Every sales-driven organization knows how crucial it is to get sales forecasting right. With an accurate prediction of revenue coming in over the next quarter or year, sales teams can set smarter goals, and leadership teams will know how much they have to invest in the business.
Forecasting becomes even more necessary as you plan to grow, expand into new markets, or face economic uncertainty. The better you can visualize revenue in the short- and long-term, the better position you’ll be in to make the right decisions for the business.
So how can you harness the power of sales forecasting efficiently and effectively?
In this guide, we’ll explore what sales forecasting is, why every business should forecast sales regularly, what the biggest challenges are, and how you can get started today.
We’ll also cover some of the most common questions about sales forecasts and the factors that can impact your accuracy.
Let’s get started.
What is sales forecasting?
Sales forecasting is the process of generating sales revenue predictions for a set period of time, such as a month, quarter, or year.
While there are different sales forecasting methods, you’ll most likely need historical sales data, a clear view of your sales pipeline, and an understanding of internal and external factors in order to create the most accurate forecasts. You can also rely on sales forecasting tools to streamline the process and pull in relevant data.
A forecasting process can help your sales team set and reach their quotas and goals. However, the impact of sales forecasting goes well beyond your sales team.
The importance of sales forecasting
Though it may seem like purely a function and concern of sales, forecasts can impact the entire organization, from marketing to HR to finance.
Companies rely on sales forecasts to make hiring decisions, manage inventory, develop new products, and set goals for the future.
Why is sales forecasting important? Here are a few of the most beneficial outcomes that sales forecasts can help you achieve.
Predict business performance
A sales forecast can predict how well your business will do over a set amount of time and allow you to track progress as you go. This way, you can spot issues before they cause significant damage.
If your monthly or quarterly sales aren’t on track with your predictions, you can step in and better assess your pipeline or work with reps to identify what’s causing actual revenue to fall behind.
As time goes on, your future sales predictions should get more accurate, helping your organization better plan and benchmark its performance.
Make data-driven decisions
Gut feelings won’t help you set growth goals, but forecasts can. A noticeable increase or decrease in monthly or quarterly sales predictions can influence spending, investing, and any decisions about the future of the company.
The more data you have at your disposal, the more confident you can be about the decisions you make.
Budget more accurately
One of the most important ways to use sales forecasts is in budgeting and resourcing. A period of decreasing sales might lead businesses to freeze hiring or assess spending overall.
On the other hand, if you expect sales to skyrocket, you’ll know you can hire, bump up marketing spend, or bring in additional resources to support your growing customer base.
For example, you might realize you’ll need more customer success staff to support the surge of customers onboarding or upgrading.
Sales teams thrive off proper goal-setting, which is why having an accurate forecast is so important. As mentioned above, forecasts give your sales team a benchmark to track progress against for daily or weekly check-ins.
Accurate forecasts help your team align on sales strategy and set better goals that allow for growth while still staying realistic.
The top challenges of sales forecasting
Of course, like any worthwhile practice, sales forecasting has its challenges.
A recent report found that only 15% of revenue leaders were “very satisfied” with their sales forecast process. Clearly, there’s room for improvement.
Here are a few of the top challenges for generating accurate sales forecasts:
- Subjectivity – It’s not uncommon for sales reps to rely on gut feelings about current opportunities rather than looking at objective CRM data. With so many factors going into a deal, human-based predictions can cause forecasts to differ wildly from actual closed sales.
- Lacking or low-quality data – Your forecasts will only be as good as the data that’s feeding them. Not having historical data or allowing poor CRM hygiene can lead to inaccurate data and, thus, unhelpful sales forecasts. If you aren’t able to easily see which sales are slipping and why, you won’t know why your forecasts seem off.
- Lack of formal reviews and management – Without recurring check-ins or clear processes such as pipeline reviews, it’s much more difficult to identify which deals are at risk or overestimated. Improving sales pipeline management can impact forecasting. Formal reviews illuminate leading indicators (such as time in stage and activity) and help you keep opportunities in the appropriate deal stage, which can then impact the accuracy of your forecasts.
