Why Is Sales Forecasting Important? | MethodData

Why Is Sales Forecasting Important?

Before we dive into all of the reasons why you need accurate sales forecasting for your business, let’s quickly address what sales forecasting is.

“A sales forecast predicts what a salesperson, team, or company will sell weekly, monthly, quarterly, or annually.”

It is almost impossible to forecast perfectly but even a forecast within 10% of your actual results can positively impact your business. As such, it should be performed consistently for every business, regardless of size.

5 Reasons You Need Accurate Sales Forecasting

1. To Predict And Plan For Demand Throughout The Year

An accurate sales forecast allows you to properly plan for impending sales. If you have developed an accurate understanding of how your business’ sales naturally increase and decrease over the year, you can plan by:

  • Keeping appropriate levels of stock
  • Hiring temporary staff
  • Spacing out projects that would otherwise preoccupy staff needed to support an increase in demand

Sample Scenario

Retail stores invest significant amounts of time developing accurate sales forecasts which allow them to better prepare for peaks in business. In retail, the holiday season typically influences a sharp increase in sales and to prepare for that stores ensure they have more stock than normal and they hire a seasonal workforce to support the demand.

If retail companies maintained the same level of stock and staff throughout the year, they would not be able to meet the demand of their customers which means lost business and negative customer perception which can impact future business as well. On the other hand, if a company maintained the same levels of stock and employees that they need during the holiday season all year long, they would have overspent more money than they could plan to recover even in their busy season.

2. To Make Wise Business Investments

Do you want to expand locations, invest in a new application or hire additional staff? These can all be great investments to grow your business if you have the funds to invest in them. Accurate sales forecasting allows you to predict the funds you have coming in against your anticipated costs. These forecasts allow you to understand when you will have the funds available to wisely invest in growth without sacrificing much needed capital for your day-to-day business expenses.

Sample Scenario

An organization forecasts significantly higher sales during the spring, summer and fall but, during the winter months, sales barely cover daily business costs. To prepare for this, the organization sets aside a percentage of funds throughout a portion of the year to cover anticipated costs later in the year.

If this organization did not forecast at monthly and yearly intervals, they could easily risk overspending in their high sales seasons and going into a deficit during the low season.

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3. To Quickly Identify And Mitigate Potential Problems

Consistent and accurate sales forecasting allows you to identify potential issues while you still have time to address them. By consistently reviewing your team’s pipeline you are likely to notice trends that are out of the norm. For instance, if your team is trending 40% lower than where they should be in sales at that point in the month you can start investigating what is causing this dip. Below are common factors that may positively or negatively affect your sales forecast:

  • Changes to the sales compensation plan
  • Changes to your marketing and sales lead process
  • Competitor promotions
  • Competition that goes out of business or new competition that enters the market
  • Changes to your product or service
  • Economic changes
  • New laws or mandates related to your business

Once you understand what is causing the decrease, you can then pivot your efforts to make up for the lost revenue in other areas. If you weren’t consistently reviewing your sales forecast, these issues could go undetected until later in the month or quarter when you don’t have sufficient time to correct.

Sample Scenario

A certification training company is two weeks into the month and is noticing a sales trend that is about 30% lower than what was anticipated. Leadership begins searching for a cause and learns that an existing mandate that required a specific training course they offer was updated and no longer requires that course. In response, they:

  • Updated their marketing and sales team about the change
  • Decreased marketing spend reserved for promoting the course that is no longer mandated
  • Increased marketing spend and initiatives around courses that are still required
  • Changed their sales qualification process to identify other relevant courses that are still mandated for their customers

The quick diagnosis of the problem affecting their sales forecast, allowed the company to rapidly change their direction. By taking action quickly, they are able to close the sales gap within a more acceptable deviation.

4. To Improve Your Sales Process

When you understand how things work, you can then identify ways to make them work better. This is true for sales forecasting. If you are consistently forecasting, you can begin to identify areas in the sales process that take longer than they should, have low conversion rates, etc. Once you understand these problems, you can dive into the current process around them and experiment with ways to make it better, knowing that a positive outcome would reduce those bottlenecks in your sales forecast.

Sample Scenario

A sales manager has been tracking their sales forecast and it is consistently within 8% of the total projected sales. However, he has noticed that only 30% of opportunities result in closed won sales. This number leads him to believe that his team is wasting the majority of their time on deals they are destined to lose and he would like to get them to a point where their efforts are resulting in more wins.

Based on this information, he begins delving deeper into the opportunities that are being opened and the point in the sales process they are being lost. He finds that his reps are opening a deal as soon as they are assigned a lead and they are being lost because they have not made contact. Based on this information, he creates a new step in the sales process that opportunities are only created once a lead has explicitly shown interest in their offering. By doing this, the number of opportunities decreased but the close rate increased significantly and his team saved a good deal of time by reducing the number of opportunities they have to add, update and close.

5. To Improve Company Morale

Probably one of the most positive aspects of accurate sales forecasting is the impact it can have on your team overall. We already discussed that an accurate understanding of your sales forecast leads to:

  • Better planning
  • Better business decisions
  • Better sales processes
  • Faster problem identification and mitigation

But these aspects also allow companies to provide accurate information to the entire organization and provide assurances employees can trust. On the flip side, if a company does not accurately forecast this can lead to:

  • Over promising on department budgets, raises, or other business investments
  • Unexpected project delays due to funding
  • Unexpected layoffs
  • Increased pressure to generate unrealistic revenue or meet unrealistic cost-savings goals

These things all negatively impact your employees’ morale and can lead to high turnover, job dissatisfaction, and low work output.

Sample Scenario

Company A consistently and accurately forecasts sales. As such they realized early on that economic and market changes were impacting their business and they were transparent with their team that these problems were identified, they were working to mitigate but there was a potential this could affect their year end bonuses. Employees were understandably upset but everyone did their part in the problem mitigation to turn sales around. As a result, the impact on sales was reduced and bonuses, though smaller than previous years, were still awarded.

Company B is in the same industry but they don’t consistently forecast. They did not identify the same changes as Company A and, as such, they did not make any changes to mitigate the problem. By the time the last month of the year started, they were seeing sharp decreases in revenue and they were scrambling to fix it. The pressure of needing more sales rippled throughout the entire organization and dissatisfaction mounted when they were told no bonuses would be given.

As you can see, though the situations were identical in many ways the insight and action fueled by consistent sales forecasting made the difference in the final outcome.

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