A sales forecast is an educated guess about future sales revenue that uses historical data and common sense to project monthly, quarterly, and yearly sales totals for a business.
Sales Forecasting vs Goal Setting
Sales forecasting is different than sales goal-setting. With a forecast, you build a realistic map of the revenue your team can earn for a particular period.
This isn’t the time to set dream goals based off of best-case scenarios. Instead, you should define the reasonable outcome of current sales efforts combined with your return business from the previous year.
A sales forecast can help you build your overall company budget. But just like the weather, your team should view this as a plan to work from, not a firm prediction.
Before You Start: Gather Metrics
Building an accurate sales forecast takes planning and deep knowledge of your sales process. Before you begin, examine your pipeline and the milestones your sales team should meet along the way.
When you map out the sales process and pipeline before you begin your forecast, you should establish a reasonable estimate for the following items:
- The time it takes the customer to express interest
- How long it takes to land each contract
- The customer on-boarding process
- Average renewal rates
Essentially, you want to define the length of your average sales cycle.
Once you know these broader parameters, you can extrapolate into more detailed metrics. This is also good time to separate different products or services that you offer, which will help you understand the seasonal changes or fluctuations in demand that affect sales.
Key Forecasting Metrics
- The percentage of leads that historically turn into contracts (conversion rate)
- Length of the contract process
- Time to delivery
- Customer renewal cycle
- Average churn rate per month or quarter
- Historical sales numbers per month and product
A side note: don’t confuse your contracts and funnel stages with sales and revenue. A lead or prospect is not the same thing as a sale and shouldn’t be counted in your final sales totals.
If you want accurate numbers, count the number of deals that will result in an exchange of product/service for money, rather than promises in the pipeline.
To build a sales forecast based on historical trends, pull up the existing sales data from a similar period. Most businesses build their sales forecasts based on a similar month the previous year. In its most basic incarnation, a historical forecast will take last year’s numbers and multiply by inflation.
If you want to add more complexity to the historical forecast (hint: you should), calculate repeat business revenue from last year (those who continue to have a subscription or renew contracts) and multiply by the churn rate, then subtract the churn from the previous period’s revenue.
So, if you have $1,000 of repeat business from February, and your churn rate is 3%:
$1,000 x .03 = $30
$1,000 – 30 = $970 ← previous period business minus churn rate
You can expect to have a similar percentage of return business, so forecasting lets your team set goals that maintain business, reduce the churn, and bring in new business on top of that.
If you’re just starting out in a new business, you will have little or no historical data. If this is the case, take whatever sales data you do have and extrapolate from there.
The length of time it took you to make your first deal is a good place to start. Although you’ll perfect your system the more you do it, you’ll also put in much more time building product awareness and customer buy-in.
Build a view of your future pipeline based on the top-of-the-funnel and full-pipeline activities. What do your existing leads tell you about the number of opportunities? Contrast that data with the historical percentages of leads that make it to closed-won status.
When you define your funnel stage percentages, the team can reverse-engineer to set goals for how many visitors to your website, demos, or proposals you need to make to get to the right number.
So, if your team starts with the goal of “I need to make $2 million this quarter,” you can then ask, “How many products do I need to sell/deliver during this quarter?” By defining these numbers according to historical funnel stage percentages, you’re better able to set the marketing, inbound, and outbound numbers you need to ensure you reach $2 million.
Composites of Individual Sales Rep Forecasts
This sales forecast is a group effort, which makes it a helpful tactic to engage your sales reps and increase ownership of the resulting goals.
Go to the sales experts — your reps on the ground — for their numbers. Have each team member look at their individual numbers for a given period.
Then have each of them calculate their personal sales forecast based on previous activity and their reasonable understanding of their abilities and the marketplace.
When the reps turn in their individual forecasts, ask them to include notes about market forces they see at play for each month or quarter. Then aggregate the data to build the team forecast. You can then use the forecast to set team goals that push their abilities and increase revenue.
Sales Forecasting Technology Stack
CRM: CRM software combines the storage and retrieval power of a database with dedicated sales tools that help reps close deals. These features may include lead tracking, funnel analytics, call cadences, and reporting features.
Sales Analytics (or Excel): If your company is just starting out or only has a few products, Excel should suffice for building your sales forecast. Sales analytics tools aggregate data for many products and services, build forecasts, give you deep analytics, and a lot of them have helpful visualizations that take less brainpower to build. Dedicated analytics tools also have the advantage of staying updated in real time.
Lead Scoring: These tools grade prospects according to actions on your website, outcomes of conversations, and any other touches that your team deems pertinent to the sales process. A lead scoring tool also helps your marketing team with campaign segmentation and content personalization.
Project management tools with resource allocation: These tools help teams ensure that the product funnel doesn’t bottleneck once the contract has been signed. Following through is the most important part of your cycle, and the only way to build strong customer relationships. Project management tools help your team stay on task and ensure that the team has the resources to complete the project.
- Sales forecasting is an educated guess about future sales revenue that uses historical data and common sense to project monthly, quarterly, and yearly sales totals for a business.
- Your team should view the sales forecast as a plan to work from, not a firm prediction.
- Before you try to build a forecast, estimate the length of your average sales cycle and conversion rate.
- There are several different types of forecasts you can build: historical forecasts (most common), funnel forecasts, and individual sales rep forecasts.
The post Sales Forecasting 101: Definition, Methods, Examples, KPIs appeared first on Sales Hacker.