Sales forecasting is the process of estimating future sales revenue using historical performance, current sales information and market conditions. The importance of sales forecasting comes from how those revenue expectations influence budgeting, staffing, inventory and broader financial planning. Generally, sales influences the expense spending plan. If the company is a manufacturing company, the sales forecast will drive the production plan.
WHAT IS SALES FORECASTING?
Sales forecasting involves predicting the future sales revenue of a product or service. It can inform decisions about budgeting, inventory management, and resource allocation.
WHY IS SALES FORECASTING IMPORTANT?
The importance of sales forecasting comes from giving businesses valuable insights into future market demand.
Knowing what to expect in terms of sales revenue can help businesses plan and ensure that they are well-prepared to meet their goals. If you’re wondering why is sales forecasting important, sales forecasting helps businesses identify potential risks and opportunities, allowing them to adapt to changing market conditions.
Because expected revenue influences the rest of the operating plan, a sales forecast can inform budgeting, staffing, inventory, production, marketing, and investment decisions. It can also help leadership evaluate expansion or new product plans before committing additional resources.
Key Metrics Used in Sales Forecasting
Sales forecasting involves analyzing key metrics that help businesses predict future revenue. Several of the key metrics used in sales forecasting include:
- Historical Sales Data
- Customer Trends
- Market Demand
- Seasonality
- Lead Conversion Rates
- Sales Cycle Length
- Sales Pipeline Velocity
Accurate sales forecasting is crucial for annual business planning, as it enables businesses to make informed decisions about their future endeavors. Ultimately, the key to successful sales forecasting lies in selecting the right metrics for your business and applying them to future strategies.
WHAT DOES THE SALES FORECASTING PROCESS LOOK LIKE?
Getting clear about the sales forecasting process can support better financial outcomes. Here is how the process unfolds:
1. Build and Validate the Initial Forecast
Typically, it starts with the Sales Department figuring out how much product they can sell in the following year, but it should be validated by finance, operations, marketing, and leadership before it becomes the basis for business planning. Initial sales forecasts can be optimistic, especially when they depend on aggressive assumptions about pipeline conversion, new business, or product timing.
There are several factors that can impact the forecast:
Product availability, technical issues and economic climate to name a few. All of these factors can be unpredictable and outside of anyone’s control. If there are new products being introduced during the year, there are delays that can happen that may not be readily apparent during the sales forecast process.
2. Stress-Test the Assumptions
Sometimes the forecast may just seem unachievable; it is our job to inject some realism into the equation. There are different methods to validate the sales forecast. One is to review the sales quotas for each sales person and weight their performance based on historical results. Another way to stress-test the forecast is to model sales performance across different outcomes, including performance above, at, and below expectations. Another method is to look at historical growth patterns and extrapolate forward or to look at the growth in the industry that is applicable and assume the company will grow at the same rate. Comparing several methods can help show whether they point toward a similar forecast range.
3. Update the Forecast as Results Come In
Compare actual sales with the forecast regularly, and revisit assumptions when pipeline, pricing, product timing, or market conditions change. This keeps the forecast useful as new information becomes available.
HOW DOES SALES FORECASTING SUPPORT BUDGETING AND BUSINESS DECISIONS?
The sales forecast has a direct impact on many business decisions; not the least of which is staffing levels. In order to support a company’s sales objectives, there is a considerable amount of support staff and expense spending that is directly related. There are many peripheral departments that are directly affected by the sales budget. Take the marketing department. The marketing department includes the advertising budget, which can fluctuate wildly depending on the business strategy to the company adopts to support the Sales Forecast. Spending time up front on the Sales Forecast can ultimately save the company from making some very expensive mistakes.
Because the sales forecast feeds into the broader financial plan, significant changes in expected sales should also trigger a review of budgets, hiring plans, inventory commitments and other spending assumptions.
TIPS FOR IMPROVING SALES FORECASTING ACCURACY
In order to improve sales forecasting accuracy, businesses should account for the impact of external factors, such as economic conditions and competition.
Another tip for improving sales forecasting accuracy is to align your forecast with your profitability plan. This means considering factors such as pricing strategy, cost of goods sold, and operating expenses.
By taking a holistic approach to sales forecasting that considers both internal and external factors, businesses can improve the accuracy of their projections.
Review forecast accuracy over time by comparing projected sales with actual results and identifying which assumptions caused the largest variances. No forecast will be exact, so the goal is to improve the assumptions and importance of sales forecasting as new information becomes available.
HOW TGG CAN HELP
TGG can help you improve your sales forecasting and achieve long-term growth with our reliable financial management services. Our team of experienced financial experts helps businesses develop accurate sales projections that align with their unique goals and objectives.
We can help evaluate sales assumptions against historical performance, budgets, and other financial information so leadership can use the forecast when planning expenses, staffing, and other business decisions.
If you’re ready to launch a new product, expand into new markets, or optimize your sales strategies, get in touch with our financial management experts today.
FAQS ABOUT THE IMPORTANCE OF SALES FORECASTING
Can Sales Forecasting Help in Setting Realistic Goals?
Yes, sales forecasting provides valuable insights that can aid in setting achievable sales targets and goals. By analyzing historical data and market trends, businesses can establish realistic objectives and track progress towards them.
What Is the Difference Between a Sales Forecast and a Sales Budget?
A sales forecast estimates expected sales based on current information, while a sales budget turns those expectations into revenue targets and approved spending. Forecasts usually change more often, while budgets serve as a longer-term benchmark.
What Is the Difference Between Sales Forecasting and Demand Forecasting?
Demand forecasting estimates how much customers may want, often in units, to support inventory and purchasing decisions. Sales forecasting estimates what the company expects to sell based on factors such as pricing, capacity, and product availability.
How Far Ahead Should a Sales Forecast Look?
It depends on the decision being supported. Monthly and quarterly forecasts can guide cash flow, staffing, and inventory, while annual or multi-year forecasts support budgeting and strategic planning.
How Is Sales Forecast Accuracy Measured?
Forecast variance compares actual sales with forecasted sales, while MAPE averages the size of forecast errors across several periods. No universal accuracy benchmark exists, so tracking performance over time is usually more useful.
What Tools Are Used for Sales Forecasting?
Smaller businesses may use spreadsheets, while growing companies often use CRM or financial planning software to connect pipeline data with budgets and cash flow projections. The quality of the underlying data matters as much as the tool itself.
This post was reviewed by our team of accounting and financial experts. TGG’s mission is to make business owners’ lives better through excellent financial management. We strive to provide the most up-to-date and objective information on accounting-related topics so our readers can make informed decisions based on factual content. All posts undergo a review process with at least one member of our Leadership Team to ensure accuracy.
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Matt Garrett is the Founder and Chief Executive Officer of TGG. He is a regular speaker across the country on behalf of Vistage educating business owners on the need for sound financial practices, and is Vice President of the Board of Directors of FINACA. Under Matt’s leadership, TGG has received the following recognition: INC. 5000 top companies in the U.S. five years in a row; one of “San Diego’s Fastest Growing Companies” the past four years; and is among San Diego’s “Best Places to Work.”