- Poor tech integration – Sales teams use many different tools, but they rarely work seamlessly together without some careful planning. The more you can connect software through integrations, the more up-to-date and accurate your CRM and sales data will be.
How to create a sales forecast in 3 steps
Since forecasting is an ongoing endeavor, the teams who forecast the best are the ones who dedicate time and energy to creating a successful process that works for them. It’s well worth your time to define and document a forecasting process that can be repeated at the right cadence for your business.
The more repeatable, scalable, and standardized your forecasting process is, the more accurate and useful your predictions will be.
Here are three steps to start creating a more accurate sales forecast.
1. Choose a forecasting time period
The first step is to choose your forecasting time frame. To do this, look at your sales cycle. Companies with longer sales cycles that require more touchpoints might need to look further ahead as deals won’t close as quickly.
If your current forecasting doesn’t seem to capture deals or reflect your industry's lulls and seasonality, you might be looking at the wrong time frame.
Monthly and quarterly forecasts seem to be two of the most common options if you’re not sure where to start.
2. Review your active pipeline
If pipeline reviews aren’t already part of your regular sales processes, now is the time to make some changes.
Sales pipeline analysis allows you to see all active opportunities, at-risk deals, and ones that have stalled. It gives your sales reps a chance to discuss opportunities as a team and for you to coach and provide input that can help the entire team stay on track.
Regular pipeline reviews also allow you to check in on average conversion rates, length of your sales cycle, deal size, and other key pipeline metrics. All of this data can feed into your forecasts. The more clearly you can see where leads are in the process, the more accurate your forecasts can be.
3. Select the best sales forecasting method for your business
After establishing the foundation of your forecasting (picking the timeframe and assessing your current pipeline), it’s time to choose the best sales forecasting method for your organization.
These are some of the most common approaches, each one with its own pros and cons. Let’s take a closer look.
Historical forecasting looks at past years in business to help predict what an upcoming month or quarter will look like. Since most businesses have access to sales and revenue from years past, historical forecasting shouldn’t be too difficult.
However, purely predicting what September of this year will look like based on past Septembers won’t always take into account any changes you’ve made year-to-date.
If you’ve launched a new product or feature within the calendar year, that impact won’t show up in last year’s data, so you may have to adjust accordingly.
Pipeline forecasting looks at the active opportunities in your pipeline to predict how likely deals are to close and what revenue will be. This approach can be effective and accurate if you have scoring in place, a properly maintained CRM, and clear pipeline visibility.
If you don’t, or if your CRM data isn’t up-to-date and filled in, pipeline forecasting might not be as accurate as it could be. It’s also crucial to have software that can help with this. Otherwise, you’ll risk analyzing your pipeline based on gut feelings rather than data.
Opportunity stage forecasting
Opportunity stage forecasting assesses where each opportunity is in the sales cycle, how likely it is to close, and what the value of that opportunity is.
Then, you multiply the likelihood of closing by the potential value to forecast your sales for that quarter or month.
For example, if qualified leads turn into closed deals 10% of the time, you would multiply the potential value of any opportunities in that stage by 10%. The further along someone is in the process, the more likely they are to become a customer (at least, that’s how it should work).
The one inaccuracy to watch out for here is with leads that have gone cold. They could be further along in the process, but they might not be as likely to close if they're no longer responding.
Keeping your CRM up-to-date and promoting good data hygiene will help ensure your opportunity stage forecasts are as accurate as they can be.
Length of sales cycle forecasting
Length of sales cycle forecasting looks solely at the age of an opportunity to estimate its odds of closing. If you know your typical sales cycle is 8 months, then you can assume opportunities that are 2 months underway are 25% likely to close.
The risk of going with this approach is, similar to other approaches, not having accurate CRM data for every opportunity.
Your sales cycle might differ for leads you acquired through cold outreach compared to leads gained through an affiliate program or personal referral.
Segmenting opportunities will give you more accuracy in your length of sales cycle forecasting.
