You’re always selling something in business. Even if your business is far from a storefront with cash registers and credit card readers — for instance, a consulting firm that charges by the hour — you make a sale every time you earn money by offering goods or services. Of course, there are fees associated with making these sales, so you’ll need to know in advance whether you’ll generate enough to cover your costs. Forecasting sales can help with it. In this post, we’ll define the sales forecast, as well as the formula for calculating it using examples and sales software.
What is a Sales Forecast?
A sales forecast is a detailed report that predicts how much money a salesperson, team, or firm will make on a weekly, monthly, quarterly, or annual basis. Sales forecasts are often produced using historical performance data.
Managers predict how much business their team will close based on reps’ sales forecasts. Directors forecast department sales using team estimates. The VP of Sales projects organization sales using department estimates. These reports are often distributed to company executives, board members, and/or stockholders.
Why is a Sales Forecast Important?
A business of any size can acquire a more in-depth understanding of its capabilities by calculating sales forecasts. It can also bring numerous other benefits to a business, such as:
- Prepare financial documents: Sales forecast data can assist a company in preparing financial documents such as a profit-and-loss statement, cash flow statement, and balance sheet. These records can help you understand a company’s success and describe it to stakeholders or auditors.
- Establish realistic goals: Knowing how many sales a company will make can assist a business owner to decide how many people to hire, how much to spend on marketing, and what products to offer. They may utilize evidence and intuition to make safe financial decisions that will keep their business profitable.
- Create a wise budget: A sales forecast projecting future income can assist a business owner in calculating profits because a company’s profits are equal to its revenue minus its expenses. They can then create a budget, being mindful of what they spend so that it does not exceed what they earn.
- Impress investors: Sales predictions can assist convince investors to pay startup costs, operation costs, and new equipment, especially for a new firm or startup company. Investors that view a positive sales forecast may be more optimistic about the company’s future.
- Managing inventory properly: A business owner can use their sales forecast to estimate how much inventory they will require throughout the sales season. Preparing the right amount of supply can save money, time, and effort while also ensuring customer satisfaction and reducing waste.
- Expand operations: Sales predictions can help business owners make decisions that will ultimately lead to higher earnings.
How to Forecast Sales
Here is a step-by-step guide to sales forecasting. These measures will ensure that your organization has an accurate sales forecast.
#1. Set up your team’s sales process.
You won’t be able to forecast the likelihood of an opportunity closing if your sales team doesn’t regularly use the same stages and actions. Learn how to construct a documented, organized sales process to use when converting any prospect from a lead to a customer by consulting a guide to building a sales process.
#2. Establish quotas for both individuals and teams.
To assess performance, an objective definition of “success” is required. Set sales quotas in conjunction with your sales reps and leaders. They will serve as financial baseline goals against which your sales forecasting will be compared.
#3. Invest in a customer relationship management (CRM) tool.
CRMs, such as HubSpot CRM, provide your salespeople with a database for tracking opportunities, allowing you to make accurate close forecasts. Accurate forecasting will be possible with reliable data.
#4. Choose a sales forecasting method.
You can select a sales forecasting approach once your sales process, sales quota, and CRM are in place. The approach you use will be determined by a number of criteria, including the age of your company, the size of your sales staff and pipelines, as well as the quality of your sales data and data tracking habits.
#5. Incorporate information from other organizations, such as marketing, product, and finance.
While analyzing prior sales data is essential for developing a solid sales forecast, other departments within your business can also give useful information. Make sure to include the following companies in your forecasting process: Marketing, Product, Finance, and Human Resources
#6. Go over previous sales projections.
How did your team fare this year? Compare the actual data you have to hand to the forecast from the previous year and record any discrepancies or differences.
#7. Maintain accountability and communication with your sales team.
Whatever strategy you pick for sales forecasting, keep your sales staff informed and discuss changes and choices frequently. Another reason to invest in a CRM is that it keeps your salespeople informed of every encounter with leads and with one another.
Sales Forecasting Methods
You may select the finest sales forecasting approach for your company by understanding the various ways. Here are some types of sales forecast formulas:
- Opportunity stage forecasting: This strategy employs a company’s closure rate or the chance of closing deals at each level of a sales contract. The formula is “sales forecast = total value of current deals in the sales cycle x close rate.”
- Intuitive forecasting: This strategy is appropriate for small organizations or startups that lack historical data because it focuses on the sales rep’s observations. Simply ask your sales agents when they anticipate closing their agreements and how much profit they anticipate making.
- Historical forecasting: This strategy employs historical data (results from prior sales cycles) and sales velocity (the rate at which sales increase over time). The formula is: previous month’s sales x velocity = additional sales; and then: additional sales + previous month’s rate = forecasted sales for the next month.
- Multivariable analysis: This strategy takes into account a number of different elements, such as the likelihood of closing deals, sales cycles, sales rep insights, and historical data. It involves complex math, but CRM, forecasting, or sales software can make it simpler.
- Bottom-up approach: This approach makes educated estimations about how many clients a company can reach. The formula is: sales forecast = estimated amount of customers x average value of customer purchases.
- New business approach: This method is for new enterprises and tiny startups that lack historical data. It makes use of the sales forecasts of a similar company selling comparable products.
How to Calculate a Sales Forecast
There are various sales forecasting techniques, some more difficult than others. These are some simple steps for calculating a business forecast:
#1. Keep track of your company’s data.
To construct a sales forecast, you must track your company’s financial data, particularly the monthly sales of each product. You can also keep track of the number of sales that are canceled or returned and deduct them from the total number of sales. Several online software tools, such as Customer Relationship Management (CRM) systems, can assist you in tracking data. They can be quite useful in creating sales estimates, comprehending other company data, and better evaluating the priorities and preferences of your consumers.
