What Is Sales Forecasting?
A sales forecast is an estimate of the value of total sales over a specific period in the future. It’s a number that drives not just your sales team’s commit but also aids in better decision-making for marketers, customer success, product team members, and the C-suite. However, the primary owners of the sales forecast are the sales team and their leaders. Sales leaders typically forecast through a combination of the following approaches:
- Top-down: Measure the biggest target possible (based on the company’s revenue goals) and work your way downwards from there.
- Bottom-up: Take the company’s resources, capabilities, and historical attainment into account and plan targets accordingly.
The process usually involves a thorough analysis of the current market trends, inventory, and working with an up-to-date tech stack. You can completely automate your sales forecasting in this way, but even if you do it manually, there’s a good reason why it’s worth the effort. Four good reasons, actually!
What Are the Objectives of Sales Forecasting?
Sales forecasting serves your business in the following ways:
1. Predict Revenue
Forecasting aims at minimizing the risks associated with fluctuating revenue. At its most basic level, an accurate sales forecast can show you how much you can expect to earn in the coming months, quarters, or years. This will help you keep cash flow problems at bay and plan for demand.
2. Course-Correct
Sales forecasting gives your team a chance to adjust their sales approach and avoid expensive mistakes. For instance, if a forecast predicts lower-than-expected sales for a quarter in advance, you can investigate why your pipeline coverage ratio is low and take corrective action. However, even if you aren’t able to resolve the issue, the forecast gives the leadership team time to prepare for a lean period. Teams can then use these projections for better budgeting of time and internal resources, to optimize the sales process, and keep their board of directors or shareholders in the know on the most up-to-date revenue results and projections.
3. Redirect Reps to Suitable Prospects
Most sales forecasting methods take into account a prospect’s ‘likelihood’ of conversion as well as the sales representatives’ individual track records. This allows sales leaders to realign their strategy for maximum impact by matching sales reps to accounts or deals that are most likely to convert. For example, you can ensure the sales reps who have had past success with enterprise accounts are assigned to your largest prospects over the next several quarters.
A little balance goes a long way!
4. Optimize Demand Fulfillment and Growth
An accurate forecast is crucial for effective demand planning. This is a holistic process that ensures your product, customer success, and go-to-market teams are well-prepared to meet customer demand anticipated by your sales projections. Enterprise software companies that also provide a service component (such as customizations, deployments, and onboarding) can use forecasting insights to plan their capacity in accordance with growing demand. Similarly, non-SaaS companies can leverage forecasting to fine-tune various facets of their operation, like supply chain, inventory, staff size, etc. Sales forecasts also offer predictability about pipeline growth, wins, losses, and the reasons for churn during the sales cycle. More than just numbers, these insights paint a reliable picture of your business’ mid to long-term health.
Use them to plan for:
- Team expansions
- Contract negotiations
- Pitching to VC's
- Product launches
- Marketing campaigns, etc.
This way, you can time growth for when your business is at its strongest.
7 Critical Steps to Design a Sales Forecasting Plan
Many sales teams still opt for a largely manual approach to sales forecasting that often involves these seven steps: (If you want to automate the entire process, just skip to this section)
1. Analyze Past Forecasts, Performance, and Processes
Review previous sales performance data and study the contributing factors. This helps you figure out any correlation between factors like seasonal trends, staff strength, product type, sales processes, marketing effectiveness, pricing, etc., and your team’s performance.
Some of the historical performance metrics that are instrumental in this step include:
- Total revenue earned
- Win rate
- Average sales cycle length
- Average Contract Value (ACV)
- Net Revenue Retention (NRR)
- Expansion revenue
- The ratio of New to Old (Cross-sell/Up-sell) customers
- Customer Lifetime Value (CLV)
- Customer Acquisition Cost (CAC)
You should also look at your sales activity metrics, such as:
- Calls made
- Emails sent
- Qualified leads generated
- Opportunities created
- Proposals sent
- Opportunity stage progression
- Meetings set
- Sales meetings held
- Closed lost
- Closed won
- Next steps updated
- Methodology requirements
Expand your sales data collection scope to individual rep stats, too. Track rep performance, such as success rates, average close times, and other sales metrics. Finally, measure how accurate sales forecasts in the past were when compared to your actual performance in those periods.
2. Study the Market
Sales forecasts are an estimate, and not created in a bubble. Your forecast should reflect and respond to your target market conditions.