Finally, the last forecasting method has the most room for error but is the easiest to generate. Intuitive forecasting requires sales reps to estimate the likelihood of the opportunities in their pipeline closing and the value of those deals.
As you can see, this is the least data-driven approach, so there’s plenty of opportunity to miss the mark in forecasting. It is also the easiest approach to start with if you don’t have any data or software when you start forecasting.
Over time, your reps might get more accurate in their predictions, but the best methods remove the subjective nature of forecasting as much as possible.
Internal and external factors that can influence sales forecasts
For more accurate sales forecasting, you should consider these internal and external factors when forming your predictions.
It can take your sales reps time to adjust to new territories and customers. If your business is growing into new markets or there are changes to sales staff and regions, you can expect a bit of a dip in sales for a time.
Implementing sales commission changes, or any policy changes at your company, can impact sales. Expect a shift in sales as employees adjust to new policies, whether that’s around compensation, promotions, or operations.
New hires and laid-off employees
Adding new staff and training them can take time away from selling. Similarly, a leaner staff or layoffs will impact sales, so make sure you plan for either scenario.
Economic uncertainty, inflation, and looming recessions can all influence the way people shop and spend their money. You should have a general understanding of how the economy might impact sales and plan for any adjustments.
Nearly every industry has busier stretches than others, so you should consider your natural lulls and peaks when forecasting.
Market and industry changes
It’s always a good idea to stay on top of what’s happening for your customers and their industries. Suppose you work primarily with retailers that have faced labor shortages, inventory challenges, and the need to pivot to drive-up or online sales in recent years.
In that case, you can expect these factors to impact how long it takes to close a deal or the budget they have for your products. If new competitors are entering your space and outspending on marketing, that’s another factor to consider in your own industry.
While less common, legislative changes can impact sales. New or updated laws at the city, state, or federal level could cause you to make adjustments to your operations and offerings or increase the demand for your product (depending on what you’re selling).
Stay informed of new changes so that you can plan accordingly.
Launching new features and rolling out new products can build buzz and help you reach new customers. Additionally, changing from a freemium model to only paid plans can also change how much you bring in.
Frequently asked questions about sales forecasting
Who is responsible for sales forecasts?
The sales team — sales leaders, sales managers, and reps — plus marketing, finance, and even the C-suite can all influence a business’s sales forecast.
Each team brings its unique perspective to the forecasting process. For example, marketing might launch a new campaign expected to drive higher sales over the next month. Your CEO might be working with other leaders to create the company roadmap, which could see the business expanding into new markets and generating more revenue.
Generally speaking, however, the sales team generates sales forecasts with input from key stakeholders and is also the team that relies on them most heavily.
Who uses sales forecasts?
Hopefully, most departments within your business use forecasts to drive decision-making.
HR might use forecasts to impact hiring decisions, and operations teams might look at forecasts to manage inventory and ensure their supply chain can keep up with expected demand.
What are the objectives of sales forecasting?
The goal of sales forecasting is to predict sales revenue over a certain period of time so that the company can align on what the next month, quarter, and year might look like.
Forecasting should help leadership teams make decisions and allow sales reps to see if they’re on track with their goals.
How accurate are sales forecasts?
Sales forecasts can range in accuracy depending on the forecasting method you use and the data you have available.
According to Forrester, 79% of sales organizations miss their sales forecast by more than 10%, so it’s safe to say that most organizations are less than 10% accurate in their predictions.
However, certain sales software, such as CRM platforms and tools that help keep your CRM data clean and updated, can help you improve accuracy.
Improve your sales forecasting in 2023
If you want to step up your forecasting, start by looking at your current sales process. Then, use the steps outlined above to improve the accuracy of your predictions.
There might be areas you can streamline and data you can access to help generate clearer forecasts.
If you’re using Salesforce, a tool like Weflow can help improve CRM data hygiene, pipeline visibility, and forecasting.
Automating Salesforce activity tracking with Weflow ensures all relevant data ends up in your CRM, while custom pipeline views allow you to inspect pipeline health quickly and improve your forecasts.
Get started today by installing the free Chrome extension.