Managing your business financials is no easy feat, especially when you have to project future numbers to create your yearly budget, for example. While it would be great to tap into a crystal ball to see how your business will perform in the next several months, there is a real solution that can help any business owner: sales forecasting.
Sales forecasting methods are one of the many ways in which you can look toward the future of your business and take steps right now to improve your future sales. The more you understand current and historical sales, the better you can implement sales and advertising tactics, staffing changes, and more to affect positive changes for the future.
In this article, we’ll highlight 10 sales forecasting methods so you can find the one that works best for your business.
What Is Sales Forecasting?
Sales forecasting is the process by which you estimate your future sales. There are a number of different sales forecasting methods, including using past sales, using the sales of your competitors, using predictive analytics, and many other methods.
Sales forecasting and revenue forecasting are important tools to help a business predict their future sales in order to plan their finances for the next year.
10 Sales Forecasting Methods for Your Business
There are a number of sales forecasting methods—each of which has its own benefits and drawbacks.
Depending on the age of your business, the market you’re in, and your competitors, certain sales forecasting methods will be better for estimating your future sales for your business. Let’s take a closer look.
1. Intuitive Sales Forecasting Method
One of the simplest sales forecasting methods is the intuitive sales forecasting method. This method is based on word of mouth and intuition. While this might be one of the least sophisticated sales forecasting methods, it is using information straight from the people who know best, your own salespeople.
The intuitive sales forecasting method is simple and uses the knowledge of those closest to the sales, but it can’t forecast sales too far into the future and is only as accurate as the salespeople. It’s important to remember that a sales forecast isn’t a guarantee and to understand the difference between budget vs. forecast.
While it has its limitations, the intuitive sales forecasting method can be very useful in the early stages of a business when there’s minimal historical data.
2. Historical Sales Forecasting Method
A tried and true sales forecasting method is the historical sales forecasting method. The historical sales forecasting method uses historical sales data to predict future sales.
One of the benefits of this sales forecasting method is that you can use the historical data from any period of time to estimate the sales for any matching future period. You can make your estimate even more accurate by using the percentage of growth over time to add to your estimate.
While this is a decently simple sales forecasting method, it can also be quite accurate. The one drawback of this method is that it makes the assumption that sales are consistent from year to year for each period of time. While this may generally hold true, it’s not always accurate.
Another thing to watch out for when you’re using the historical sales forecasting method is seasonality. You need to be aware of your business’s high and low seasons and make sure you account for these changes in your calculations. You can also use this sales forecasting method to help you create a cash flow forecast.
3. Sales Per Square Foot Method
This sales forecasting method is most useful for businesses that sell products out of a brick-and-mortar location.
The sales per square foot forecasting method takes your total sales and divides it by the square footage of your store to calculate the average sales volume per square foot of retail space. You can then compare your store’s ratio to other, similar stores. By finding a store with a similar product line and location, you can estimate your future sales based on their historical sales.
This can be a very useful sales forecasting method for a new business that will be selling retail products out of a physical location. However, keep in mind that a new business and an established business will typically have different sales volumes, so don’t assume you’ll reach the same numbers as an established business right out of the gate.
4. Lead Value Sales Forecasting Method
This sales forecasting method relies on historical sales data from each of your lead sources. A lead source is any tool or software that you use to track potential customers. These types of lead generation tools also track conversion rate, or the number of prospective customers who become paying customers.
The lead value sales forecasting method has you pull sales data from all of your lead sources, which can then be used to analyze current sales trends and predict future sales trends. Understanding your lead sources, the number of leads you’re getting, and your conversion rate can help you to better understand your overall sales and any trends your business has.
5. Gross Sales Forecasting Method
The gross sales forecasting method helps you to evaluate your daily sales to calculate and predict future sales.
For example, you’ll look at the daily sales for each type of product and/or service your business offers. Then you take your average daily sales for each month, which gives you a basic overview of your sales for the year.
This sales forecasting method also helps you to see any trends in what products or services are selling better than others, which can inform your advertising and inventory decisions. The gross sales forecasting method can also help you to manage cash flow by creating a cash flow projection.
6. Opportunity Creation Sales Forecasting Method
The opportunity creation sales forecasting method is different in that it’s less about predicting sales numbers and is more about pinpointing your target customer to better inform your sales strategy. This information can make your salespeople smarter and more efficient.
This method has you look through historic sales data for demographic information on your customers. If you can find a trend within this data that there’s a certain type of customer who is more likely to buy your product once they’ve become a prospect, you’ll then focus on this type of customer.
Once you’ve found your ideal customer with the highest conversion rate, you can use that data to inform future sales and advertising decisions.
7. Length of Sales Cycle Forecasting Method
Similar to the above sales forecasting method, the length of sales cycle method looks at trends among customers to predict future customer behavior.
The length of sales cycle method focuses on the length of time it takes for a customer to go from prospect to buyer. The first number you want to find is the average number of days it takes a customer to convert.
