A Guide to Sales Forecasting and How it Impacts Your Business
There are few metrics more important to long-term success in retail and eCommerce than a sales forecast.
Whether you have an Amazon FBA Business, are looking to sell your Amazon FBA brand, or use another eCommerce platform, operating in the dark isn’t a feasible long-term strategy for retail businesses. Instead, you need to crunch the numbers, create a forecast, and adjust your strategies accordingly. The ability to make accurate forecasts and hit those numbers repeatedly lends you the tools to plan your budget vs forecast, and strategically invest your capital.
Today, we’ll delve further into the purpose, advantages, and methodologies of sales forecasting.
What is Sales Forecasting?
So what is sales forecasting? Sales forecasting is a method retailers use to anticipate future sales. By analyzing historical sales data and identifying ongoing trends, a business can extrapolate how much product will sell in the future.
The sales forecasting method shouldn’t be confused with inventory forecasting, financial forecasting, and budgets. While they share similar traits and calculations, they’re not the same thing.
- Inventory forecasting predicts future demand, thus allowing you to gauge how much stock you need to have on hand throughout the course of the year. With an accurate forecast, you can set reorder points that align with demand fluctuations. Your calculation must account for factors like lead times, cost variance, inventory perishability, and demand seasonality.
- Sales forecasting predicts how much of a product will sell on a weekly, monthly, quarterly, or annual basis. The information enables the sales team to set quotas and measure their progress throughout the sales cycle.
- Financial forecasting is a foundation for every business. So, what is financial forecasting? Unlike sales forecasting where it only predicts how much of a product will sell, financial forecasting covers all the company’s projected expenditures as well as sales forecasts. This will help the company to determine its profitability. It is also used to assess how a company is performing against its budget, discussed below.
- Budgets are in depth financial documents that demonstrate the financial position the leadership team is aiming to achieve, and often guides decision making during the timeframe of the budget. Typically, it will show the projected revenue, cash flow, and expenditures of the company. Financial forecasts often inform a company’s budget.
To create an accurate sales forecast, you need a wealth of historical sales data, a clearly documented sales process, clear goals and sales quotas, and technologies that can analyze past and present datasets.
Why Sales Forecasting Matters
Sales forecasting isn’t—or, at least it shouldn’t be—wish casting. That’s a recipe for disaster. Instead, it must be data-driven. As Paul Saffo notes in Harvard Business Review:
“The primary goal of forecasting is to identify the full range of possibilities, not a limited set of illusory certainties. Unlike a prediction, a forecast must have logic to it. That’s what lifts forecasting out of the dark realm of superstition. The forecaster must be able to articulate and defend that logic.”
Accurate sales forecasting serves as the cornerstone of any retail strategy. Done right, it can empower a business across various departments, providing myriad benefits, including:
- Driving sales teams – It’s hard to hit a target if you don’t know what or where it is. You can try to fire blindly, but the odds that you’ll miss the mark increase with each successive time period. The sales team needs an actionable and attainable sales quota that serves an incentive and objective purpose.
- Identifying issues – Companies can use an accurate sales forecast to gauge ongoing success or lack thereof. The sales forecast acts as an advanced warning for potentially unsatisfactory business performance. Falling short of your benchmarks indicates that something’s wrong, which gives you the opportunity to adjust and reorient before the worst can occur.
- Enabling growth – Accurate sales numbers allow you to plan budgets that optimize your cash flow and strategic investment. Research from the Aberdeen Group has found that companies that have accurate forecasts are 7-10% more likely to experience year-over-year sales growth and are twice as likely to be best-in-class within their field.
- Better understanding your target consumer – Accurate forecasting affords you insights into consumer behavior, thus enabling your teams to identify opportunities for cross-selling, up-selling, or retargeting.
Sales Forecasting Methodologies
What is forecasting in business? There isn’t a singular way to perform the sales forecasting process. Depending on your business, product, and market, you may need to use a specific method or an amalgamation of several. That said, there are four commonly used methods:
- Quantitative sales forecasting – This forecasting method uses past sales data to predict future sales. Many companies rely on a time-series sales forecasting model that can pick out trends in the data to extrapolate your future position according to the ongoing sales pipeline.
- Qualitative sales forecasting – This uses industry trends, knowledge, and experience in the field to make predictions. Naturally, a subjective forecasting method like this one shouldn’t ever be used completely on its own; instead, it’s an impactful way to supplement your quantitative data.
- Top-down sales forecasting – This looks at the total addressable market (TAM) and then estimates how much of the market share you’ll be able to corner. Typically, TAM models are far more speculative and require complex modeling and analysis.
- Bottom-up sales forecasting – This relies on the sales rep and teams to analyze their sales pipeline and sales activity to predict future sales or revenue.
Sales Forecasting—the Keystone to Long-Term Success
Forecasting isn’t an exact science—it’s educated guesswork. But the more accurate you can make it, the better off your business will be.
Because these models are so reliant on complicated data sets, it becomes incredibly difficult to do accurate sales forecasting without the assistance of the right tools. Here, having a predictive app, like Crystal, could make all the difference. With Crystal, you can create a range of forecasts that enable you to take an if-then approach.
Want to try it out? Sign up for Crystal today.
Sources:
Harvard Business Review. Six Rules for Effective Forecasting. https://hbr.org/2007/07/six-rules-for-effective-forecasting
