Sales Forecasting – Art and Science
The sales forecast is one of the most important factor in setting any business plan. Despite this, the sales forecast is often set with much less rigor than many other elements of the business plan that are far less important. It is time to revisit this and look at the art and science behind a good forecast.
Sales are essential to business, not only to derive revenue, but also because the sales mix directly impacts on the nature of the work and resources required. Forecasting sales is not easy. Many people don’t even attempt it. Indeed, many organisations skip the process entirely and just jump straight to setting sales budgets. The two most common ways of setting sales budgets are:
- Add a percentage to last year’s sales figure
- Set it the revenue required to satisfy the organisations ambitions
The first method is more common in established businesses and markets, where it might be reasonable to assume the status quo. However, in a rapidly changing world, the status quo is a dangerous thing to be building a business plan on.
The second method is often no more than hope and often triggers the sales team to start looking for work elsewhere. This is because this method usually results in targets being delegated to the sales team along with bonus plans that they know are unachievable.
The best way to set a sales forecast is to base it on customer behavior. This is because the best indicator of future customer behavior is past customer behavior; and the best predictor of new customers are current customers. However, this requires knowing your individual customers behavior and having the tools to forecast them individually and collectively into the future. It is this in-depth customer knowledge that has underpinned the success of companies like Amazon, Google, and the big banks. With products like Insiightful Sales+ (insert link) this capability is now available to all businesses. However, even without these tools it is possible to do establish a realistic forecast.
Creating a realistic forecast
In establishing a realistic sales forecast it is important to understand your sales pipeline. Too often the focus of the pipeline is on the sales persons activity and results, when forecasting it is important to have the focus on the customers activity and orders.
Something that we see in a wide variety of businesses is that 80% of the revenue comes from the top 20% of customers. For these businesses knowing these customers well enough to predict their future buying patterns essential. Ideally you should be able to predict the future buying patterns of all your customers, and by inference, any new customers. There are six behavioral patterns to look for:
- Unchanged
- Buy more
- Buy less
- Buy different mix
- Stop buying
- Start buying
The impact of these changes then needs to be quantified, and the net impact rolled up, consolidated. If there is a pattern identified, e.g. a customer segment are all behaving the same way, then this should be inferred onto prospective customers in the same segment.
Getting the timing right
Unless you are selling Fast Moving Consumer Goods (FMCG), then the other key factor you need to consider is the time taken for current and potential customers to move through the buyer’s journey. The basic principal of this is that each stage of the buyer’s journey takes time, so if you are launching a new product tomorrow then even if it is very well received by your customers, it could still be months before you see any income from it. This is particularly true of business to business deals, where the following steps are not uncommon:
- Enquiry
- Proposal or quote
- Discussion/negotiation
- Deal/contracts
- Delivery
- Payment
Allow four weeks for each stage, and from enquiry to payment is six months. This should also be taken into account when incorporating your sales forecast into your business plan (click here to download interactive forecasting tool)
Making adjustments
Having established an initial forecast based on the status quo, the next step is to consider what sales and marketing activities would be required to improve the result and to create an alternate forecast that includes a cost benefit of the additional sales and marketing activity.
Conclusion
Sales forecasting is a mix of art and science, but just because it is hard does not mean that it should not be attempted. The process of creating a realistic forecast can also uncover some early indicators of potential change that significantly alter the priorities of the business.