Sales Forecasting 101: Definition, Methods, Examples, KPIs

sales forecasting definition, methods, examples, metrics

Sales forecasting is a crucial business exercise. Accurate sales forecasts allow business leaders to make smarter decisions about things like goal-setting, budgeting, hiring, and other things that affect cash flow.

Meanwhile, an inaccurate sales forecast leaves sales managers guessing at whether they’ll actually hit quota. As a result, they may not be aware of any problems the sales pipeline in time to fix them.

Let’s look at what sales forecasting is, and some of the basics you need to get it right.

What is a Sales Forecast?

A sales forecast is a prediction of future sales revenue. Sales forecasts are usually based on historical data, industry trends, and the status of the current sales pipeline. Businesses use the sales forecast to estimate weekly, monthly, quarterly, and annual sales totals.

Just like a weather forecast, your team should view your sales forecast as a plan to work from, not a firm prediction.

Sales forecasting is also different than sales goal-setting. While a sales goal describes what you want to happen, a sales forecast estimates what will happen, regardless of your goal.

Requirements for Accurate Sales Forecasts

sales forecasting metrics

Good data is the most important requirement for a good sales forecast. New businesses that don’t have much data about their own sales process may need to rely on industry averages or even educated guesses. On the other hand, more established companies can use their historical data to model future performance.

Before you begin forecasting, here’s a list of things you should document:

  1. Your sales process.

Without a clearly documented sales process describing the actions and steps it takes to close a deal, you’ll have difficulty predicting whether any single deal will close.

  1. Your Sales goals or quotas.

While your forecast may be different from your goals, you won’t know if your forecast is good or bad unless you first have a target. So each rep needs an individual quota, as does the entire sales team.

  1. A benchmark or a current average of some basic sales metrics.

Having easily accessible measures of the following basic metrics will make forecasting much easier:

  • The time it takes the customer to express interest
  • How long it takes to close a deal
  • The average price of a deal
  • The duration of the customer on-boarding process
  • Average renewal or rates, or how frequently you get repeat business
  • Conversion rates at each stage of the sales process

Essentially, you want to define the average duration and performance of your sales process.

  1. Your current Sales pipeline.

Make sure you understand what’s in your current pipeline, and that your CRM is accurate and up-to-date. If you don’t have a CRM, forecasting is more difficult, but not impossible.

How to Forecast Sales

There are several methods you can use to forecast sales. Many businesses use two or more methods together, to create a range of forecasts. That way, they have a best-case scenario and a worst-case scenario.

Common sales forecasting methods include:

1. Relying on sales reps’ opinions.

Many sales managers simply ask their reps: “when will this deal close, and how much will it close for?”

While this is a method you could use to try to create a sales forecast, it’s not recommended. Sales reps tend to overestimate sales forecasts, and there is no repeatable process to generate a consistent forecast with this method. Unfortunately, many businesses still rely on this method to estimate future sales.

2. Using historical data.

With this method, you use a record of your past performance under similar conditions to estimate how you’ll perform in the present. For example, you may know that your business typically grows at 15% year over year and that you closed $100k of new business this month last year. That would lead you to forecast $115,000 of revenue this month.

This method is slightly more accurate but ignores other factors that may have changed in the last year, like the number of sales reps you have, or how your competitors are doing.

3. Using deal stages.

In this forecasting method, you assign a probability of closing a deal to each stage in your sales process. Then, at any given time, you can multiply that probability by the size of an opportunity to generate an estimate of the revenue you can expect.

This forecasting method is better still and is very popular because of its simplicity. However, it does have a weakness: it ignores the age of the opportunity. If two opportunities have booked a sales demo, but one is three weeks old and the other is three months old, are they really equally likely to close?

4. Using a custom forecast model with lead scoring and multiple variables.

This forecasting method relies on a combination of all of the above. Usually, you’d need an analytics tool or advanced CRM reports set up to help create these forecasts.

If you have those resources, this method of sales forecasting can be most accurate. Also, you can take into account the age of an opportunity, its current stage in the sales process, the characteristics of the prospect that make them more likely to purchase, and more.

Sales Forecasting Examples

Sometimes, reading about forecasting just isn’t as useful as reviewing examples. Here are some basic hypothetical scenarios you can consider, to see how sales forecasting is done in the real world.

Example 1: Forecasting Based on Historical Sales Data

Let’s say that last month, you had $150,000 of monthly recurring revenue and that for the last 12 months, sales revenue has grown 12% each month. Over the same period, your monthly churn has been about 1% each month.

Your forecasted revenue for next month would be $166,500.

You multiply last month’s revenue by your expected growth, and subtract your expected churn:

($150,000 * 1.12) – ($150,000 * .01) = $166,500

Example 2: Forecasting Based on Your Current Funnel

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Let’s say you have three open opportunities this month:

  1. One where you’ve just had a quick phone call, with an expected value of $1,000.
  2. One that has received a full demo, with an expected value of $1,500.
  3. And one with an offer, with an expected value of $1,200.

You’ve done your math, and you know that in each of these stages, any given opportunity has the following likelihood of closing:

  • “Connect Call” = 30% chance of closing
  • “Demo” = 40% chance of closing
  • “Offer” = 70% chance of closing

You multiply that probability with the forecasted value of the deal, and sum them all up to come up with a total sales forecast of $1,740, like in this example:

Forecasting sales based on probability and sales process stage

Example 3: Forecasting Based on Lead Scores and Multiple Variables

You’ve really done your research, and have lead scoring set up in your CRM. You group your leads into three groups of varying quality: A, B, and C. These determine how likely an opportunity is to close.

You also know that companies with less than 50 employees close at a slightly lower rate, and companies larger than 50 employees are more likely to close.

You could then use average opportunity sizes to calculate the forecasted value of any given opportunity, using a table like this:

Sales forecasting method based on lead scoring

Related: 3 Proven Sales Forecasting Methods for Greater Accuracy

Tools That Help With Forecasting

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CRM: CRM software combines the storage and retrieval power of a database with dedicated sales tools that help reps close deals. These features may include lead tracking, funnel analytics, call sequences, and reporting features.

Excel: If your company is just starting out or only has a few products, Excel should suffice for building your sales forecast.

Sales Analytics Platform: Sales analytics tools combine data for many products and services, build forecasts, and give you deep analytics. Plus, many also have helpful graphs and charts built in. Lastly, dedicated analytics tools also have the advantage of staying updated in real time.

Lead Scoring: These tools grade prospects according to actions on your website, outcomes of conversations, and any other touches that your team deems pertinent to the sales process. Also, a lead scoring tool can help your marketing team with campaign segmentation and content personalization.

Project management tools with resource allocation: Follow-through is the most important part of your sales cycle, and is the only way to build strong customer relationships. Project management tools help your team stay on task and ensure that the team has the resources to complete the project.

Accounting Software: If all you want is a new revenue forecast, more basic tools are fine. However, if you want to forecast gross margins and account for the cost of goods sold, you may also need to include data from your accounting software in your forecasting exercise.

Key Takeaways

  • Sales forecasting is an educated guess about future sales revenue that uses historical data and common sense to project monthly, quarterly, and yearly sales totals for a business.
  • Your team should view the sales forecast as a plan to work from, not a firm prediction.
  • Before you try to build a forecast, estimate the length of your average sales cycle and conversion rate.
  • There are several different types of forecasts you can build. Test various methods for accuracy within your business.

Also published on Medium.

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