Once you have your average customer conversion time period, then you can break it down by type of customers. For example, a referral customer will likely take less time to convert than a customer with no previous connection.
Break your customers down into groups by behavior and calculate their average sales cycle length. Once you have these numbers, they can help inform how your sales reps spend their time. Plus, knowing these average sales timelines and how much of your business is based on referrals, new customers, etc. can help you predict how much revenue you’ll bring in over a set amount of time.
8. Opportunity Stage Sales Forecasting Method
When you look at overall sales data, you get just that—an overview. But you can be missing important details that mean a lot to your business.
The opportunity stage forecasting method looks at one of those details. Depending on what stage of the buying process a prospective customer is in, you can predict how likely they are to convert into a customer.
Using your company’s conversion rate numbers, you can discover the likelihood at each stage of the buyer’s journey a prospect is to become a customer. In general, the further along a customer is in the journey, the more likely they are to buy.
This sales forecasting method can help you to predict a customer’s behavior and the next month’s sales based on how many customers you have in each stage of the buyer’s journey.
9. Pipeline Sales Forecasting Method
This sales forecasting method can help you to estimate sales within your immediate future. The pipeline sales forecasting method looks at what prospects are in the pipeline and then calculates each prospect’s likelihood to convert to a paying customer and the amount they’ll spend.
The pipeline sales forecasting method can give you useful data for looking at the near future, but not for looking too far into the future. This sales forecasting method should be used for predicting sales within the next few months, not the following year.
One drawback of this sales forecasting method is that it requires a lot of data and calculation for arguably minimal information. If you’re attempting this sales forecasting method, you also need to ensure that you have high-quality data. This means that sales reps need to be diligent about updating prospect data and cleaning out their pipelines regularly.
10. Multivariable Sales Forecasting Method
We saved one of the most sophisticated sales forecasting methods for last. So, keep in mind, if you’re going to attempt this method for your business, you’ll need to do some intense calculations and will likely need the assistance of tracking software.
The multivariable sales forecasting method uses several of the above factors and predictive analytics to calculate your future sales. These variables may include historical sales data, sales cycle timing, and demographic information of prospective customers. The multivariable sales forecasting method can even use sales reps’ historical data to predict who is more likely to close a deal for which customer and in what period of time.
Because this sales forecasting method uses a number of factors to calculate future sales, it is the most accurate of all the sales forecasting methods. That being said, this method is also more complicated and will likely need the support of comprehensive accounting or sales tracking software.
The Benefit of Multiple Sales Forecasting Methods
You might be wondering—if there are so many sales forecasting methods, why not use all of them?
While you might not need to use all of the above methods—and likely don’t have the time—you certainly can use a combination of some kind. In fact, there’s a big benefit to using multiple sales forecasting methods. The higher the quality of your data and sales forecast, the better you can calculate your business’s cash flow.
As you likely noticed, some of these forecasting methods look at very specific pieces of your business. Using more than one sales forecasting method can help you to get a more accurate and comprehensive picture of future sales. Using multiple sales forecasting methods can also help you to avoid blind spots, such as seasonal sales, which can make certain predictive models look bleak.
Factors That Impact Your Sales Forecasting Method
No matter how thorough your calculations are or how many forecasting methods you use, you may still find that your predictions don’t play out as expected—not because your numbers or math were wrong, but because your business was affected by another, unforeseen factor.
When you’re predicting your sales, always be aware of these other factors that can have a significant impact on your business.
1. Economic Conditions
If there are economic changes, most businesses will likely be affected in some way. We saw these effects after the 2008 recession. When the economy is good, people spend money. When the economy is bad, people spend less. During times of economic uncertainty, you’ll see longer sales cycles and lower conversion rates and overall sales.
2. Internal Hiring and Firing
Both internal company factors and external factors can affect sales. When there are changes to your team, your sales may be impacted sales. For instance, you may lose your top salesperson or marketing executive and see a drop in revenue. Conversely, hiring some new all-stars can result in a jump in business.
3. Competitor Changes
If your competitors change something about their business, you may see the effects in your business. Maybe they launch a new marketing strategy that pulls prospects from your pipeline. On the other hand, they may go out of business and you can see a sudden influx of potential customers.
4. Market Changes
Depending on what type of business you operate, the industry in which you operate may go through changes that will trickle down and affect your sales. While this may not be an immediate effect, you should stay on top of industry news to gauge when a market dip or spike may show up on your bottom line.
5. Product Changes
Another internal business decision that can affect your sales forecasting is product changes. If your business rolls out a new feature, offers a new model for pricing, or runs a sale, you’re going to see either a spike or dip in sales that wouldn’t have been predicted by a sales forecasting model using historical data. While using software can make sales forecasting easier, you should always make sure a real person is reviewing the numbers as well to consider other factors an algorithm won’t anticipate.
The Bottom Line
If you’re looking to improve your business, one of the many steps you can take is to implement a sales forecasting method to look at your predicted future sales. Having an idea of your future business can help you make big decisions around your business’s financials as well as day-to-day processes.