Have you ever wondered why people go to astrologers? Why is everyone interested in knowing what the future holds? My theory is we all have the fear of the unknown. Similarity, in business too, it helps to at least get an idea of what the future looks like. Without indulging in any pseudoscience, there is a practical way to approach the likelihoods of the future.
Be it knowing the demand for your products or the sales you will make next year, everything can be forecasted. Now there is no magic here, forecasting is simply done by taking into account the data of the past along with several other parameters. Read on to further understand and know more about sales forecasting.
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The more realistic sales forecasts are created, the more likelihood of a company succeeding.
What exactly sales forecasting is?
Sales forecasting is a process of estimating and predicting the sales of your business in future. Here the term ‘future’ can be any period be it monthly, annually, yearly or even half-yearly. Businesses use sales forecasting to understand the sales they are likely to make in the near future and manage the inventory and cash flow accordingly. Forecasting sales becomes furthermore important if any business is aiming for expansion.
Individual sales executives, the sales team or the overall organization conducts sales forecasting to make smart business decisions. As sales of any company impact the revenue, the profits and overall every aspect of the company directly or indirectly. The more realistic sales forecasts are created, the more likelihood of a company succeeding.
Factors that influence sales forecasting
While several internal and external factors influence the sales you are likely to make in the future. As a company, external ones may not seem in your control, but the internal ones are. Hence, it is important to take those into account while forecasting.
Economic and industrial factors
The economic trends keep on changing and so does the market of every industry. When you are forecasting you need to remember that the economic and industrial factors of the future may not be the same as that of the past. They may be better or they may be worse, but in many ways, they keep changing and evolving. Economic and industrial factors are extremely impactful for any business.
Legislative factors
For any business you run in India, there are some mandatory laws and rules you are required to adhere to. The change in the law and rules have a grave impact on your business. Also, changes in the taxation and government policies may work or not work in your favors. The sales you assumed you will make maybe overestimated or under-estimated if any legislative changes occur in the future.
Product changes and competition
As forecasting is based on the products you sold in the past. If that product does not exist in the future or has been modified, the forecasting will have to be adjusted accordingly. Also, there are competitive changes that occur in every industry from time to time. Maybe in the future, your competitors will overpower you or you will be in the lead, in any case, it will directly impact your sales numbers.
Different methods of sales forecasting
Variety is the spice of life, and definitely when it comes to sales forecasting methods variety is available in abundance. There are several ways to go about forecasting the sales of your company. While there is no best in the game, the best decision would be to create multiple sales forecasts. Choose the methods that appeal to you the most and create a range of forecasts. Eventually, you can observe and understand which method has been giving you near to accurate results for your business.
Lead-driven forecasting
Lead-driven forecasting requires you to analyze the source of each lead and assign a value to it. The value you assign here should be based on how similar leads have performed in the past. By assigning a value to each of your leads, you will get an idea of how many revenue-generating clients a lead is likely to generate.
Data-driven forecasting is susceptible to changes as there are multiple factors involved. For example, as the trends keep evolving, the lead generation strategy of your company might also change. As the number of leads and sources of leads changes, there might be a change in the customer conversion rate as well. This fluctuation and change can be handled by taking into account the latest trends and their impact on your business while calculating sales forecasting.
Opportunity stage forecasting
Opportunity stage forecasting is a type of sales forecasting where the focus is on where the prospect is in your sales pipeline. A company here needs to break down their pipeline and calculate the probabilities of the deal closing. The prospect can be anywhere from the first initial call to the final call. An analysis of the past performance is needed in this forecasting method. It is essential to get an idea of the success rate of each stage of the pipeline.
The forecasting being completely data-driven, has no guaranteed accuracy. As opportunity stage forecasting does not take into account individual characteristics. As some leads may be longer in the sales pipeline while some may be quickly converted into customers. Just like in any data-driven forecasting the catch here is the more accurate the data, the more accurate the forecasting. However, if the data is inadequate or incorrect, the numbers derived would be way off the reality.
Length of sales cycle forecasting
This method of forecasting takes into account the data that reflects the time taken to convert a lead into a revenue-generating consumer. This technique is used by several businesses as it is very objective and is not impacted by subjective factors. As the data accurately speaks for itself. Also, several sources of leads can be divided into various buckets according to the time taken to generate them.
In this method, a company that tracks how and when prospects are entering the sales pipeline will be able to forecast sales accurately. This requires your sales and marketing team to be on the same page. However, this relentless tracking that is required by your sales team can be the drawback of this method. Also, minute inaccuracies can cause inaccurate forecast numbers.
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Sales forecasting will help in predicting your sales numbers and as a business help, you make better business decisions.
Historical forecasting
In this method of sales forecasting, as the name itself suggests, you use the data of the past to estimate the sales of the future. It is calculated by taking into account previous sales data for a certain period of time. The underlying assumption here being that your future sales will be the same or better. However, there are two components ignored in this method. It does not attribute the changing condition of the market as well as the change in competition.
Historical forecasting is one of the easiest and swift ways to conduct the sales forecasting of your company. Along with any other forecast a company wishes to conduct, this one is easy and serves as a strong base, to begin with. Also, it serves great for those businesses where usually the market is not much susceptible to changes.
Test-market analysis forecasting
Forecasting using data of the past is quite handy. However, what about new businesses or new products? The test-market analysis forecasting works perfectly for such companies and products. In this forecasting, you test the waters by releasing your product to a small portion of your targeted market and see how it works. By getting the numbers in from the testing, you would know how well your product is selling to at least a part of your audience.
Based on the results of the testing, sales forecasting of the product or company can be created. However, it is important to remember that all parts of the market may not react in the same manner. This method will also give you the time to make corrections and fix any issues before the final launch. Also, this method is a great way for small businesses and SMEs to increase their brand awareness.
Sales forecasting will help in predicting your sales numbers and as a business help, you make better business decisions. The information derived from sales forecasting will prove vital as it will spot any potential issues or problems that you are likely to encounter. The data helps in a great way to understand what is working for you as a business and what needs to be changed. It helps you understand your strengths and also the potential opportunities the future holds. Sales forecasting also helps in understanding if any resources or inventories are going overused or underused. Also, a forecast report helps a company to drive performance. It gives a goal to the business overall as to how much sales they need to make in the coming weeks, month or quarter. As times evolve, the way to generate leads evolves as well. Read our article on lead generation for a better understanding of how to convert leads into sales.
