Importance of sales forecasting
Why is forecasting so important? Sales forecasting protects sales teams and helps businesses prepare for the best — or the worst. As an art and a science, it’s the practice of learning as much as an organization can about what their future revenue will be, including who will make purchases, when, of what, and how much they’ll buy.
Read more below.
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The importance of sales forecasting
Why is forecasting so important?
Sales forecasting protects sales teams and helps businesses prepare for the best — or the worst. As an art and a science, it’s the practice of learning as much as an organization can about what their future revenue will be, including who will make purchases, when, of what, and how much they’ll buy.
And that makes sense. The urge to make predictions is one of humanity’s oldest survival instincts. For instance, when we see unsafe behavior, we’re able to predict there might be an accident or injury. When someone who has been reliable in the past makes a promise, we predict that they will keep it. Based on these predictions, we take action, like trying to intervene in risky behavior, or operating with confidence a friend will keep their word.
But because these predictions are all rooted in lessons of past experience, they aren’t completely reliable. The child deciding to skateboard blindfolded might not fall and get hurt. A friend might not be able to keep their promise. As much as people love to make — and rely on — forecasts, everyone has experienced a time when they don’t come true.
This is why one of the historic objectives of sales forecasting has been simple accuracy. Providing a reliable prediction of sales in the coming weeks and months lets leadership make the best decisions for the future of the business, to say nothing of the importance of forecasting in operations management. Sales forecasts are also relied on for hiring decisions, inventory management, marketing budgets, and more. But much like the predictions and assumptions made by individuals, the historic methods used for sales forecasting can give a hugely different portrait of the future than what reality has in store.
Fortunately, today’s technology has made it possible for sales teams to leave behind inaccurate forecasting methods and focus on what really works. Let’s dive deeper into the importance of sales forecasting, some inadequate forecasting methods that teams have been forced to settle for, and the technology today that is finally putting sales forecasting in the central, empowering role it deserves.
What are the major benefits of forecasting?
To outsiders, the discipline of sales forecasting might seem like a purely “sales” endeavor. And while forecasting plays a clear role in helping sales managers keep their sellers accountable, it also touches on every level of a business when done right. Whether or not sales teams make projections a reality is a whole topic for discussion in and of itself, but when thinking about why that matters, it’s important to go beyond seller quotas and accountability.
Let’s take a look at these major benefits based on the many functions of sales forecasting that can be served within an organization:
Cash flow management
Sales forecasting gives businesses insight into short-term and long-term costs and revenue. This reveals what the cost will be of doing business, whether providing goods or services. On a basic level, this means predicting how much money will overall be coming in through both new business and upselling existing customers.
It also highlights the role of financing and capital acquisition in a business’s broader financial strategy. If a sales forecast accurately projects a shortfall next quarter, the business is better prepared to weather that storm with advanced warning. They may choose to pursue a new line of credit, or to cut executive bonuses to make up for a dip in sales. The point is, with an idea of what’s coming, the company has options.
Without a sales forecast to look to, sellers could find themselves closing deals that operations can’t serve. With a prediction of which revenue lines will drive revenue in the future, operations managers can better prepare to meet demand accordingly. This touches on everything from hiring personnel, to training, inventory purchasing, departmental budgets, and more.
When marketing and sales are aligned, it’s like catching lightning in a bottle. Marketing understands the questions, concerns, and objections salespeople observe from among their market. Sales understands how marketing is establishing a brand’s value and informing leads before they make contact, helping them to provide a more customized and positive customer experience. Together, they make each other stronger when unified under a direction that comes as a result of a strong sales forecast.
Specifically, marketing managers who have a grasp on what demand could look like in the future will be better prepared to produce marketing materials around that demand. They’ll focus on the types of customers that are projected to buy the most, and they’ll be able to prepare things like special sales, PR campaigns, and other marketing efforts that seize real opportunities in the marketplace.
Sales forecasting has the clearest connection to the people working in sales. For sellers and sales managers alike, forecasts have long served as a sort of target generator; based on a sales forecast, a manager may give each seller a portion of the total to be responsible for closing. And while this is historically how sales forecasting has functioned, there’s a better way forward.
Today, modern sales teams are using predictive forecasting tools like Collective[i] as a measuring tool rather than a goal. With this approach at work, sales forecasting enables sales teams to take early correction when barriers arise to achieving goals, whether that’s new approaches to convert existing prospects or pivoting to gain new leads.
What are the advantages of forecasting based on different approaches?
The answer varies radically based on the type of forecasting you are doing. Research shows that nearly 80% of organizations miss their sales forecasts by at least 10%. On the other hand, companies with precise forecasts grow 13-14% more annually than those without quality sales forecasts.
This is partially because different organizations utilize different forecasting methods. These could be qualitative, quantitative, or a mix of both. Check out this importance of forecasting pdf for more information about where human judgment (qualitative) and statistical analysis (quantitative) align and can complement one another.
