A sales forecast helps a business make better business decisions, efficiently allocate resources, and accurately predict short and long-term performance goals.
Companies with accurate sales forecasts are 10% more effective to grow year-over-year revenue and two times more likely to hit quota.
One such example can be drawn from Samsung Electronics–with the Korean smartphone manufacturer recording its highest first-quarter operating profit since 2018. The company’s operating profit has climbed to $8.2 billion, thanks to forecasts from consistently accurate analysts.
What Is Sales Forecasting?
A sales forecast provides a tentative roadmap of how much sales your business will generate in a given period of time. It uses data to predict an idea of your revenue and helps you plan for the future.
Easy it may seem but sales forecasting is not a walk in the park. Accurately predicting your sales over a certain period of time can be difficult due to several factors that come into play.
In addition, no matter how accurate you think your sales forecasts are, you can never be 100% sure because sales forecasts can be put into disarray by unpredictable events like the Covid-19 pandemic.
Why Accurate Sales Forecasting Is Important?
Sales forecasts allow you to spot potential issues while there’s still time to avoid or mitigate them. They also play an important role in decision-making from hiring to goal-setting to budgeting.
In supply chain management, accurate sales forecasting predicts demand, supply, and pricing. It also involves evaluating the competition, collecting supplier data, and analyzing historic data to anticipate the future of an industry.
Here are some of the key benefits of accurate sales forecasting:
- Predicting Product Demand: Accurate forecasting helps in predicting product demand even in the most critical situations. While no forecast can be 100% accurate, relying on past patterns helps you make informed decisions and minimize disruptions.
- Streamlining Planning Process: Forecasting helps you understand how demand is changing and the way customers are using your product. It builds information about future trends and lets you streamline your planning process.
- Anticipating Seasonal Variations: One of the most important benefits of forecasting is predicting seasonal variations in the supply chain performance. It includes recognizing the apt time for promotional activity or a product launch when the demand for your product type is the highest.
- Increasing Customer Satisfaction: Recognizing dynamic customer requirements is essential in product-focused industries. By correctly predicting customer demands, you fulfill orders with shorter lead times. This helps you build credibility and increase customer satisfaction levels.
Now that we know the benefits of sales forecasting, let’s discover its role in influencing supply chain performance.
How Does Sales Forecasting Apply to Supply Chain Demand Forecasting?
Demand forecasting is the method of using predictive analysis to investigate the demand at a certain point in the future. It is carried out by complex algorithms that use past trends, historical sales data, and any potential events that can have an impact in the future.
A supply chain is formed of several components that work in collaboration to ensure seamless logistics operations within an organization. Here’s how demand forecasting can enhance the performance of multiple parts of a supply chain:
- Inventory Management: Inventory management is one of the most challenging aspects of a supply chain. Surplus stock can result in high warehousing costs while insufficient stock means failure to meet the required demand. Forecasting helps you stock the optimum amount of goods required to meet future customer demands as well as prevent any unnecessary warehouse costs.
- Third-Party Logistics Providers: High volatility and complexity in the supply chain require accurate demand forecasting to streamline third-party logistics providers and effectively meet customers’ demands. Forecasting also reduces friction within the supply chain and gives your business the capability to anticipate customers’ needs and fulfill orders as soon as you receive them.
- Scheduling: Demand forecasting enables you to streamline order fulfillment by delivering products to customers when they want them–increasing their satisfaction levels.
Common Sales Forecasting Methods
There is no sales forecasting method which is 100% accurate, using a combination of different methods can provide the best possible way to move forward for a business. Here are the most effective sales forecasting methods used by organizations across the globe:
1. Opportunity Stage Forecasting
This method involves recognizing where the prospect is in your pipeline and calculating the chances of closing a deal. You can divide your pipeline into different stages such as prospecting, qualified, investigating, trial, and quote. Typically, the deeper your prospect is in the pipeline, the higher are the chances of closing the deal.
Easy to implement with objective calculations
Calculations don’t consider the size of each opportunity
2. Lead-driven Forecasting
It involves analyzing each lead source and assigning a value based on the activity of similar leads in the past and creating a forecast based on that value. Assigning a value to your lead sources allows you to have a better sense of which lead can turn into revenue-generating clients.
Assigning lead value to each creates an accurate sales forecast
Susceptible to changes
3. Intuitive Forecasting
The Intuitive Forecasting method relies on your sales rep’s knowledge and insights on their prospects. The rep uses their intuition to predict when they will close a deal. Intuitive forecasting is entirely subjective and you have the risk of having inaccurate estimates.
Great way to close deals with clients who don’t have any sales history
Reps can be incorrect with their estimates
4. Test-Market Analysis Forecasting
This method allows you to roll out your new product or service to a specific group of people based on market segregation. For instance, you can evaluate how your product performs within a limited, geographical area and based on that create an accurate forecast for the full release.
Provides first-hand market exposure and allows you to refine your product before the final launch
Doing a soft launch is not cost-effective
5. Regression Analysis
It is the most mathematically focused method that uses predictive analytics to calculate the relationship between different variables that influence sales.
The method can incorporate a variety of factors like length of the sales cycle, individual rep performances, opportunity type, and more.
Highly focused and accurate
Requires a forecaster training in mathematics or statistics
How To Accurately Forecast Sales
In addition to selecting the right forecasting method for your business, here are some prerequisites that can enhance the efficiency of your sales forecast:
Assessing historical trends
To begin with, analyze sales from previous years and segregate the data into the price, product, sales rep, period of sales, and other necessary parameters. Then, generate a sales run rate from this data to have an approximate value of projected sales per sales period.
The obtained value will form the crux of your sales forecast.
Your competitors’ performance tells you about your market position. When you take into account their products and marketing campaigns, you will get insights about their product sales, product prices, and emotional values of the product, which will help you shape up your forecasting strategy.
Anticipating market dynamics
It’s essential to track all market events and discover information about any legislation changes that can impact the performance of your sales.
With continuous market uncertainties, many companies have to adjust quickly to survive sales fluctuations. Using supply chain forecasting software can help you identify seasonal shifts in the market and implement sales strategies accordingly.
An accurate sales forecast builds confidence and confers credibility to a business. While companies rely on different methods to create sales and demand forecasts, sales forecast software grants them the capability to see into the future and anticipate both positive and negative events before impact.
Sales forecast software companies like Algo provide precise visualizations based on accurate insights and statistics. And with a live dashboard, it allows companies to see how they are performing in real-time and track goals to achieve certain success.