The Importance of Sales Forecasting: A Guide for Business Success

Sales forecasting is one of the smartest choices that you can make to ensure business success.

Why?

If you don’t want to be one of the 23% of first-year businesses that will fail this year, you need to make smarter, data-backed decisions. An accurate sales projection will help you plan for the future – good or bad – and strengthen your company in the process.

Owners or managers who haven’t taken advantage of advanced sales forecasting should reconsider.

If you’re not integrating sales and revenue forecasting, you’re missing out on the following benefits:

1. Predict Future Revenue

An obvious benefit of forecasting is that you can predict your future revenue. If you know what your sales will be, you can then react to market changes. For example, you may find out that, based on current market conditions, one of the following occurs:

• Sales remain flat, meaning that it may be worth investing more money into marketing or other growth opportunities than the ones that you’re pursuing right now.
• Sales decline, which may impact your cash flow and lead to strategic changes that must be made, such as securing finances or laying off workers.
• Sales increase, which will allow you to allot more money for growth opportunities.

If you’re able to predict your future sales, it’s an asset for your business that ties right into the next point on our list.

2. Smarter, Data-Backed Decisions

Data-driven insights and decisions are something that they’re teaching in universities because it’s the future of business. We live in a time of big data and the ability to collect and analyze more data than we have been able to at any other time in history.

A sales prediction goes beyond just the final revenue that you may make for a month, quarter or any forecasting period that you choose.

You can use the data to:

• Identify products or services that are costing more money to sell than they are bringing in revenue. You can opt to eliminate these offers to save more money and reduce the impact of the sales decline.
• Learn which products or services are expected to underperform and either market them more or decide to phase them out of your offerings completely.
• Understand shifts in consumer data so that you can adjust your focus to high-profit areas.

If you “trust your gut,” which many business leaders do, you can make decisions that have a negative impact on your business. Poor decision-making can have a lifetime impact on your operations and cause you to lose a competitive advantage in the process.

However, if you decide to use data to justify your decision-making, you’ll be making decisions based more on facts and current market conditions.

3. Better Manage Your Resources

Your business doesn’t have unlimited resources. Every business, even Google, Apple and NVIDIA have limited resources. If you can manage your resources properly, it will strengthen your company's finances and stability.

For example, let’s assume that sales for one product that you manufacture are expected to dip 30% next quarter, you can opt to:

• Avoid purchasing too much inventory for that product so that you don’t tie up your free cash flow.
• Transfer employees to another division or begin training them to work in other areas of the company.
• Reallocate your marketing budget to focus more of your funds on items that are expected to sell better during the forecast period.

When you have a forecast to work off of, you can keep your company functioning better and improve sales in other areas. If you make strategic changes based on a poor or better-than-expected forecast, it will only benefit your company.

4. Project and Plan for Growth

Forecasts that show rapid growth can help you avoid unhappy customers and missed sales opportunities, too. If sales are expected to rise 40%, you can then begin to hire new workers, invest in new opportunities and manage your risk better.

Growth often stales for companies that grow too fast because they cannot keep up with the pace of growth.

All of a sudden, orders rise and you’re ill-equipped to offer:

• Customer service
• Timely product or service delivery
• Etc.

Accurate forecasts allow you to plan for the future and even use variables and scenarios to better understand what happens if something else happens. For example, if you raise prices by 10%, what happens if sales also increase or decrease by this amount?

You can create other forecasts to better understand what happens if you hire a new employee or invest in a new product or service.

5. Adjust and Improve Your Goals

Businesses must change and adjust their approach because consumer and industry demands evolve over time. Your goals must also be adjusted and improved so that you can keep hitting your KPIs.

Leaders who opt to use sales data for their company goals should:

• Set realistic goals that their team can achieve.
• Align your objectives and resources
• Judge business performance

Sales teams that have quotas to meet can be expanded, scaled back or trained further to help with sales, too.

Improving your goal-setting and supporting them is possible with your forecasted sales.

6. Better Budgeting

Your budgeting can be improved with your sales forecasting. It's possible to understand:

• Where to cut back on expenses
• Where to allot the business’ money
• Where to invest your money

Many businesses are over budget or do not run a LEAN operation, causing them to spend more money than necessary on unnecessary expenses. Forecasting can often lead to budget overhauls, which are always good to conduct.

One of the worst mistakes that business leaders can make is not using the data in their sales forecast to make data-backed decisions.

As the saying goes, “The numbers don’t lie.”

Methods of Sales Forecasting

Forecasts can be created using multiple methods, and the most common are:

1. Trend analysis: A trend analysis forecast is one that analyzes your past data to uncover patterns that show seasonality and other variables that will impact your sales.
2. Regression analysis: A regression analysis uses your past performance to forecast what will happen if strategies don’t change. For example, if sales have been down 20% for the past four quarters in a row, regression analysis will use this data.
3. Casual analysis: A casual analysis will assess and predict the market and how it impacts your sales.
4. Time series analysis: A time series will pull data at intervals to better understand and track changes. You can use this data to predict cycles and trends and uncover any irregularities in your data.

