The Forecast Factory: A guide to forecasting in 2023

We all know that nailing down sales forecasts is crucial to success for any sales-driven organisation. Done right, it can be like having a crystal ball that reveals how much revenue will flow into your business in the coming months or even years. With this knowledge, your sales team can set smarter goals, and your leadership team can make strategic investments with confidence.

But here's the thing: accurate forecasting becomes an absolute must when you're planning to take your business to new heights, explore new markets, or navigate through uncertain economic times. The better you can see into the future and predict your revenue, the more informed decisions you can make to steer your business in the right direction.

So, how do you tap into the incredible power of sales forecasting efficiently and effectively?

Buckle up because, in this guide, we'll dive deep into everything you need to know about sales forecasting. We'll uncover why it's absolutely essential for every business to forecast sales accurately, tackle the biggest challenges, and show you how to kickstart your forecasting journey today.

But that's not all! We'll also answer some burning questions you might have about sales forecasts and shed light on the key factors that can impact their accuracy.

What is sales forecasting?

Strong sales forecasting can help you predict the future of your sales revenue for a specific period, whether it's a month, quarter, or even a whole year.

Now, there are various methods you can use to forecast sales, but trust me, you'll need a few key ingredients. First up, you'll want to dig into your historical sales data - that's the treasure trove of insights that'll guide your predictions. Then, you'll need a comprehensive view of your sales pipeline so you know what's in the works and what to expect. And lastly, don't forget about the internal and external factors that can influence your sales because they're crucial puzzle pieces, too.

But here's the exciting part - you don't have to go at it alone! You can harness the power of sales forecasting tools to make your life easier. These nifty tools streamline the process and gather all the relevant data you need to make accurate predictions.

Now, let's not underestimate the impact of sales forecasting. Sure, it helps your sales team set and reach their quotas and goals like clockwork. But guess what? Its benefits extend far beyond the sales department. It can aid in budgeting, resource allocation, and strategic decision-making for your entire organisation.

The importance of sales forecasting

Did you know that sales forecasts can actually impact your whole organisation, not just the sales department? From marketing to HR to finance, everyone can benefit from accurate sales forecasts.

Think about it: companies rely on these forecasts to make important decisions like hiring new employees, managing inventory, developing new products, and setting goals for the future. Sales forecasting plays a crucial role in all of these areas.

But why is it so important, you ask? Sales forecasts can help you achieve some awesome outcomes. Let me share a few examples with you.

Become more predictable

A sales forecast can actually give you a sneak peek into how well your business will perform in the coming months or quarters. It's like having a crystal ball for your sales! Not only that, but it also allows you to keep a close eye on your progress along the way. So, if any issues arise, you can tackle them head-on before they wreak havoc on your business.

Imagine this: your monthly or quarterly sales are not quite meeting your expectations. Instead of panicking, a sales forecast empowers you to take action. You can dive into your pipeline or collaborate with your reps to identify what's causing the actual revenue to fall behind. It's all about staying one step ahead!

And here's the best part: as time goes on, your sales predictions become even more accurate. This means your organisation can plan better, set realistic goals, and benchmark its performance effectively.

Make data-driven decisions

When setting growth goals, gut feelings won’t help, 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 times to use sales forecasts is when budgeting and resourcing. If you have gone through a period of decreasing sales, that might lead you to freeze hiring or assess spending overall.

On the other hand, if you expect sales to skyrocket, you’ll know you can hire, increase marketing spend, or bring in additional resources to support your growing customer base.

For example, you might realise that you need more customer success staff to support the surge of customers onboarding or upgrading.

Better goal setting

The best sales teams thrive when they have proper goals, and having an accurate forecast is a really important part of the goal-setting process. As mentioned, forecasts give your sales team a benchmark to track progress against for daily or weekly check-ins, but just as importantly, having an accurate forecast means that the goals your team is aspiring to hit are set for growth but are also realistic.

Challenges when forecasting

A recent report found that only 15% of revenue leaders were “very satisfied” with their sales forecast process. So, clearly, there’s room for improvement and, like any worthwhile practice or process, challenges.

Here are a few of the top challenges encountered when generating accurate sales forecasts:

Poor tech integration – In 2023, it’s common for sales teams to use an array of different tools to support their work. Still, without careful planning, they rarely work seamlessly together. The more you can connect software through integrations, the more up-to-date and accurate your CRM and sales data will be. In turn, your forecast should be more accurate.

Subjectivity – ‘My gut feeling is…’ It is a common phrase you hear from sales reps when they are talking about current opportunities, and it’s often used instead of 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.

