Sales Forecasting: What Is It, Importance, And Methods

by | Aug 27, 2021

“The future belongs to those who prepare for it today” – M.K. Gandhi

This phrase still holds true today, especially for revenue leaders, sales executives, and CXOs who are keen to drive favorable sales outcomes for their teams. Accurately forecasting their sales numbers quarter-on-quarter can be an invaluable tool in helping them achieve those outcomes. These outcomes are invariably linked to a company’s health and growth. Sales forecasting can indeed make or break a business.

What’s in this guide:

  • What exactly is sales forecasting?
  • Why is sales forecast important?
  • Different approaches to sales forecasting
  • Why inaccurate forecasting hampers growth?
  • Benefits of accurate sales forecast
  • Best practices to maximize accuracy of forecasts
  • A buyer’s guide to sales forecasting software

Before we deep-dive into sales prediction methods, best practices, and tools that can help you achieve high accuracy in your forecasts, let’s define what sales forecasting actually is.

What Is Sales Forecasting?

Sales forecasting is the process of predicting how much revenue a company, team, or a person will generate within a specific timeframe. This could be a week, month, quarter, or even a year. The ability to forecast sales (accurately) is pivotal in enabling a company’s leadership to future-proof their strategic vision and run their day-to-day operations effectively.

Why is Sales forecast important?

The value of sales forecasts is twofold. One, if you’re able to identify that you’re going to achieve or even exceed your sales target for the given quarter/month it gives you the ability to hire more staff, purchase inventory ahead of time, and cut down on delays that your organization might otherwise encounter down the line. Two, if you run your forecast accurately and see that you might not hit your number, you can proactively execute remediation plans–you can find more leads, build more revenue out of certain accounts etc– knowing how you’re going to perform in a given period will have far reaching benefits in your org across job functions.

How To Create Sales Forecasting Accurately?

There are myriad ways to forecast sales, all of which are highly dependent on your business model. However, some common sales forecasting models/methods that broadly apply to most firms are:

  1. Top-down Sales Forecasting:
  2. Top-down sales forecasting starts with identifying your total addressable market or TAM and estimating how much market share you’ll be able to capture. For example, If the size of the market your product competes in is $100 million, a company may estimate that they can win 5 percent of that market, making their sales forecast $5 million for the year.

    Top down sales forecasting

    Top Down Sales Forecasting

  3. Bottom-up sales forecasting:
  4. Bottom-up sales forecasting starts with sales projections from reps who report on what they think can close based on the opportunities they have lined up. One of the advantages to doing this is that the projection estimate is based on the deals already in the pipeline, but on the flip-side there are several factors due to which the deal might not close. Thus sales managers and reps should constantly stay on top of sales activity and customer engagement data to make sure they close all deals to achieve their forecasts.

    Bottom-up sales forecasting

    Bottom-up Sales Forecasting

  5. Qualitative sales forecasting:
  6. Qualitative sales forecasts are subjective and bring human intuition and emotion into the equation. Business leaders use their long-term expertise and industry knowledge to make predictions about where sales for the quarter is headed. This is advantageous because it takes into account external events like global pandemics that could affect their sales numbers. But this could also prove unreliable because ultimately it is based on observation and gut feeling rather than real data.

  7. Quantitative sales forecasting:
  8. Quantitative forecasting is a statistical technique which uses historical sales data to calculate accurate forecasts. There are two types of quantitative forecasting methods. The first method is the time-series forecasting model, which examines and parses through past data to predict what your sales number will be based on your current sales pipeline. The second method is a linear regression based forecast model called an associative model.

Quantitative models are preferred by enterprises since they are data-driven and are highly objective in nature. It is one of the best ways for organizations to have a realistic view of their forecast numbers and land as close to their projections as possible (usually within 2%)

Why Inaccurate Forecasting Hampers Growth?

For most companies coming up with an accurate sales forecast is still a major challenge. Thanks to inaccurate and intuition based forecasting methods, companies end up having poor visibility into their sales projections. According to Gartner’s “State of Sales of Operations” report, over 50 percent of sales leaders polled said that they have little confidence in being able to forecast their sales accurately.
How to forecast sales accurately
Having an accurate sales forecast is critical because enterprises cannot afford to miss their forecasts, as a missed forecast could prove disastrous. For example, if an organization over forecasts and under-delivers, it could affect the company valuation in a negative way. whereas if the organization under-forecasts and over-delivers, which albeit a good thing, would not give orgs the necessary lead time to leave money on the table in terms of marketing plans, product launches, and hiring.

