How to conduct a sales forecast?
Sales forecasting allows company managers to anticipate the needs of their customers and to make important decisions for the growth of their activities. Of all the business strategies, it is the one that seems to best meet the needs of modern companies and the problems they face on a daily basis. Indeed, a company that uses sales forecasting is more likely to reach its sales quotas and increase its annual revenue than a company that does not forecast its sales. That is, if the sales forecast is well developed. To develop a sales forecast, historical data can be used to model consumer behavior. Otherwise, there are other methods that are just as effective.
Forecasts based on sales cycles
One way to build a sales forecast is to base it either on the phase of a sales cycle or on the duration of that cycle. These two sales forecasting techniques based on sales cycles do not have the same purpose.
The phase of the sales cycleHere, the position of each opportunity is taken into account when calculating the probability of closing, which is likely to increase as the process goes on. Thus, a sales forecast based on the sales cycle phase will estimate that the probability of a prospect converting from a discovery call is significantly lower than from a demo.
This is a method that is very easy for sales teams to implement. The principle is simple: an opportunity that has been in the sales pipeline for more than 6 months will be given the same probability of closing as a recent opportunity. We can observe that the age of the opportunities is not taken into account and this can generate forecasts that are rarely viable, especially if they have to be made relatively quickly in the process.
As for the periodicity of the forecasts, it is generally necessary to consider the length of the sales cycle (monthly, quarterly or annually) and the quotas that must be reached by the sales team. To obtain the total sales forecast, simply add up the weighted value of each transaction.
The length of the sales cycleUnlike forecasts based on the phase of the sales cycle, those based on the length of the sales cycle rely on the age of the opportunities to assess their probability of closing. For example, if a cycle lasts about 7 months, the probability of closing a lead that has been in the pipeline for more than 4 months is higher than a lead that has been in the pipeline for only 2 months.
While for the sales cycle-based sales forecasting method, the calculation of the probability of closing is based on the subjective opinion of the sales team, for the cycle-based sales forecasting, the calculation is based on objectively measurable data. This is why predictions from this type of forecasting are considered more viable.
Both of these techniques are very dependent on the historical data they rely on to estimate future sales. Therefore, in order to make forecasts more realistic, it is best to opt for an automation of the processes via a CRM software.
Predictions based on intuitionIntuitive predictions indicate the willingness of business leaders to trust their sales people. If the team is performing well, the probability of the predictions coming true will of course be higher. Thus, the success of this forecasting method relies entirely on the expertise of the negotiators.
In concrete terms, what they will be asked to do is to take a gamble on the future, based on the feeling that an opportunity, more than any other, present in the sales pipeline is likely to lead to a purchase.
Of course, no Supply Chain actor can claim to know prospects as well as sales people. But the downside is that they equate their desires with reality by overestimating the probability of closing certain opportunities. The best way for a business owner who has decided to use intuition as a sales forecasting method is to assess the reliability of the prediction based on data from email exchanges and meeting reports.
Sales forecast and cash flowFor a company, cash flow is an indicator of the vitality of its cash flow. It is also a result indicator that highlights all the cash flows linked to its activities. Thus, a sales forecast based on cash flow will allow managers to foresee cash shortages early on in order to better cope with future financial demands.
However, for the forecast to be viable, the CRM software must contain certain data such as:
- the revenues of the operation;
- the expenses of the transaction;
- the cash-in capital;
- cash-out capital.
On the other hand, we can analyze the impact of optimizing the sales forecast on the cash flow. Indeed, the accuracy of the predictions will increase the self-financing capacity of the company. But not only! A realistic forecast is also likely to improve the cash flow of a company by:
- preserving free cash flow;
- streamlining the stages of the sales cycle;
- optimizing the collection process;
- improving the billing process;
- smoothing its annual expenses.
The method of forecasting sales based on historical dataIt is a question here of a company using the data corresponding to its past sales to make predictions concerning future performance. This method is more appropriate for existing companies. For these organizations, the starting point for a sales forecast based on historical data is the previous year's sales figures.
For example, a company that generated 50,000 Euros in revenue during the month of February will estimate its earnings for the month of March based on that amount.
However, while this is the quickest way to estimate sales within a month, quarter or year, there is a major drawback: historical data does not take into account seasonality or disruptions in the business. These upheavals can take the form of personnel changes, product modifications or the disappearance of a competitor in the market.
Forecasts based on a multi-variable analysisMulti-variable sales forecasting combines several forecasting techniques and relies on predictive analysis to estimate sales over a given period. What does this mean in practice?
Two sales people work on the same account, but at different levels of the sales cycle. One presents an offer to the sales committee and the other goes to a meeting with potential buyers. The company will then establish its predictions based on these two variables.
In the case of the first salesperson, who is less advanced in the sales process, the estimated 50% probability of closing is based on his or her intrinsic negotiating skills. As for the forecasted value, it is set at 4800 euros.
For the second sales person, well advanced in the sales process, but with a lower closing rate, the probability of closing is also estimated at 50% with a forecast value of 6,200 euros.
The forecasted sales will be valued at 11,000 euros for the current quarter. This type of forecasting is not very easy to implement by companies, as it requires the use of technologies that are not available to everyone. However, of all the other forecasting methods, it is probably the one that guarantees the highest success rate.
Sales forecasting and sales pipelineThe sales pipeline presents all of a company's opportunities over a more or less extended period of time. The probability of closing will only take into account variables internal to the company, such as: the value of the opportunity, the salesperson's closing rate, the age of an opportunity, etc.
However, in the context of a sales forecast based on the sales pipeline, the company is required to have the appropriate forecasting software to avoid time-consuming data entry activities by salespeople. The advantage of this method lies in the fact that it is easy to implement for companies operating in both the retail and mass distribution sectors.
Sales forecasting method: the mix of other methods
There are several techniques for forecasting sales. Thus, apart from those mentioned above, a company can use a mix of other methods to forecast its sales. The most commonly used are:
- the sales forecasting method based on customers' intentions;
- the method of sales forecasting based on probabilities;
- the quantitative method of sales forecasting;
- the qualitative method of sales forecasting.
In conclusion, there is no miracle cure for forecasting sales. A company must only make sure to adopt the method that best relates to its realities and that is likely to take into account a certain number of variables to guarantee accurate and realistic predictions.
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