Ask questions like:
- What market trends, tailwinds, or headwinds affect your pipeline and sales?
- How are you differentiated from competitors?
- Are there internal or industry-level benchmarks to guide targets?
For other, more intangible trends, try to capture them in close-to-reality assumptions.
3. Inventory and Capacity Estimates
A realistic sales forecast must account for how much can be sold. To find this number, estimate the total value of your products or services over time. Of course, inventory size depends on the development pipeline. For example, enterprise software companies that have to make a lot of customizations and build customer-specific features, would have to estimate their product and engineering team’s bandwidth to assess their capacity to deliver on time.
Alternatively, if you deal with tangible goods, a good question might be, “how many units will be available to sell, and when can the sales team take them to market?” This number is the baseline for your sales forecast. To arrive at a realistic number for your estimates, you should also ensure you know what costs are involved and if you have the necessary working capital and other resources to build the projected features/units.
This includes calculating the cost of staffing and training for service-based companies, including ongoing costs like:
- Remote or on-site support
- Research and development costs for product improvement
- Tech stack subscriptions
- Storage and transportation for tangible and/or perishable goods
4. Define Business Priorities
If inventory is about asking how much can be sold, accounting for business priorities involves asking, ‘what and how much should be sold?’ Senior business leaders could choose to focus on a new product/feature launch or reset sales targets to support a strategic pivot. Your sales projection must respond to these changes.
5. Set the Right Tone Internally
Generating sales forecasts can be a stressful activity for reps who foresee unrealistic targets in the future. This fear can sometimes urge them to set lower-than-normal benchmarks to avoid the fallout of not meeting their sales targets. On the other hand, some sales managers will simply agree to whatever forecast number is handed down from leadership, even when they know it’s very unlikely to be met. Even worse, some have been known to massage the numbers to make it appear like they met or surpassed their forecast when they didn’t.
The only way out of this is a culture of transparency.
Have an honest talk with the team about all that’s riding on accurate prediction of the sales revenue. Explain the link between the sales data they gather on past performance and forecast accuracy. Help them see how an accurate sales forecast is everyone’s shot at achieving the possible outcomes and meeting long-term performance targets. If you don’t work with your team who’s responsible for attaining the number, there will often be a disconnect between forecasts and attainment.
6. Agree on a Set of Assumptions
Since a forecast is about an as-yet-undiscovered future, your team must work with some assumptions about the market, team capacity, budgets, etc. For example, you might assume that the economy will keep growing at a certain rate in the next quarter. This assumption can form the foundation for other calculations. However, it’s good practice to plan for both conservative and optimistic scenarios so that you cover all bases. This way, you can quickly pivot if necessary.
7. Set Up CRM Software
Manual sales forecasts aren’t just cumbersome and time-consuming but also prone to errors. Work with experienced sales reps and SaaS specialists to shortlist your exact requirements for a CRM.
Common features to look out for include:
- Sales pipeline management
- Productivity and performance management
- Customer relationship management
- Sales analytics and forecasting backed by machine learning, predictive analytics, and other cutting-edge technologies
- Automation and process management
Many sales teams opt for a CRM like Salesforce to handle their processes. But chances are, you’re already on Salesforce and still haven’t perfected sales forecasting. It’s not you, it’s universal. Sales forecasting, especially in Salesforce, presents some real hurdles:
3 Key Challenges of Sales Forecasting
Most sales teams have yet to perfect sales forecasting for a number of reasons. Read through them, and we’ll follow it up with a workaround.
1. Forecasting with Spreadsheets is Hard and Inaccurate
The overwhelming majority of sales leaders still use spreadsheets to make forecasts. Even companies using the Salesforce forecasting module use spreadsheets to make forecasts.
That’s because Salesforce Forecasting is simply hard to use, and spreadsheets provide a much easier and familiar solution for leaders. All they need to do is export deal data into a spreadsheet and have their reps update their numbers. This way, the spreadsheet becomes the "forecasting source of truth" for all deals.
However, working with spreadsheets isn’t without its issues. For example:
You have to manually transfer data from your CRM to your spreadsheet or vice versa to create your forecasts. Not only is this time-consuming, but you also risk adding inaccurate data during these data transfers.
Moreover, the data a sales manager pulls from Salesforce onto a spreadsheet could be incorrect if the reps haven’t diligently updated their pipeline, next steps, and opportunities, which is often the case. Correcting the sales data on a spreadsheet would make the already tedious process worse.