What are the benefits of forecasting by methodology? Here we present sales forecasting approaches along the spectrum of modernity: qualitative, quantitative, and AI-enabled.
Benefits of qualitative sales forecasting:
Based in human judgment, qualitative forecasting uses the opinions and experience of the sales team, executives, and outside experts to project sales for the coming weeks, months, or quarters. Compared to quantitative methods, qualitative forecasting allows for greater prediction of changing sales patterns or shifts in customer behavior.
Qualitative forecasting also allows for outside research and non-historic data to impact and improve the forecast. This includes, but is not limited to:
- The opinions and instincts of individual sellers as related to the likelihood of any one prospect to close, and when
- Surveys of current customers to better understand their decisions around purchasing, including any future plans to purchase
- Input from company executives on what they’re seeing in the market, and how they’re reacting from an operations perspective
Working with these factors in preparing any sales forecast adds a level of context to the data. Without leveraging the informed opinions of sellers and buyers alike, companies run the risk of becoming too focused on historical data.
Benefits of quantitative sales forecasting
Based in analysis, quantitative forecasting uses historical and market data to reveal patterns and forecast sales revenue for the coming weeks, months, or quarters. Compared to qualitative methods, quantitative forecasting allows for objective interpretation of data without bias.
Quantitative forecasting also reveals patterns or buying cycles that have historically impacted revenue. There are many quantitative forecasting factors that can be considered to improve a forecast’s overall relevance, including:
- Market surveys to understand potential customers’ intent to purchase
- Macroeconomic indicators like shifts in the prices of commodities like oil, or changes in the stock market
- Market analysis of the impact of a competitor offering a new solution
- Seasonality in historic sales data
Again, it’s important to think of quantitative forecasting as being complementary to qualitative forecasting. Without hard data to ground sellers’ opinions, sales teams could fall victim to flimsy opinions about which deals have the most potential.
This is why AI-enabled sales forecasting offers the clearest benefits to sellers in any industry.
Benefits of AI-enabled sales forecasting
Learning from both individual experience and historical data, AI-enabled forecasting uses machine learning to generate sales forecasts that make the most of the insights of the past while also incorporating real-time data from the present. Compared to qualitative and quantitative methods, AI-enabled forecasting objectively analyzes and interprets data to share actionable insights that allow sales teams to do their best work.
AI-enabled sales forecasting is a prescriptive approach, where recommendations and forecasts are made based on the market and sales pipeline today, not the way sales outcomes were in the past.
Former GE executive Ian Wilson once said about sales forecasting: “No amount of sophistication is going to allay the fact that all of your knowledge is about the past, and all your decisions are about the future.” But AI-enabled sales forecasting does allay this fact — by incorporating the present in real-time.
The benefits of prescriptive sales forecasting
Prescriptive sales forecasting is an innovation that allows the sales forecast to be properly-oriented as a tool and resource for the sales team, not a prediction that has to be made real at all costs. These reports are updated on a daily basis, keeping all stakeholders informed of the current sales projections. But these projections aren’t just based on the current information in the CRM or the reports from the sales team. Artificial intelligence leverages market insights and even makes projections based on current events to provide a forecast that incorporates both analysis and unbiased opinion.
Additionally, machine learning in a prescriptive sales tool means the forecast goes beyond a simple prediction of how many deals in the pipeline will close. Non-private third-party data can also be integrated to let sales people know more information about the prospects in the pipeline, the average buyer’s journey that customers go through, and who else in their network might be able to help them close any given deal. All this adds up to a sales forecast that also includes support prioritizing the highest-impact steps a sales person can take today to improve the forecast.
Prescriptive forecasting allows teams to get all the operational and management benefits that come with a traditional sales forecast. But unlike more traditional forecasts, the reports provided by an prescriptive forecasting tool take the present into account and provide actionable advice for the sales team to be in control of the future. More than any other option on the market, this type of sales forecasting lets teams stop obsessing about the accuracy of recent guesswork, and better-spend their energy focusing on proactive steps to grow revenue and achieve more sales.
Use Collective[i] in the present and improve sales in the future
What is the importance of sales forecasting? Only the importance of the survival of your business. Without a sales forecast, business leaders and decision-makers cannot make informed decisions about cash flow, expenses, budgets, or operations. But while the sales forecast is essential, in many cases it is also essentially flawed by assumptions, emotions, or an over-reliance on historical data that doesn’t take into account what is different this year versus last year.
Collective[i] is a tool developed to go beyond these limits and put the power back in the hands of sales professionals. Today’s sales activities are bigger than any individual organization. Taking into account the actions of sellers, the reactions of buyers, and the opportunities inherent in an individuals’ network, the forecasts provided by Collective[i] go beyond predictions to create empowerment.
Explore our product today to learn how it could make a difference for your team.