Do you have an idea of how your business sales will perform this year? You should. Businesses should be able to estimate its performance through forecasting – a key practice to businesses should use to manage its financial performance. Here’s why it matters and how you can do it effectively.
Why is Forecasting Important?
Sales forecasting is the process of estimating future revenue over a specific period using carefully selected metrics and, often, expert insights.
The advantages of sales forecasts go far beyond simply reinforcing your team’s confidence. Performed properly, forecasts can help you and your leadership team set ambitious but realistic sales objectives to enforce your broader strategic goals.
Through forecasting, you can create more accurate budgets across the business and better allocate resources to ensure you’ll meet those objectives. In addition, sales forecasts often reveal strategic and operational risks before they become crises.
Types of Data to Forecast
Businesses typically use two primary models for sales forecasting: quantitative and qualitative approaches.
Quantitative Forecasting
This method focuses on analyzing numerical data to estimate future sales. It often begins with historical sales data and trends, breaking them down by:
Time Periods
Product or Service Lines
Regions or Markets
In addition to past sales performance, other key business metrics contribute to quantitative forecasts, such as:
ROI on Marketing Campaigns
Productivity and Staffing Levels
Inventory Turnover
External factors like economic indicators, market trends, and consumer behavior can also play a significant role.
Qualitative Forecasting
This approach relies on insights from key stakeholders both inside and outside your company. These may include:
Executives
Sales and Marketing Teams
Feedback from Customer Surveys, Focus Groups, or Consultants
For start-ups and businesses with limited historical data, qualitative forecasting often forms the foundation for estimating sales.
Blending the Two
Most companies combine quantitative and qualitative methods to create a more accurate and comprehensive forecast.
Best Practices for Sales Forecasting
Sales forecasting isn’t a one-size-fits-all process. It should be tailored to your company’s unique needs and goals. That said, there are some universal best practices:
Define the Time Frame: Established businesses often conduct monthly or quarterly forecasts, while smaller or newer businesses may use annual forecasts due to limited data.
Be Consistent with Data: Quantitative models require consistent metrics over time to track trends effectively. For qualitative methods, gather input from reliable sources, but avoid overwhelming the process with too much information.
Select the Right Analytical Method: Trend analysis works well for stable, data-rich businesses, while regression analysis can explore relationships, such as marketing spend versus sales. Explore the methods that align with your operations.
Leverage Technology: Many CRM platforms and specialized sales forecasting tools can automate and enhance forecasting. Emerging AI technologies are making these tools smarter and more precise.
Refining Your Forecasting Process
If your business already engages in sales forecasting, you’re on the right track. But remember, it’s a process that demands continuous improvement. Adjustments to your approach can refine accuracy, account for changes, and integrate the latest best practices.
Need help setting up or optimizing your sales forecasting process? We’re here to guide you toward more accurate, actionable forecasts that drive success.