What is Sales Forecasting and How to Forecast
Because sales is the lifeblood of your company, sales forecasting should be included in your company’s list of priority things to do. Without a sales forecast to base your business plans on, you’ll be hard-pressed to develop your cashflow forecasts, production plans, or even your human resource plans (among other things).
Let’s look into what sales forecasting is and the nitty gritty of how it works.
What is a sales forecast?
Candiff and Still gives a concise, yet, an easy-to-understand definition of the phrase.
“Sales forecast is an estimate of sales during a specified future period, whose estimate is tied to a proposed marketing plan and which assumes a particular state of uncontrollable and competitive forces.” — Candiff and Still
While most people would think of sales forecasting as something that only large corporations would do, such is clearly not the case when looking at the definition given by Candiff and Still.
Regardless of a business’ size and the nature of its operations, it should still run sales forecasts so it can carve out a future direction that has a chance of bringing in business growth.
Now that you have a better idea of what the term’s definition is, let’s dive into the nitty gritty of why you should use it.
Why you should use sales forecasting.
1. A sales forecast is a planning tool.
The act of planning is always one of the best ways to ensure adaptability to your business’ ever-changing ecosystem. It reduces uncertainty and leads you to increased responsiveness and improved services.
There are certain changes within a period that happen in regularity or those that are already sure to happen (like the seasons and occasions, for example). These events will almost always affect your number of sales.
Sales forecasts allow business owners to plan out their much-needed requirements such as their raw materials, workforce, budget, and other logistics-related needs.
When using a sales forecast as a planning tool, you are not only able to prepare your resources, but you can also stay consistent with supplying your goods in the market. Elements like these can maximise your sales since you won’t have to turn down a single customer/client due to your lack of inventory.
As you can probably imagine, having your goods ready and available in the market at the right time (or when demand is estimated to be high) can spell the difference between you getting hundreds of thousands of sales, or you not getting anything at all.
2. A sales forecast is a mitigating measure.
Because sales forecasts enable you to see potential problems before they actually occur, it gives you ample amount of time to prepare for the potential problems, making it easier for you to avoid them.
In short, you can mitigate risks or business problems through sales forecasting. It allows you to anticipate changes and make the necessary adjustments prior to the changes occurring.
3. A sales forecast is a decision-making tool.
Sales forecasts are remarkable decision-making tools since it gives you a better perspective of all the elements in place that can affect your sales.
Not only do sales forecasts have sales records and estimates in it, but it also includes events and their possible dates (among other things). It even tells you what your sales performance was in the past, giving you better insights on what would happen in you perform certain actions (like the ones you did in the past).
When you have all of these pertinent details at hand, you can now make educated decisions, that have a higher chance of bringing in outstanding results.
It is worth mentioning, however, that some executives or experts have the wrong mindset towards sales forecasting.
According to the research, “Sales Forecasting, Market Research and the Value of Information” conducted by Michael Barron and David Targett of London Business School, forecasting experts have the tendency to focus (exceedingly) on the accuracy of their sales forecast instead of its decision usefulness.
While the forecast’s accuracy is undoubtedly important, the sales forecaster should also put as much value on their reports’ relevance, value, and decision usefulness to the company.
4. A sales forecast is a performance assessment tool.
Sales forecasts can be an effective measuring tool where you gauge the efficiency of your sales team or the organisation as a whole.
It presents targets that all departments can base their respective action plans on to support the sales team and generate better results. This can improve the communication between both departments and facilitate continuous improvements.
When you do sales forecasting, you can -- to some extent -- reduce the uncertainty of the future. This can lead to your team's level of preparedness to increase, and your overall game plan to generate sales to better fit the circumstances that your business will face in the future.
The factors affecting sales forecasts.
At this point, I’m guessing that you’re already convinced of why you should start sales forecasting (if you aren’t doing it, yet).
Allow me to share with you the factors that you need to consider when sales forecasting.
1. The internal factors.
The internal factors include your employees, your policies, and certain changes within your firm (among other things).
Know that the coming and going of people -- especially in your sales department -- can have an adverse impact on your company’s sales at any given time. Thus, your HR department needs to have systems in place to address employee turnover especially in critical moments (e.g., holidays, product launches, special events).
Also, changes in your organisational policies relating to sales – pricing, commission, discounts, advertising and even policies that govern the quality of your products, have a corresponding effect on your sales. You must, therefore, study how certain changes in these policies will affect your sales so you can prepare the necessary action steps that will help you decrease the damage it can cause your business, or avoid the damage altogether.
Changes to the organisation could also bring about either positive or negative results to your sales. Changes in administration, a shift in direction, downsizing, merging or acquiring more assets, adopting new technology, and other possible major changes in your firm must be carefully planned and implemented as all these will have an impact on your sales forecast.
2. The external factors
Some of the external factors that can affect your sales forecasting include general economic conditions, the market place, industrial changes, and legislative changes.
It is of utmost importance to consider (and study carefully) the general economic conditions that govern your business. A sales forecaster must be able to see economic trends, which of the trends affect the business positively or undesirably, how these effects are manifested, and how they can be maximised or mitigated.
For the most part, a strong economy is expected to result in more sales for a lot of business owners since the citizens will have more buying power. A weak one, however, will cause the would-be buyers to be as prudent and careful with their spending, therefore, making it harder for business owners to sell their products.
Market and industrial behaviours must also be taken into consideration. You need to be on top of what is happening in the market – new products, prices, technology advancement, designs, and promotional activities. You have to know what your competitors are doing and how they are faring in the market as well.
Together with the economy and the industry, you should also look into the government regulations and mandates. Keep watch of new laws and mandates that can either facilitate and help your business, or limit and hurt you.
