What is sales forecasting?

Sales forecasting is the process of estimating future revenue by

predicting the amount of product or services a sales unit (which can
be an individual salesperson, a sales team, or a company) will sell in
the next week, month, quarter, or year.

At its simplest, a sales forecast is a projected measure of how a

market will respond to a company’s go-to-market efforts.

Why is sales forecasting important?

Forecasts are about the future. It’s hard to overstate how important it
is for a company to produce an accurate sales forecast. Privately held
companies gain confidence in their business when leaders can trust
forecasts. For publicly traded companies, accurate forecasts confer
credibility in the market.

Sales forecasting adds value across an organization. Finance relies on

forecasts to develop budgets for capacity plans and hiring, and
production uses sales forecasts to plan their cycles. Forecasts help
sales operations with territory and quota planning, supply chain with
material purchases and production capacity, and sales strategy with
channel and partner strategies.

These are only a few examples. Unfortunately, at many companies

these methodologies stay disconnected, which can produce adverse
business outcomes. If information from a sales forecast isn’t shared,
for example, product marketing may create demand plans not aligned
with sales quotas or sales attainment levels. This leaves a company
with too much inventory, too little inventory, or inaccurate sales
targets — all mistakes that hurt the bottom line. Committing to
regular, quality sales forecasting can help avoid such expensive
mistakes.

Benefits of having an accurate sales forecast

An accurate sales forecast process confers many benefits. These
include:

 Improved decision-making about the future

 Reduction of sales pipeline and forecast risks
 Alignment of sales quotas and revenue expectations
 Reduction of time spent planning territory coverage and setting
quota assignments

 Benchmarks that can be used to assess trends in the future

 Ability to focus a sales team on high-revenue, high-profit sales
pipeline opportunities, resulting in improved win rates
Bottom-up sales forecast or a top-down sales
forecast?
In general, there are two types of sales forecasting methodologies:
bottom-up forecasts and top-down forecasts. Bottom-up forecasts
start by projecting the amounts of units a company will sell, then
multiplying that number by the average cost per unit. You can also
build in the number of locations, number of sales reps, number of on-
line interactions, and other metrics.

A top-down sales forecast starts with the total size of the market (the
total addressable market or TAM), then estimates what percentage of
the market the business can capture. If the size of a market is $500
million, for example, a company may estimate they can win 10% of
that market, making their sales forecast $50 million for the year.

The idea behind a bottom-up sales forecast is to begin with the

smallest components of the forecast and build up from there. The
advantage to a bottom-up forecast is that if any variables change (like
cost per item or number of reps), the forecast is easy to modify. It also
provides fairly granular information.

When making a sales forecast, it’s important to use both methods.

Start with a top-down method, then use the bottom-up approach to see
if your first estimate is feasible, or do the two separately and see how
well they accord. To produce the most accurate forecast, companies
should perform both types of forecasts, then tweak both until they
produce the same number.

How to accurately forecast sales

To create an accurate sales forecast, follow these five steps:

Assess historical trends

Examine sales from the previous year. Break the numbers down by
price, product, rep, sales period, and other relevant variables. Build
those into a “sales run rate,” which is the amount of projected sales
per sales period. This forms the basis of your sales forecast

Incorporate changes
This is where the forecast gets interesting. After you have your basic
sales run rate, you want to modify it according to several changes you
see coming. For example:

 Pricing: Are you changing the prices of any products? Are there
competitors who may force you to modify your pricing schemes?
 Customers: How many new customers do you anticipate landing
this year? How many did you land the previous year? Have you
 hired new reps, gained quantifiable brand exposure, or increased
the likelihood of gaining new customers?
 Promotions: Will you be running any new promotions this year?
What is the ROI on previous promotions, and how do you expect
the new ones to compare?
 Channels: Are you opening any new channels, locations, or
territories?
 Product changes: Are you introducing new products or changing
your product suite? How long did it take for previous products to
gain traction in the market? Do you expect new products to act
similarly

o

Anticipate market trends

Now is the time to project all the market events you’ve been tracking.
Will you or your competitors be going public? Do you anticipate any
acquisitions? Will there be legislation that changes how your product
is received?

Monitor competitors
You’re likely doing this already but take into account the products and
campaigns of competitors, especially the major players in the space.
Also check around to see if new competitors may be entering your
market.

Include business plans

Add in all your business’s strategic plans. Are you in growth mode?
What are hiring projections for the year? Are there any new markets
you’re targeting or any new marketing campaigns? How might all this
impact the forecast?

Once you’ve quantified these things, build them into your forecast. You
want everything to be itemized, so you can understand the forecast in
as granular a level as possible. Different stakeholders in the company
will likely want to understand different aspects of the forecast, so it
behooves you to be able to zoom in or out as far as needed.

Keys to success in sales forecasting

Improving the accuracy of your sales forecasts and the efficiency of
the forecast methodology depends on multiple factors, including
strong organizational coordination, automation, reliable data, and an
analytics-based process. Ideally, sales forecasts should be:

 Collaborative. Leaders should synthesize input from a variety of

sales roles, business units, and regions. Frontline sales teams
 can be of great value here, providing a perspective on the market
you hadn’t considered before.
 Data-driven. Predictive analytics can reduce the impact of
subjectivity, which is often more backward-looking than forward-
looking. Using common data definitions and baselines will foster
alignment and save time.
 Produced in real time. Investing in the real-time capability to
course-correct or reforecast allows sales leaders to quickly gain
insight so they can make more informed decisions. This enables
them to quickly and accurately update the forecast based on
demand or market changes.

