Sales Forecasting: What It Is and Why It’s Important

If you run a business, knowing how popular your products are likely to be is essential. Sales forecasting is a powerful tool for helping you estimate future sales. Read on to learn exactly what sales forecasting is, why it matters, and how to use this process to its full effectiveness.

What is sales forecasting?

Sales forecasting is the process of estimating future sales or revenue for a business based on historical sales data, market trends, and other relevant factors. It involves analyzing past sales data to identify patterns and trends that can be used to make predictions about future sales performance.

Why is forecasting important?

Sales forecasting enables businesses to plan and make informed decisions about future operations, marketing, and resource allocation. Accurate sales forecasting can help businesses anticipate future demand, identify potential problems or opportunities, and adjust their strategies accordingly. It can also help businesses optimize their inventory levels, production schedules, and staffing requirements.

In addition, sales forecasting is a key component of financial planning and budgeting. It provides the information necessary to set revenue targets, establish budgets, and allocate resources effectively. By accurately forecasting sales, businesses can make more informed decisions and improve their overall financial performance.

Without sales forecasting, a business would be operating in the dark, leading to the risk of either not having enough of a popular product or wasting money buying stock they don't need, causing the business to waste perishable products or needlessly incur storage costs. Companies faced with seasonal changes in demand may find sales forecasting particularly important, as it helps them better predict peaks and troughs in demand.

One of the biggest benefits of sales forecasting is that it forces managers to think about other areas of their operation. For example, defining your sales pipeline may be a major part of creating a sales forecast. Sales pipeline analysis software can be useful for this, helping you better understand the customer journey, how long it takes and what your conversion rate is.

Challenges that Arise from Manual Sales Forecasting

Effective sales forecasting requires processing large volumes of data, making it a time-consuming and error-prone task. As an organization grows and its sales team grows with it, manual sales forecasting can become impractical. Using sales forecasting software could save sales managers a significant amount of time when it comes to creating accurate forecasts.

Some challenges associated with manual sales forecasting include:

Time-consuming: Creating a sales forecast spreadsheet can be a time-consuming task, particularly if the forecasting process involves large datasets or complex calculations.

Prone to errors: Manual data entry and formula-based calculations can lead to errors in the forecasting process. These errors can be particularly problematic when they are not immediately identified and corrected, potentially leading to incorrect decisions based on inaccurate forecasts.

Limited accuracy: The accuracy of sales forecast spreadsheets can be limited by a variety of factors, including the quality and completeness of data, sophistication of forecasting models, and the assumptions made during the forecasting process.

Lack of flexibility: Once a sales forecast spreadsheet has been created, it can be difficult to make changes or update it in response to new information or changing market conditions.

Difficulty in collaboration: It can be challenging to collaborate effectively on a sales forecasting spreadsheet, particularly if multiple stakeholders are involved or if the forecasting process requires input from multiple departments or teams. This can lead to version control issues and a lack of transparency in the forecasting process.

How to Create an Accurate Sales Forecast

Creating an accurate sales forecast can help an organization better predict its income over a given period of time. It can also help with other aspects of organizational planning, such as staffing and inventory management. There are several tasks that go into creating an accurate sales forecast. We've outlined the process here:

Document your sales process

Creating a sales forecast begins with documenting your existing processes in terms of marketing and lead generation, discovery, and nurturing leads through the sales funnel. Try to document every aspect of the process, including remarketing to prospects who have expressed an interest but have not yet completed a purchase, upselling or cross-selling, and so forth.

The more detail you can provide about your sales process, the stronger an understanding you'll have of your sales pipeline and the better-equipped you'll be to make plans. You may also discover ways to increase your sales pipeline by making improvements to your current processes.

Gather historical sales data

Collect as much relevant historical sales data as you can. Ideally, you should look at data from the previous year. In some cases, older data may still be relevant, however, consider any factors that may have changed over time. If you've grown your sales team, expanded into different channels or territories, or massively altered your marketing strategies, this will change your sales figures.

Use the data you obtain to calculate your sales run rate. This is a projection of the number of sales you're likely to make over a given period and is the most basic form of sales forecast. Feeding this data into adaptive forecasting software can help you generate these figures.

Consider alternative scenarios

During unpredictable times, it is important to consider alternative scenarios. This may include scenarios such as a prolonged economic downturn or a sudden recovery. By considering different scenarios, businesses can be better prepared for any outcome and adjust their sales forecasts accordingly.

Monitor competitors

It's likely you already carefully monitor your competitors as a part of your market research work. Having an awareness of what your competitors are doing is also important for sales forecasting.

One of the differences between top-down and bottom-up forecasting is the view it takes of the market. With top-down forecasting, you consider the wider competitive landscape and what market share your organization could potentially achieve. Bottom-up forecasting, in contrast, looks at your company's historical performance, budget and production capacity to consider what's possible on a closer time horizon.

When assessing the competition, don't just look at your biggest current competitors. Consider whether there are others who are aiming to enter the market. Being aware of these potential threats to your market share helps you create more accurate forecasts.

Why use sales forecasting software?

There's a lot of number-crunching involved with sales forecasting, and there are many variables to consider. If you're doing things by hand or even creating a custom spreadsheet, it's easy to overlook crucial details.

Using sales forecasting software can save you time and help you take a more systematic approach to sales forecasting. Xactly Forecasting is a powerful tool for sales forecasting that can pull up-to-the-minute data from your sales pipeline. It can also combine sophisticated analytics with AI-augmented calculations to create detailed forecasts.

Xactly Forecasting can save you time and provide you and your team with the insights they need to make better-informed business decisions. If you're interested in learning more about Xactly Forecasting and the other tools in our sales suite, contact us today to schedule a demo so you can see first-hand how we can help your business.