Lack of formal reviews and management – Management has a role to play in the accuracy of sales forecasts. Without scheduled 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.

Lacking or low-quality data – As with any report in a workplace, forecasts will only be as good as the data that’s feeding them. Not having historical data or allowing poor CRM practice can lead to inaccurate data and, therefore, unhelpful and inaccurate 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.

Creating a sales forecast in three steps

Creating an accurate sales forecast is crucial for any business. To achieve this, teams need to invest time and effort in developing a successful forecasting process that suits their specific needs. It is worth dedicating time to define and document this process, ensuring it can be repeated at the appropriate intervals.

The key to improving the accuracy of your sales forecast lies in making the process more repeatable, scalable, and standardized. By doing so, you can enhance the reliability and usefulness of your predictions.

To begin creating a more accurate sales forecast, consider these three steps:

1. Choose a forecasting time period

The first thing we need to do is agree on a forecasting time frame. To inform this step, look at your sales cycle. Businesses with longer sales cycles that require more touchpoints might need to look further ahead as the time it takes to close deals will be longer.

If your current forecasting method doesn’t take into account the type of deal or reflects your industry's patterns and seasonality, you might find yourself 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

Before I write this section, I want to make it clear that I commonly see pipeline reviews configured in the wrong way. Things like every rep in the meeting or the review begins an update meeting rather than coaching on the pipeline. I’ll cover this in a different blog or article.

That said (making the assumption it’s done correctly), if pipeline reviews aren’t already part of your regular sales processes, now is the time to make some changes.

Sales pipeline analysis lets you see all active opportunities, deals at risk, and ones that have stalled. It gives your sales reps a chance to discuss opportunities and for you to coach and provide input that can help your team stay on track.

Regular pipeline reviews also allow you to check in on important metrics such as conversion rates, length of sales cycle, and deal size. 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

Once you have established the foundation of your forecasting (the timeframe and pipeline review), it’s time to choose the best-fit forecasting method for your business.

Below, we have shared some of the most common approaches, each one with its own pros and cons. Let’s take a closer look.

Historical forecasting

Historical forecasting looks at past years to help predict future performance, which could be for the upcoming month or quarter, etc. Since most businesses have access to sales and revenue from years past, historical forecasting should be relatively simple.

However, purely predicting what December of this year will look like based on past December won’t always consider any changes you’ve made since the previous December.

You also need to consider (and factor in) things like new product releases. For example, If you’ve launched a new product or feature within the calendar year, that impact won’t appear in last year’s data, so you may have to adjust accordingly.

Pipeline forecasting

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. Analysing your pipeline based on gut feel can be a challenge with this method, and therefore, it can be useful to have software that can help with this.

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 10% of the time a qualified lead turns into a closed deal, you would multiply the potential value of any opportunities in that stage by 10%. The further along a prospect is in the process, the more likely they are to become a customer, which means the value is multiplied by a higher percentage.

The 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.

For the above reason, keeping your CRM up-to-date and promoting good sales admin will help ensure your opportunity stage forecasts are as accurate as possible.

Length of sales cycle forecasting

This method of 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.

It also requires you to understand your sales cycle for different types of leads. For example, 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 accordingly will give you more accuracy in your length of sales cycle forecasting when using this method.

Intuitive forecasting

Last but not least, the forecasting method with the most room for error, but 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.

Obviously, 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.

Conclusion

In conclusion, sales forecasting is of utmost importance for any organisation. It not only impacts the sales department but also influences various other departments like marketing, HR, and finance. Accurate sales forecasts enable companies to make informed decisions regarding hiring, inventory management, product development, and goal setting.

Sales forecasts provide businesses with the ability to predict their future performance, allowing them to stay ahead of any potential issues and take proactive measures. By analysing the pipeline and collaborating with the sales team, organisations can identify and address factors that may be hindering revenue growth.

Moreover, sales forecasts help in making data-driven decisions. With a clear understanding of future sales predictions, companies can allocate resources effectively, invest strategically, and plan their budget accurately. Whether it's scaling up or tightening the belt, sales forecasts serve as a guiding tool.

Setting goals becomes more efficient with accurate sales forecasts. Sales teams can track their progress against benchmarks and strive for realistic yet ambitious targets. This encourages growth and keeps the team motivated.

However, there are challenges associated with generating accurate sales forecasts. Poor tech integration, subjectivity, lack of formal reviews and management, and lack of low-quality data can all impact the accuracy of forecasts. Overcoming these challenges through improved processes, better data management, and effective communication can lead to more reliable sales forecasts.