you can find more leads or generate more revenue from specific accounts. Finance relies on forecasts to develop budgets for capacity plans and hiring, and production uses sales forecasts to plan their cycles
Benefits of an accurate forecast
Knowing when and how much you plan to sell is one of the key advantages since it allows you to manage cash flow effectively. Many companies experience erratic sales throughout the year. An organization can plan to set away money during their peak season so that there will be money to cover expenses during slower periods if they are aware of predicted monthly or quarterly revenue. This preparation avoids running out of money to cover payroll, pay bills, and pay taxes. You will be able to keep up strong ties with suppliers and staff by avoiding these situations.
A business can more effectively manage inventories with accurate sales forecasts. Overstocking is less likely if you have an estimation of what short-term sales will look like. This reduces the need for material transportation and product storage costs. Accurate sales forecasts also put a cap on the possibility of not having enough inventory to fulfill demand. If the product is accessible when the customer wants to purchase it, customer happiness is likely to be higher. Last but not the least, predictions lessen the necessity for sudden product discounts to lower inventories.
Another area that gains from having a sales revenue estimate is the supplier chain. A business can perform just-in-time ordering of the resources they require to produce at the anticipated demand level, similar to inventory management. This reduces carrying expenses. 6Appropriate lead time can be built-in when a material is difficult to obtain.
When a corporation anticipates generating larger sales revenue, it might plan more expensive campaigns. During slower times, it might employ less expensive marketing strategies like promotional offers and pushing discounts.
Product And Price Planning
A thorough sales revenue projection can show which products or services are selling the best for businesses that provide a variety of goods and services. It also shows whether your rates are appropriately set. If a product is expected to sell a lot of units but generates little revenue or profit, the company might wish to modify the price.
It is possible to determine what is effective or needs to be changed during this particular sales process by monitoring and gathering data for sales profit estimates. The data can show that some procedures need to be changed because they take too long or are unnecessary. The team may opt to concentrate on employing these techniques more frequently if they produce a larger percentage of closed sales than other strategies.
How to accurately forecast sales
Assess historical trends
Analyze the prior year's revenue. Sort the data according to price, product, rep, sales time, and other important factors. Create a "sales run rate" based on them, which is the amount of anticipated sales per sales period. Your sales prediction is built on this.
- Pricing: Have any of your product pricings changed? Are there any existing rivals who could pressure you to alter your pricing strategies?
- Customers: How many brand-new clients are you hoping to bring in this year? How many did you add the year before? Have you employed new reps, boosted your chances of attracting new clients, or received quantifiable brand exposure?
- Promotions: Are you planning to launch any new promotions this year? How did the past promotions compare in terms of return on investment?
- Channels: Are any new channels, regions, or territories being launched? Product changes: Are you making adjustments to your product lineup or launching new products? How long did it take for the market to accept the previous products?
Tweaking the business model from the insights the company can get by answering the following questions can go a long way in increasing growth and sales rate.
Identify Market Trend
Project all the market events you have been following right now. Are you or any of your rivals planning to go public? Do you plan on making any purchases? Will new legislation alter how people view your product?
You probably already do this, but pay attention to the offerings and marketing strategies of rivals, especially the industry leaders. Additionally, keep an eye out for any potential entry of new rivals into your market.
Key to an accurate forecast
Collaborative: Leaders should combine ideas from various sales roles, company units, and geographical areas. Frontline sales staff can be quite helpful in this situation by offering a viewpoint on the market you hadn't previously considered.
Data-driven: Subjectivity, which is frequently more retroactive than prospective, can be lessened by the use of predictive analytics. Alignment will be promoted and time will be saved by using standard data definitions and baselines.
Single source, several perspectives: You have excellent insight into rep, region, and company performance when the forecast is generated as a single source of data, which helps align different business functions across the organization.
Progressively better: Utilize the knowledge gained from an improved sales forecasting process to produce future predictions that are more precise and whose accuracy increases with time in comparison to a set of accuracy objectives.
Bottom-up and Top-down forecasts
Bottom-up predictions and top-down forecasts are the two main categories of sales forecasting methodology. In bottom-up forecasting, the number of units a company is expected to sell is first projected, and the average cost per unit is then multiplied by that number. The number of sites, sales representatives, online interactions, and other analytics can also be built in.
In a top-down financial analysis, the entire market in which the company competes is analyzed. Prior to making predictions about how the business would do in the market, it first determines the size of the market that is now accessible to the company while taking into account current market trends. The business' advantages and disadvantages are then assessed in light of the possibilities of the larger market.
A bottom-up analysis places more of an emphasis on the product or service itself and the operations of the company, paying less attention to the larger market. Bottom-up forecasting involves evaluating variables like production capacity, marketing expenses, recruiting expenses, and more - every action or variable that could have an impact on finances is taken into account. It's crucial to combine the two approaches when forecasting sales. Start with a top-down strategy, then check the viability of your first estimate using a bottom-up approach, or perform the two independently and compare how well they agree. Companies should do both types of forecasts, then make adjustments to each until they yield the same result in order to produce the most accurate forecast.