You'll want to work with an accountant or forecasting tool to predict what your sales may be in the future and use the data to your advantage.

Key Components of a Sales Forecast

If you want your sales forecast to be accurate, you must know the key components that forecasts use. You'll need to have:

• Historical data
• Pipeline information
• Market information
• Previous growth markers
• Forecast period date
• Sales rep opinions
• Current sales trends

You need base data to help you understand what your sales may be. If you’re a new startup with no data, your forecast will be based on the current market conditions, market size and other information.

Importance of Accurate Data in Sales Forecasting

Any forecast that you make is just that – a forecast. You can be the world’s largest business, and your forecast is very unlikely to be 100% accurate because sales are never guaranteed.

One thing that is in your control and will help you create forecasts that are more accurate is the data that you feed it.

You need to have accounting work to verify that all of the data that is used in the forecast is 100% accurate.

If you don’t have accurate data, you’re setting your projection up for failure because it will not be accurate from the start.

Businesses can operate without a sales forecast, but if you have one available, it’s easy to begin implementing it into your company’s decision-making and workflow. During your quarterly meeting, you’ll be able to:

• Review the forecast
• Discuss the forecast with the sales team
• Make integral decisions based on the forecast

Your forecast should be a tool for making better decisions and provide a roadmap to the financial decisions that you make. If you use a sales forecast along with your other financial statements, they’ll provide the data necessary to run your business with confidence.

Sales Forecasting Tools and Software

Manual sales forecasting is tedious and resource-intensive. If you run forecasts by hand, you risk:

• Error
• Inaccuracies
• Slow forecast reports

If your reports come in slowly, the data that you use may be too old for you to react to accurately.

Tools like Cash Flow Frog allow you to take the hard work out of creating forecasts by allowing you to connect data points together using APIs. You can connect all of your bank accounts and databases to better forecast sales with no manual data entry errors to concern yourself with.

Automating your sales forecasts offers the benefit of a more effective and efficient forecast that can be created at any duration you wish:

• Daily
• Weekly
• Bi-weekly
• Monthly
• Quarterly
• Every six months
• Annually
• Etc.

Using forecasting software or a sales forecasting tool eliminates the need for forecasting formulas to be added to your forecast. Rapid forecasts are changing the way that companies of all sizes, from startups to enterprises, manage finances and decisions.

Even when using state-of-the-art software, you want to adhere to the best practices that we’re going to outline in the section below.

Best Practices in Sales Forecasting

Sales forecasting can only benefit your business if you follow the best practices to ensure they’re accurate and reliable.

Here are some of the most important best practices to follow.

Ensure Your Data is Clean

Your forecasts will only be as accurate as your data. But ensuring your data is complete and accurate can be challenging for a number of reasons:

• Information on deals or sales gets scattered across various online and offline places
• Teams forget to update opportunities or only do so partially

Make sure that you have systems and processes in place to ensure your data is clean.

Account for Both Internal and External Factors

There are several internal and external factors that can affect your sales forecasts. These factors should be taken into account when creating your forecasts.

These include:

• Seasonality
• Economic conditions
• Legislative changes
• Market changes
• Hiring and layoffs

Use Sales Forecasting Software

Manual forecasting methods are time-consuming and error-prone. The software can automate the process, saving your team time and ensuring that your forecasts are always accurate.

It’s not enough to simply create a sales forecast. Your forecasts should be put to good use to support decision-making and improve financial planning.

Building a Financial Roadmap with Sales Forecasts

Forecasts are crucial to building a financial roadmap. You can use the data in your forecasts to:

• Make smarter business decisions. Scenario forecasting, for example, can help you predict the outcome of various decisions, such as hiring new staff or launching a new product.
• Make data-backed investment decisions. Forecasting can help you identify where and when to invest.
• Plan for the future. Whether you need to invest in new equipment or expand into a new market, forecasting can help you plan for the future and achieve your goals.

You can also use sales forecasts for cash flow management.

Navigating Cash Flow Management Using Sales Forecasting

Forecasting can help you navigate cash flow management with ease. It can alert you when:

• You’re facing a potential cash gap, so you can take action right away to get your business back on track.
• You’re facing a potential cash surplus, so you can invest your cash and grow your business.

Sales forecasts are the cornerstone of cash flow management.

Sales forecasting plays an important role in helping businesses achieve their goals and improve their performance. Following the best practices, using the appropriate forecasting methods and integrating forecasting into your financial planning will help you maximize the advantages of this practice.