Forecasting - Everything You Need to Know
At its core, forecasting predicts the future. Though some forecasts seem entirely fictional, the best business forecasts base projections on historical data and sound assumptions. Leave the creativity to the art majors, not your numbers.
Learn why this is important to your company, how to do it, and what factors could impact your actual bottom line. Armed with this knowledge, you'll be better prepared for more accurate forecasting as time goes on.
What is Forecasting, and Why is it Important?
Forecasting your sales lets you discover possible issues while you're still able to dodge the proverbial bullet -- or at least clean up the mess quickly. For instance, if your team's sales are trending under quota, you can find the problem right away and correct it. Maybe it's something as simple as a competitor's new discounts, or your own discounting method is unintentionally flawed. Finding these problems right now -- as opposed to month- or quarter-end -- has an incredible impact.
Forecasting sales is important because it leads to several decisions in your day-to-day operations. Hiring, onboarding, managing resources, and setting goals and budgets are all performed with the information gleaned from your forecasts.
For example, your forecasted sales suggest opportunities will increase by more than 25%. If you want to continue to meet demand, start recruiting new talent. On the other hand, if you're noticing a downward trend, maybe stop hiring for the time being and consider reinvesting in your current employees or upping your marketing budget.
You can even use your forecasts as motivational tools. Say you prepare a forecast every week to make sure your sales team is tracking in the positive. You could even prepare this forecast for individual reps to make sure they're not lagging.
The most important aspect of forecasting, however, is the understanding you don't have to be spot-on accurate for the information forecasted to have value. Forecasts tend to vary from your actual results often, if not every time. That's not to say that forecasts way off the mark are beneficial. Just make sure that the data you're using is correct and clean, and that you're using the right method to arrive at your numbers.
Budgets and Forecasts: Are They the Same Thing?
Indeed, often these two terms get used interchangeably, and rightfully so, but there is one difference: Forecasts are more commonly for sales projections, while budgets are more commonly used to project your spending. In other words, if there's a holiday coming up, you'll probably forecast much higher sales than on an average day. Because of this forecasted rise in revenue, you'll most likely budget more for your marketing ads spend.
Budget refers to the plan of spending you've created and its limits. Budgets are more or less commandments from upper management and not simply a forecast.
What You'll Need to Forecast Sales
To get the right data out, you have to put the right data in.
For accurate sales forecasts, you must have:
Individual quotas and team quotas. You can only gauge performance if everyone is on the same page regarding the company's definition of success.
A well-documented sale process. Your agents should always use the same steps throughout their sales stages. If not, it'll be difficult to predict which sales are nearing closure.
Well-understood definitions within the process. Do all of your reps agree on the method used when counting leads, where those leads are in the sales funnel, and what constitutes the prospect having left the funnel?
A good customer relationship management (CRM) software. A CRM database tracks opportunities, leads, prospects, and closings. You can make accurate predictions if the entries into your CRM are accurate.
Strict accountability. Do you follow up every time a rep's actual sales don't mesh with their forecast? If you don't, you're sending the message that sales forecasts aren't realistic and don't mean much. Is that the message you want to send? Do you hold your reps accountable?
Methods of Forecasting Sales
You can choose among various methods to create your sales forecasts. While there are a lot of ways you can interpret these methods and put them into action, all methods fall into one of two types: qualitative or quantitative. Sometimes, these types can blend into each other.
Qualitative methods are great for forecasting in the short term if your forecast is a limited one. These types of forecasts depend more on outside influence and opinion and are useful when forecasting company success over the next few days or weeks. On the other hand, this type of forecast is also limited because of this reliance on outside influence or opinions rather than raw, measurable data.
A quantitative method blocks out the sound of those experts and attempts to remove human feelings from the equation to instead focus on sheer, raw data. Fickleness becomes forgotten as numbers speak for themselves. These types of methods are perfect for projecting long-term gains or pitfalls and measure in terms of months and years.
Factors that Commonly Impact Sales Forecasts
There are factors, both internal and external, that can affect your forecasts.
Internal factors include:
New hires and the newly let-go
If you lose sales reps, regardless of the reason, your revenue is likely to decrease. If you have a large backlog of potential new blood, however, you're just as likely to see a spike in business.
Changes in policies
If you suddenly change your compensation plan, be sure to allow for this adjustment in your forecasting. For instance, if you introduce a new policy to withhold commissions for three-months, expect to see a decrease in your revenue because your reps will only target the most apt leads.
Shifts in territories
It's difficult for reps to adjust to new territories and build up their leads, so if you suddenly change up your reps' territories, expect to see a sudden dip in your sales before they begin to pick back up. And that's only if your restructured territories were well-planned.
External factors include:
Changes implemented by the competition
It's not surprising that your competitors influence your sales whether positively or negatively. If a competitor suddenly implements a new sale, drastically lowering their prices, your reps might need to offer deeper discounts in order to maintain sales rates -- or you could begin to lose business. On the other hand, if one of your stiffest competitors closes its doors, you might see an increase in demand.
A strong economy equates to more sales. Weak economies lengthen the sales cycle and cause greater scrutiny prior to purchase.
Changes in the market
Remain in the know when it comes to the world of your buyer. For instance, if you provide a service to the hospitality industry, an anticipated spike in local tourism could mean higher sales for you.
Changes within the industry
This is one of the most difficult trends to avoid. If your industry is on its way out, it might be time to diversify your offerings. On the other hand, what other industries can you partner with, or piggyback on? If there's a product that complements yours and it suddenly sees a rise in sales, you can focus your marketing on illustrating why the two products go hand-in-hand, but in a subtle way -- you don't want any lawsuits eating into your profits!
Aspects of Better Future Forecasting
Putting the above into practice can yield amazing results, but there are a few aspects of forecasting you should put into practice as soon as possible, such as:
Involving as many levels in the company as possible
Keeping it dynamic
Lofty numbers have their place -- how big was that fish you caught last weekend? But that type of fluffing has no place in your sales forecasts. It's reckless, and you won't appear credible anymore. Not to mention, a sales team won't get excited about their positions if they know the goals are unattainable right off the bat. At the same time, you don't want to lowball your figures, either, because that can bring about the same "why bother?" attitude.
The responsibility of the actual forecast usually falls only on one person's shoulders, but it's vital for every department to input data that goes into the decision-making process. For instance, say you make sub sandwiches and you're forecasting next month's cost per sandwich. If you include your mayo level and your lettuce guys in the forecast but you fail to include the meat gurus, your forecast might leave you wondering, where's the beef?
And finally, for a forecast to breathe life into your business, it has to be alive. Make sure your forecasts are living documents that you attend to on a regular basis and your figures will be a reminder of why your company is relevant.