And that’s not all.
You can’t inspect deals in a spreadsheet, as all the deal-related data resides in Salesforce. This means you would need to go back to Salesforce to inspect an opportunity, which can be a nightmare when managing dozens of them across multiple reps.
2. Can't Inspect Data Easily
Using spreadsheets for sales forecasting hinders your ability to inspect deals effectively. You can't see what is changing, including new deals entering the sales pipeline or lost/pushed deals. This lack of visibility makes it difficult to assess their impact on your quarterly sales quota. But there’s more.
To derive full value, you need answers to tough questions about:
- What is the path to my target number?
- What’s changing in the forecast and why?
- Where are the gaps? What is falling through the cracks?
- If your pipeline drops unexpectedly - why?
- Which deals fell the most sharply and why?
- If your commits are lower than expected, how does that impact the number for the quarter?
- How are commits changing compared to the best case?
- How can we analyze sales regions, teams, and individual performance in more detail and track progress over time?
This usually requires advanced business intelligence tools with a dedicated data team at their helm as spreadsheets and Salesforce forecasts simply aren’t enough. And this issue with poor data inspection isn’t limited to sales leaders. Your reps may not always see how each data field required in their sales methodology matters to the overall health of their pipeline and forecast accuracy.
For instance, sometimes, a prospect shows enough general interest in the product for the rep to progress a deal to a new stage or commit it to close at the end of the quarter.
However, the rep might be overlooking a critical piece of information such as MEDDIC fields, which can impact the likelihood of closing a deal during negotiation. This way, even if they’re completely onboard with forecasting in Salesforce, the sheer vastness of Salesforce’s data fields makes it impossible for sales reps to know which data to input accurately.
3. Resource-Intensive Exercise
It takes truckloads of data and a few of the sharpest minds in your team to crack a sales forecast. Why so?
The complex forecasting model in a CRM or forecasting software rarely works on a simple input-output formula. You’ll typically need skilled sales professionals to ensure forecasting accuracy. This is yet another skill set a sales leader will be required to know or to learn quickly on the job. Because the alternative is an expensive revenue operations analyst or Business Intelligence professional.
The DIY-unfriendly nature of sales forecasting is usually the first of the many barriers for small sales teams to get precise about the process. The fact that a Salesforce forecast is essentially unusable despite all the effort, can be discouraging for sales leaders. That is, until there's a solution to solve these problems, and more.
How to Automate Your Sales Forecasting with Scratchpad
Scratchpad works alongside your existing Salesforce account to streamline your sales processes. It's sole purpose?
To help sales teams unlock their highest levels of performance through better pipeline management, deal inspection, coaching and sales forecasting.
Once you sign up (for free), your team gets access to best-in-class pipeline management, call intelligence, deal inspection, and forecasting features to level up your sales team performance and get more value out of your Salesforce investment.
Scratchpad also gives sales leaders the ability to update and customize your forecast and pipeline views in more flexible ways than Salesforce, while easily drilling down to inspect specific opportunities.
For example, you can:
- Configure forecasts by category and stage for a better look at opportunity trends and gaps over time – making it much easier to adjust your forecast so it’s always up-to-date and accurate.
- Set up easy automations to proactively spot gaps in your pipeline and alert reps, managers, and leaders so they can take immediate action.
Forecasting has never looked easier! Check out how Scratchpad makes sales forecasting easy:
1. Drill down to how much each deal contributes
Scratchpad sales forecasts don’t leave anything to the imagination. Within a few clicks, you can go from an overall view of your whole team to granular details of your sales pipeline. Scratchpad’s Rollups help you figure out just how much each region, team, or rep brings to the table and what status each of their accounts shows currently. Easily dive into specific deals to learn how each one is changing over time, and why.
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2. Spot what changed in your forecasts and why
No more Sunday Night Surprises when you find out your open pipeline has mysteriously dropped right before your forecast meeting on Monday morning. Wake up to thorough reports about every uptick and downswing in your forecasts so you always have a clear understanding of what changed and why. Forecasting Waterfall Analytics lets you see every change in your pipeline and the reasons behind it.
You can monitor opportunities that:
- Increased or decreased in value
- Had their Close Date change, which led to them being included/removed from select forecast periods
- Closed won or lost, so their value is no longer reflected in your open pipeline
- Upgraded to a forecast category like best case or commit so your overall pipeline value increased.