Because unforeseen conditions in the economy, the industry, and in the legislative areas concerning your business can be detrimental to your growth, you need to be always on the look-out for unstable conditions – sudden and improper availability of materials, industrial unrest, and unreasonable government regulations and controls.
Keeping tabs on these factors is crucial since it will help you come up with an effective and comprehensive sales forecast that will serve its main purpose of bringing your business to greater heights.
Last but not the least, you must take into account the period or the time factor. In looking at all the factors affecting your sales forecast, you have to consider “timeliness.” How long is your period of consideration for your sales forecast? The collection of the required information you need from the factors mentioned above will then be based on a certain period of sales forecasting you want to come up with – whether short, medium, or long term.
Having the knowledge and information of all the factors mentioned above will help you complete the following required elements of an accurate sales forecast:
A sales quota that will serve as the objective of your business sales success.
A structured sales process to guide your sales team throughout the forecasted period.
A standard definition of what is opportunity, prospect, lead, and close predictions that everyone agrees with.
A Customer Relationship Management database to track opportunities and help come up with accurate close predictions.
Accountability. To enforce your sales forecast and make your team see and realise that the sales forecast is not just something written on paper, but is something to be strictly guided with and achieve.
Methods of Sales Forecasting
Now that you know the importance and the basic factors to take into account when forecasting, let’s look into the nine methods that you can use to create a sales forecast.
1. Sales Force Opinion
This is a method where the salespeople or intermediaries are the ones responsible for making their estimate sales goals specific to their respective scope at a given period.
This method takes advantage of the specialised knowledge of your salespeople about your customers since they are the ones in direct contact with them. It, therefore, facilitates the breaking down of the sales forecast into specific products and markets and gives the sales team more confidence in meeting their quota.
A downside worth looking into when using judgment-based forecasting is the possibility of alterations whenever results lack appeal to management.
The research “Judgemental Revision of Sales Forecasts: Effectiveness of Forecast Selection” conducted by Brian P. Mathews and A. Diamantopoulous reveals the tendency of managers to revise sales forecasts that are initially low. These corrections may inject some bias into the overall prediction.
2. A Jury of Executive Opinion
This is known to be the oldest method of sales forecasting. In this method, the executive committee is the one responsible for coming up with the sales forecast presumably based on the committee members’ knowledge and experience of the market factors.
To give you a better idea of how a jury of executive opinion is carried out, here’s an example from MarketingProfs.
“Mainframe computer forecasting is done by conducting a series of meetings between the two mainframe analysts at a company, the Service director, and a Research Operations analyst. Typically, three or four meetings are required in order to arrive at a forecast consensus. In between meetings, the forecasts are examined by colleagues, both domestic and abroad, for feedback and reaction.” -- MarketingProfs
Since the method is quick and simple to implement, it is therefore economical. It does not require a rigorous collection of data.
On the other hand, the latter is also one of its disadvantages since this method’s primary basis are not factual data and will more or less be a product of guesswork.
3. Consumer’s Buying Plan
This is when information is gathered directly from the consumers by administering a survey to ask them about their likely purchases given certain conditions at a given time. This method is best for products with few customers like the industrial goods.
Although this method merits from having first-hand information and knowing the user’s intention, it is limited by the fact that expectations cannot be measured. It is also difficult to identify actual buyers; therefore, the survey answers are not as reliable.
4. Test Marketing Result
This is a method where you introduce your product (or products) to a group of people from a geographical test area. The results are then studied and made as a basis for sales forecasting.
This method is considered reliable since the sales forecast is based on actual results. The method is best for new products.
It is important to note, however, that using this method is time-consuming and costly.
5. Expert Opinion
This is simply sales forecasting made based on expert opinion. Some firms rely upon or hire experts as consultants then they analyse and use their opinions to come up with a sound sales forecast. This method is quick, inexpensive, and uses specialised knowledge. However, it is not as reliable as it is dependent on the competence of the experts consulted.
To remedy this, a review performed on marketing forecasting concluded with the recommendation of relying on structured processes when predicting out of judgment — such as conjoint analysis and role-playing.
The study also suggested explicitly writing down things that may be wrong about the forecast. This strategy serves as a tool in giving prediction intervals more accurate calibrations.
6. Market Factor Analysis
This sales forecasting method is done by determining and studying the principal market factors that affect the sales and drawing a sales forecast from the results of the study.
This method uses statistical analysis (correlation and regression) to establish the relationship of certain market factors.
7. Historical Method
As the name suggests, this method uses past sales records to come up with a sales forecast. This is the simplest and quickest way of predicting sales by matching records of previous sales to a future period and assuming a certain percentage of addition or deduction to the sales results depending on set conditions.
8. Statistical Method
There are several Statistical methods you can use for sales forecasting:
The Trend method
The Graphical method
The Time Series method
Choosing which statistical method to use for a product can be quite challenging considering how there are several options available, let alone the fact that there are different types of products as well (e.g., stable mature products, slow-moving, new products, etc.).
If you can’t figure out which method to use, then you can bring in a sales forecasting expert so they can analyse the data themselves, and be able to pick the appropriate method to use.
9. Econometric Model Building
This method uses a mathematical approach to studying the factors affecting sales. Similar to Market Factors Analysis, this method also uses statistical analysis to establish a relationship between market factors. This method, however, employs more than just correlation and regression analysis, therefore requiring the availability of complete information.
Failing to do your sales forecasts can have adverse effects on your business.
Regardless of size or industry, your business should run sales forecasts to figure out your future direction in order to achieve maximised business growth.
Don’t miss out on resources and opportunities that you otherwise would have been made aware of through the forecasts, or jeopardise your ability to make crucial business decisions because you don’t have a firm grasp of your business’ overall performance or status.
Gain a better understanding of why you should leverage sales forecasting with our State of Sales Report.