#2. Choose your sales cycle and product categories.
Select the sales cycle or time period you want to track. Depending on how you define a sales period, this can be a month, quarter, or year. Choose what to forecast next. Instead of projecting your entire firm or just one product, consider creating product categories to simplify the process.
#3. Choose a forecasting method.
The objectives and procedures of various sales forecasting techniques vary. Depending on your objectives and the number of calculations you wish to perform, you can select the best one for your company.
#4. Calculate using a formula
One of the simplest methods for producing a sales forecast is to calculate an annual sales forecast, using a year as your time period. While this strategy requires reasonably consistent sales, the math is simpler and faster than other strategies. Calculate your average monthly sales rate based on your previous sales revenue. Finally, use that information to forecast sales for the remaining months of the year. To calculate your annual forecast, add the sales from the previous months to the projected sales for the rest of the year. Below are the formulas to use:
Total sales revenue so far / number of months so far = average monthly sales rate
Average monthly sales rate x number of months left in the year = Possible sales revenue for the rest of the year
Total sales revenue so far + possible sales revenue for the rest of the year = annual sales forecast
To estimate your sales for the upcoming year, you can also multiply your total sales from the previous year by the rate of inflation. The formula is as follows:
Total sales last year + (total sales last year x rate of inflation) = annual sales forecast
#5. Keep in mind factors that may impact sales
While your sales forecast can be a useful estimate to show investors or make business decisions, actual sales may vary depending on a number of external factors. Keep your numbers modest and remember to round down when calculating your sales forecast so you don’t overestimate. Also, you may improve and maintain the accuracy of your sales forecast over time by refining it.
Sales Forecast Examples
Depending on what you wish to measure, you can construct a sales forecast either on paper or on a computer. Here are some sales forecast examples to assist you to understand how to calculate it for yourself:
Example 1
Jimmy founded a farm two years ago, and he would want to calculate his sales forecast to demonstrate the profitability of his business to possible grant donors. He generated $5,000 in revenue for the year that started in January and ended in May of 2021. Following are his calculations:
- $5,000 / 5 = $1, 000 average monthly sales rate
- $1,000 x 7 = $7,000 possible sales revenue for the rest of the year
- $5,000 + $7,000 = $12,000 annual sales forecast
Example 2
Sasha owns a coffee shop that serves brunch. She wants to compare the annual sales forecasts for her coffee drinks and the meals in her shop. Inflation is 0.5%, and she made $45,000 in food sales and $55,000 in coffee sales last year. Her calculations are as follows:
- Food: $45,000 + ($45,000 x 0.005) = $45,225 Year Sales Forecast
- Coffee drinks: $55,000 + ($55,000 x 0.005) = $55,275 annual sales forecast
Example 3
In April of this year, David opened a small general store. He’s only been in business for one month, but he’d like to estimate his sales for the rest of the year. He has so far earned $1,500. Here, the amount of months left in the year covers May through December and January through March. Following are his calculations:
- $1,500 average monthly sales rate =$1,500 / 1
- $16,500 possible sales revenue for the rest of the year =$1,500 x 11
- $18,000 annual sales forecast =$1,500 + $16,500
Sales Forecast Software
Sales forecast software forecasts demand for a company’s offerings. These applications provide time-bound sales forecast based on previous data and the current sales funnel. Simply said, sales forecast software assists businesses in forecasting how much money they will generate and when.
#1. Aviso Predict
The accuracy of sales forecasting is guaranteed by Aviso Predict, a revenue forecasting tool. This tool is intended to assist users in creating highly customisable forecasts that are backed by AI-driven pipeline insights.
#2. Hubspot Forecasting Software
Teams may forecast future revenue and monitor their pipeline with the use of Hubspot’s forecasting software. You can track your progress toward meeting your projected goals here.
#3. Salesforce Sales Cloud
Salesforce Sales Cloud is a sales automation software that helps teams increase their efficiency by leveraging data, automation, and artificial intelligence. This suite contains a forecast management tool that will assist teams in improving prediction accuracy.
#4. Zoho
Zoho is a CRM that includes forecasting in its array of performance management functions. This platform enables users to create custom projections based on CRM conditionals. You can also track forecasts (achieved deals, pipeline deals, pipeline shortages) and generate reports automatically based on forecast data.
#5. Pipedrive
Pipedrive’s revenue forecasting tool uses artificial intelligence and automation to assist teams in developing precise forecasts. Users can put up and monitor forecasts using the platform’s revenue forecast view. Meanwhile, the forecast reports function enables users to build reports based on forecast periods, transaction state, pipeline, probability, team, and more.
How do you calculate forecasted sales?
The simplest formula to use is sales forecast = previous period’s sales + estimated growth (or shrinkage) in sales for the next period.
Why is sales forecasting?
Sales forecasting enables businesses to properly allocate resources for future growth while also managing cash flow.
What’s included in the sales forecast?
A sales forecast is an estimate of the amount of goods and services that can be sold realistically during the forecast period, as well as the cost of the goods and services and the projected profit.
What are the four steps to preparing a sales forecast?
Use these four steps to create an actionable sales forecast:
- Align the sales process with your customer’s buying process.
- Define each stage of the sales process.
- Train your sales team.
What are four components of a forecast?
While creating a forecasting process, you must consider four dimensions: granularity, temporality, metrics, and method.
What factors affect sales forecasting?
Price level, national income, profit rates, interest rates, and rental rates all contribute to determining the initial market potential and, eventually, the sales forecast.
Conclusion
Sales forecasting is important not just for evaluating a successful quarter or year for your sales staff but also for setting a clear goal or target for them to exceed. While reaching a sales forecast is an essential goal in and of itself, especially if it is based on past sales data and predicted lead generation, exceeding it can be a sign of great success.
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