Also Read: How To Accelerate Revenue Process?

Benefits Of Accurate Sales Forecast:

To drive our point home, here are some of the benefits that an accurate sales forecast brings to the table.

  • An accurate sales forecast allows companies to efficiently allocate resources for future growth and manage its cash flow.
  • Sales forecasts help set benchmarks for future trends and allow leaders to course correct early. Revenue leaders can align sales quotas and revenue expectations and optimize for more wins.
  • Conveys confidence to the board, and the management team that your business is supported by a reliable forecasting machine that will scale well in the future.
  • Sales projections facilitates strategic planning and tells you how soon you will be ready for executing and implementing your plans.

Best Tips To Improve Sales Forecasting Accuracy:

There are several factors like market volatility (think covid 19), flawed methodologies, and clunky tools (spreadsheets) that can contribute to inaccurate forecast results. Here are some tips that can help improve your forecast accuracy.

  1. Automate:
  2. If your CRM data entry process is manual, then chances are inaccuracies are going to creep in–considering accurate forecast results mainly rely on clean data. One tip would be to set up a checklist of guidelines for data entry (even though this doesn’t scale well in the long run). An even smarter move would be to automate the whole CRM process.

    Automate Sales Forecasting

    Automate Sales Forecasting

  3. Incentivize:
  4. Incentivizing sales reps and tying a small portion of their compensation to accurate number calling can be very effective.

  5. Integrate your revenue teams and tool up:
  6. Deploy a tool that unifies all teams (Ops, Finance, Product) on one platform, rather than spreading each function across disparate software. With a single tool, you can better hone in on your sales forecast accuracy as well as cut down on data slippage, collaboration inefficiencies, and wasted budget.

  7. Invest in coaching your sales reps:
  8. Make sure your reps are coached for accuracy, revenue leaders and managers should invest time and effort to help their people ramp up and hit their number as fast as possible. Building a high-accuracy forecast culture can help avoid over-hiring and attrition rates as well.

  9. AI/ML tools can help change the game:
  10. Forecasting until recently has been about looking at past numbers and predicting future revenue based on your quota, what your reps are willing to commit, and what you know about their past performances. Competent AI/ML tools employ a time series sales forecasting method, which parses all your past sales data/activity to help you achieve as close as 98%+ accuracy with your forecasts.

Also Read: Best Revenue Forecasting Techniques

How To Choose Your Sales Forecasting Software:

If you were a revenue leader, would you rather implement the above recommendations from scratch yourself, or let a sales prediction software do the job for you? A dedicated forecasting platform can deliver surprisingly quick results, including:

  • Improve the efficiency with which sales reps approach deal forecast
  • Offer predictive insights into the overall sales pipeline
  • keep managers and leaders in the know about team performance

Here are some features you should look out for if you choose to evaluate a sales forecasting tool:

  1. Capabilities to integrate, extract, and map from data sources:
  2. The forecasts you receive are only as good as the data your software can access. Integration with your databases/lakes/CRMs allow your tools to have all the information they need without having to enter information manually.

  3. Collaboration:
  4. Sales projection is a collaborative effort – internal team alignment is key. A sales forecasting tool should have a collaboration space where operations, strategy, and field team members can get together to focus on deal reviews and other important aspects of the forecast.

  5. Multiple views to forecast across markets, accounts, and product lines:
  6. The software should allow for multiple views of a sales forecast (business units, product lines, markets and so on) and be flexible enough to let you configure your own custom forecast view for any level of hierarchy.

  7. Implements a blend of forecasting techniques:
  8. A good sales forecasting tool should have a provision for multiple inputs, so it can solve for the best possible outcome. Intuition-based projections from sales leaders, bottom-up forecasts, and time series analysis should all be factored in for high forecast accuracies and predictability.

  9. Helps visualize your overall sales data:
  10. Data visualization is key in letting salespeople do what they do best: sell. You don’t want your people on the front lines to be busy reading a table of numbers to figure where they are in meeting their quarterly quotas. Moreover, a tool with built-in dashboards, reports, and analytics can inform CRO’s of how their quarterly forecasts look like, measure and compare sales growth over-time, and even manage sales territory assignments.

In closing: even though sales projections are a bit of a crystal ball at times, it can give you a sense of direction on where your revenue is, and where you should be going. If you are willing to leverage the tools and implement best practices that align well with your overall business, then you are well on your way to bringing in predictable and reliable revenue.

Interested to learn more about Aviso’s AI sales forecasting capabilities? Set up a consultation with our sales forecasting experts here to see how we can help.

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