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.
Why is sales forecasting important?
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.
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