 Single-sourced with multiple views. Generating the forecast as a

single source of data gives you great visibility into rep, region,
and company performance, and helps align different business
functions across the organization.
 Improved over time. Use the insights provided by an improved
sales forecasting process to create more refined future forecasts
where accuracy improves over time against a set of accuracy
goals.

Companies with more advanced forecasting processes and tools

perform better than their peers because they more deeply understand
their business drivers and can shape the outcome of a sales period
before the period closes.

Key sales forecasting challenges

It can be difficult to produce a consistently accurate sales forecast.
Some of the keys to success in sales forecasting include:

Accuracy and mistrust

When companies use spreadsheets for sales forecasting, they can run
into issues with accuracy, which in turn creates a less trustworthy
forecast. These issues with accuracy can be exacerbated by:

 Poor adoption of CRM across the company and employees not

entering data in a timely manner
 Inconsistent data across teams, or salespeople not inputting
complete data
 Company stakeholders using different methodologies to produce
their forecasts
 Insufficient collaboration across product, sales, and finance
teams. This lack of collaboration can be heightened when
companies produce sales forecasts manually or using
spreadsheets.

Subjectivity
Although producing a quality sales forecast does rely to a small degree
on the forecaster making good decisions about how to use the data, in
general, companies rely more on judgement and less on credible
predictive analytics than they should. For example, companies
forecasting with simple arithmetic pipeline weightings may miss the
nuances of the real drivers of accuracy, which may be headcount,
pricing decisions, or route-to-market points of emphasis.

Usability
When a sales forecast isn’t generated in a way useful for stakeholders
across the company, it becomes far less effective than it should be. A
good forecast should produce relevant and understandable data for
multiple teams.

Inefficiency
Sales forecasts can be especially difficult to produce when
inefficiencies are built into the forecasting process. For example,
when a forecast has multiple owners, or the forecast process is not
clearly spelled out with a standard set of rules, there can be disputes
about how the forecast will be produced. Similarly, if inputs into the
forecast are not reconciled before the forecast is produced, the
forecast itself may be subject to many revisions, which can reduce
trust if versions are rolled out and then revised.

Company forecasts across the enterprise

To forecast across the enterprise, a company needs different elements
from each business function. Here’s what different functions can
contribute to the sales forecast:

 Sales: Provides the bottom-up view, using data from the CRM
and PRM, building in judgment from sales leaders. Sales can
manage this process through the sales operations function, using
the right tools, and reporting.
 Finance: Provides macro-economic guidance and works with the
product teams. Finance can help integrate the forecast with their
financial planning software.
 Marketing: Provides macro-market guidance, especially in
industries like telecom, retail, and CPG. Marketing can also
provide finance teams with market data.
 Supply Chain: Provides input on supplies and production.
 IT: Assists sales forecasting by providing platforms, data,
integration, and technical support.

Key features of effective forecasting software

Best-in-class sales forecasting software should be able to
immediately improve the accuracy of your forecasts and make the
forecasting process more efficient. It should therefore offer the ability
to:

 Execute sales forecast simulations and outcomes. Make

changes to drivers and execute sales forecast simulations to
project future impact on sales performance.
 Analyze trends, changes, and seasonality of the sales forecast
over time. Develop time-based dashboards and key performance
indicators (KPIs), such as velocity calculations, trending
analytics, and seasonality fluctuations.
 Model and analyze “What if” scenarios. Create “what-if”
scenarios and modeling to analyze the impact to the sales
forecast if a specific business, economic, or competitive
situation were to occur. Prepare for challenges you might
encounter in upcoming deal cycles.

 Build sales forecasting calculations with familiar formulas. Apply

an easy-to-use formula builder to configure sales forecast
benchmarks using familiar formulas and syntax.
 Snapshot Salesforce CRM accounts and opportunities to compare
period-over-period. Compare week-over-week, month-over-month,
and year-over-year changes to current periods.
 Compare forecasts based on multiple modeling
techniques. Create sales forecasts based on qualitative, time
series analysis and projection, and casual modeling techniques
while determining the degree of uncertainty with the sales
forecast accuracy and predictability.
 Forecast across geographies, products, and accounts. Develop
sales forecasts by geographic locations, product lines, and
accounts, or change any of these dimensions to analyze the
sales forecast at any granularity of these hierarchies (by
state/city, a specific set of product SKUs, or a group of accounts
in a selected vertical).
 Analyze performance with data visualization. Built-in
dashboards, reporting, and analytics with data visualization
(charts, graphs, maps, and more). Dashboards and reports are
updated immediately. Analyze sales forecast and sales
performance metrics to make better decisions with actionable
insights.

The future of sales forecasting: predictive

analytics
Predictive analytics is already transforming many areas of business
and sales forecasting is no exception. Even so, terms like “predictive
analytics” and “machine learning” can still be intimidating. Abe
Awasthi, Senior Manager at Deloitte, shared a short example
explaining how predictive analytics can improve forecasting:

A tech company asked Deloitte to produce a predictive model to

improve sales forecast accuracy. To create their model, Deloitte
leveraged the company’s pipeline data from the previous few years
with customer and employee names removed. Deloitte then used
machine learning to extrapolate from historical trends and fill in the
gaps in the data.