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3. Identify trends in how the forecast evolved over time
With Scratchpad, you can easily compare past performances with your current attainment. Use the Sales Trends Analytics tab to quickly browse historical sales data from past quarters and years. A quick comparison between current commits and your best case, for instance, will reveal a lot about where the pipeline needs support. You can even hover over the graph to see Daily Snapshots of pipeline changes.
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3 Sales Forecasting FAQs
Find quick answers to some common questions about sales forecasting.
1. What Factors Influence Sales Forecasting?
Sales forecasts should not be looked at in isolation. Their context is made up of a range of internal and external factors that come under the purview of demand forecasting and have strong implications for the sales team:
Internal Factors
- Team strength and capability: More skilled reps on your team means you can aim higher.
- Business priorities: Senior leadership decides the what, where, how, and why for your forecasts.
- Marketing approach: A product that received a strong marketing push can be expected to sell better.
External Factors
- Predictable: These are the operational mainstays of any stable business, and your forecasts can easily account for them. For example, seasonal trends like peak or off seasons for products or specific supply chain conditions based on market research data.
- Unpredictable: These are ‘black swan’ events that occur without any warning. Under normal circumstances, it’s hard to predict them. Some examples include:
- Technological shifts that disrupt the market (Ex: AI for sales)
- Global market conditions
- State of the economy: Inflation, interest rates, etc.
- Legislation that affects your industry
- Geopolitics (Ex: War)
- Natural calamities
The bottom line? Account for what you can in your forecasts, and leave the rest to your team and Scratchpad!
2. What Are the 7 Types of Forecasting Methods?
Real-world sales forecasting is a complex mix of the following basic methods:
- Historical forecasting: Looking at historical sales data from a similar time period in the past and projecting similar results in the corresponding period in the future.
- Intuitive sales forecasting: With intuitive forecasting, you simply ask reps to estimate how long it’ll take them to close their ongoing leads and forecast accordingly.
- Opportunity stage forecasting: This sales forecasting method assumes that the closer a lead is to closing, the better its likelihood of conversion. A sum total of most likely to convert deals makes up the opportunity forecast.
- Length of sales cycle forecasting: This forecasting method involves benchmarking all current leads to your team’s average sales cycle length. The deals closest to the benchmark are considered most likely to convert.
- Pipeline forecasting: Forecasting sales by calculating the probability of conversion for each account individually — based on factors such as the rep’s win rate, distance from closing, cycle length, etc.
- Multivariable sales forecasting: This forecasting method uses a complex set of factors, such as buyer persona, industry benchmarks, individual rep performance, average sales cycle, etc., to come up with the forecast.
- Consumption-based forecasting: Consumption-based forecasting is the ability to anticipate sales and revenue based on actual consumption patterns and customer behaviors.
These methods leverage predictive analysis, which uses historical sales data and statistical models to predict future sales. Most CRMs and sales forecasting software use a combination of all these approaches to generate projections.
3. What Are the Latest Trends in Sales Forecasting?
In early 2023, Scratchpad interacted with 200+ sales and revenue operations (RevOps) leaders from around the world to understand their biggest challenges and sales outlook. One of the major findings was that there’s been a sudden shift from a ‘growth-at-all-costs’ mindset to an emphasis on sales process efficiency. The new focus is improving per-rep performance. And nailing sales forecasts is a critical component of achieving this aim.
Here are some highlights from our findings:
- Nearly 80% of sales leaders say that their forecasts are off by about 25% or more.
- 87% of respondents believed process compliance and getting buy-in from their reps is one of the biggest challenges in the way of accurate forecasts.
- Only 14% of these companies use a software solution for sales forecasting.
All of this points in the direction of an intuitive, easy-to-use sales forecasting aid that works for the whole team to generate inch-perfect sales forecasts.
In other words, Scratchpad!
Sales Forecasting Has Never Been Easier
Sales forecasting is undeniably one of the most valuable tools in a sales leader’s kit. If only it weren’t so complicated…We have great news. We fixed it. From lack of visibility at the leadership level to a lack of workflow functionality at the rep level.
All of this, and more, is just a click away with this powerful sales forecasting tool. Try it for free and experience the easiest, fastest, and most delightful way to create your sales forecast that you can confidently share with your board.
