Unless you have predictable revenues from projects or contracts, forecasting sales can be difficult. However, there are several practices you can use to make your forecasts as realistic as possible. In this article, we’ll examine sales forecasting and identify several ways to improve its accuracy.
The Purpose of a Sales Forecast
A sales forecast is primary strategic document that helps a business make decisions and allocate resources. By estimating sales accurately in each of the upcoming 12 months, your organization knows where it is really going instead of fantasizing about where it wants to be. Sales forecasts drive decisions about production, labor and staffing, pricing, budgets, even compensation. Good forecasts can help sales and marketing evaluate new products and decide the fates of old ones. Constructing a good sales forecast requires strategy selection, evaluation of historical data, credible unit sales projections and understanding the competitive marketplace. As in so many areas of business, the adage “garbage in, garbage out” applies, so you need good data and good thinking to give value to your sales forecasts.
Many worthy tomes have been written about sales and marketing strategies. The main point emphasized here is to adopt one that makes sense for your business/industry, and then follow and refine it — unless and until you decide on a new strategy. Sometimes, an imperfect strategy is better than none at all. Consider these points:
- A winning strategy accounts for the intermediate outcomes necessary to close a sale. This usually involves a series of tactics that help move the process along, whether its demonstrations, e-books, incentives or whatever makes sense in your context.
- Use analysis tools, such as a SWOT matrix (strengths, weaknesses, opportunities and threats) to identify the internal and external factors that drive your sales process.
- Understand your customers’ processes for deciding what and how much to buy. This requires more insight than simply extrapolating previous sales to the customer. The buyer has to act for a sale to occur, so it’s extremely useful to know what decisions the customer has to make before deciding to act.
- Apply a pipeline process for each prospective deal to gauge how close you are to making the sale. To be effective, the process must address the key milestones along the way, such as a needs analysis, on-site demonstration or a pre-proposal review .Attaching milestones to your pipeline gives you an idea of the deal’s velocity and whether to continue, recycle or abandon it.
- Your pricing strategy will have a major impact on your potential sales – but you have to find your place in the market in relation to how you position your product or service, your competitors’ offerings, and the profit margin you want.
Is Past Prelude?
It’s a good idea to maintain full marketing and sales data, because it may prove useful in helping to forecast future sales. Then again, it might not. It’s up to you to run the numbers and see how predictive previous sales data truly are for your company. Here are some tips:
- The most recent historical data generally has the most value. Going back too far could add a lot of useless noise.
- Use statistical tools to tease out the meaning of the data. But temper this with human interpretation.
- If you have a new product — and therefore lack historical data — see what factors or components of sale are common to the new product and previous offerings. You may be able to extrapolate some good numbers this way.
Your sales numbers should be based on your goals and on different scenarios for how the year will turn out.
- Start with your financial goals as a base figure for the amount of sales you need each year. Don’t limit yourself to one set of forecast numbers. Multiple forecasts are a better choice – a conservative one, a most likely forecast, and an optimistic one.
- If sales are above or below your forecasts, you can make monthly adjustments to your business decisions.
- Look at predictive factors. For example, see if there is a correlation between sales and ad buys in a particular channel — TV, cable, radio, print, social media, etc. If you have a retail store, does the square footage assigned to a category of product affect sales? Is your business hurt when interest rates change or the stock market tanks?
Understand Your Market
You might want to increase your market presence and thereby increase sales. You’ll have to figure out if this is both feasible and profitable.
- The size of your potential market is a factor affecting your potential sales – assess it early so you can derive the market’s value and how much your share of it could be. Are there enough customers out there in the market to achieve your sales goals?
- Research the strength and number of your competitor. You need to find out about your competitors as they’ll directly affect your sales potential. Analyze their pricing strategies, what they offer and how successful they are.
- Gauge demand, because you need to know how the marketplace will receive your product or service. Survey your target market to estimate potential demand and possible future sales.
Align Your Finances to Your Sales Forecasts
Suppose your most optimistic sales forecasts turn out to be true. Do you have the working capital you need to support the purchasing and production necessary to satisfy demand? Are you managing your cash flow for optimal benefit? Your capacity to grow your business depends on your ability to attract new sources of capital and conserve the ones you have.Click here for reuse options!
Copyright 2015 Eric Bank, Freelance Writer