For a business of any size, the sales function delivers a huge part of the revenue. Forecasting sales is fundamental to your business framework and will enable you to make better decisions about revenue goals, budgeting, and cash flow management.
Sales forecasting is estimating future revenue by approximating the number of units (of product or a service) that will be sold in a given period. The period can be a month, a quarter, or a year.
Having a sales forecast is essential to multiple functions of your company. Finance relies on the forecast to allocate budgets and estimate revenues. Production, operations and supply chains use the forecast to plan their operational cycles or predict the resourcing or inventory required. For privately held companies, investors, and the board are comfortable when the actual sales are close to the forecast. For publicly traded companies, an accurate forecast means better market credibility.
How to forecast sales?
Various functions of the company play a role in forecasting sales: Sales, finance, marketing, Operations. You will require inputs from all these different branches to have an accurate estimation of your startup’s projected sales. There are two ways to forecast sales – top-down and bottom-up.
Bottom-up forecasts project the units a company will sell, usually based on capacity and reasonable growth trajectory, and then multiplies that number by the price per unit. Conversely, the top-down method assesses the total size of the market and determines how much of it is accessible to the business. Your finance, marketing, and manufacturing team – all play an important role in this determination.
Both methods are integral to sales forecasting. It would be advisable to run your numbers through both the methods and then compare them to see how close you are to the target.
The 7 Sales Forecasting Mistakes
Guesswork in a business comes with costly implications. Especially for a startup, the clearer your goals, plan of action, and market readiness are, the higher the chances of hitting the sales target. A vast difference between the forecast and actual demand can negatively affect your resource and inventory planning, budget, and cash flow. You would be well-advised to avoid these errors when forecasting your sales:
#1 Acting on gut feeling
Do you have a hunch that product A is going to sell more than product B? Well, if you’re lucky, you may be right. But unfortunately, the business world doesn’t work on best guesses or an inkling in your stomach. Even if some of your forecasting decisions may be based on unknown factors, you could ensure that your forecast is realistically backed by some data. This will ensure that your actual demand is close to the target and not that far off.
#2 Ignoring historical data
Many startups might not have any historical data to compare. But getting an estimate of the market size you can capture and how other competitors in your space have performed will help develop a better estimate. This is the data that will give you a baseline to calculate your sales accurately.
#3 Not being flexible
Observing buying behaviors and keeping in mind current events and market conditions is the next step after gathering the essential historical data. Sales data is never stagnant, it fluctuates – with seasonality, with production cycles, and so on. If there are unprecedented circumstances, like a break in the manufacturing chain for example, that needs to be considered.
#4 Not updating forecasts frequently
Your sales forecast can easily become outdated because sales conditions are changing. Not calibrating and updating your forecast numbers regularly would be a grave error. It is important to be flexible, it’s even more important to take the flexibility to the numbers. It’s always smart to relook at the numbers as the forecast meets the actual to keep your estimations real-time including new trends, insights, and predictive analysis.
#5 Ignoring sales patterns
Your salespeople and your distribution channels are your ears to the ground. They will have an insight into your customer’s buying behaviors. Not considering their feedback isn’t something feasible while estimating sales.
#6 Treating a forecast like a promise
Always keep in mind you are working towards a ‘forecast’ and not a target that is written in stone. Treating the forecast as a guarantee, internally and to investors, would be detrimental. Even with data-driven analysis, the market has an ebb and flow that may affect the forecast. A sales forecast is a guideline for your business plan and is not an absolute.
#7 Relying on limited or conflicting data
To develop a forecast, you must use empirical data. Multiple spreadsheets, an array of data points might create a confusing situation. This can be a good opportunity to collaborate with various functions in the business and clarify any discrepancies that may arise. A wise idea would be employing the use of an ERP system (like NetSuite) to make sure all your business functions are aligned and there are little odds of manual errors, data discrepancies, or wastage of time and resources.
No forecast can be full-proof or 100% accurate, but avoiding these mistakes paves a way towards a more sustainable sales goal and closes the gap between estimates and reality.
Tips for a successful sales forecast
While avoiding errors is critical, there are ways to further improve the accuracy of your sales. Squeeze more value when you develop your forecast with the following tips:
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Know what your realistic goals are
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Use a consistent forecasting model
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Include exceptions in your forecast
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Keep it simple with a sales management or an ERP system
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Define your key sales and marketing metrics
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Schedule a periodic meeting to collaborate with business functions and review the forecast
Sales forecasting seems like an uphill challenge with too many variables. But it is an essential part of the larger sales management objectives. If you want to employ an ERP, our team at Rooled can help set up an organization-wide system, like NetSuite, to ensure your data is real-time and precise.