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The recommended ways of Sales forecasting
Being a small startup or a huge entity, Sales forecasting is always important to any type or size of the firm. It is key for any firm to have a forecast of what their future sales might look like. Whether they may increase or decrease due to various reasons. These reasons vary from evolving market trends that can either boost your sales or decrease them following what the people actually demand. These changes in sales are so volatile that they can literally happen in hours or minutes. An example would be the stock market. As prices of shares fluctuate, the demand for these shares increases or decreases so rapidly thus increasing the sales of these shares with much volatility.
However, Sales forecasting can be pretty difficult to calculate accurately. In order to understand all of this, let us first look at what sales forecasting actually is.
The term ‘Sales forecasting’ actually is the process of estimating future sales for a business. Estimating a figure for future sales is important to any business to make informed business decisions and predict short-term and long-term performance. Sales forecasting gives understanding of how a company should manage its workforce, cash flow, and resources. Moreover, helping a company allocate its internal resources effectively, predictive sales data is important for businesses when looking to acquire investment capital.
Now that we have thoroughly understood what sales forecasting is, Let us look at why estimating it can be a hassle. The limitations that may arise could be due to:
1. Lack of Sales history
Sales forecasts are based on what the company has been able to achieve in the past. Companies at an early stage do not have major revenue accounts to rely on. They may be expecting prompt growth, but predicting exactly what the growth rate might be is hard. Companies expecting high revenue growth also find it hard to perfectly forecast what sales might be without a track record to base forecasts on.
2. Difficulty forecasting the industry and competition
Industry situations and the competitive environment both affect a company’s sales ability. You must estimate how you believe the industry will grow in the next year and whether competition will become more strong. Both of these factors are in flux. New competitors could enter the market and devise their own strategies to try to take sales away from your firm. This state of constant change limits your capability to make sales forecasts you can depend on.
3. Living in spreadsheets
Every firm that faces difficulty with forecasting has desks and meeting tables covered in spreadsheets.
By their nature, spreadsheets will only ever reflect a snap in time – so by the time you consult them for your forecast, they are of no use. Spreadsheets tend to proliferate, producing many versions of the truth, with different people working from different numbers.
In short, spreadsheets consume time, inhibit collaboration and often create confusion instead of clarity. They keep the salespeople from doing what they do best and waste their time applying formulas. Give your sales team back the time so they can spend that in generating new leads or closing more deals.
4. Management obstinacy
The success of the sales forecasting process can be partial by the inflexibility of the company owner if you view the sales targets as fixed and not changeable. If major negative variances to forecast occur, some managers don’t adjust them but instead, try to force the sales staff to work harder. This can end in frustration and a decrease in sales staff morale because sales staff compensation is at least partially based on reaching the targets.
These might be only some limitations that might lead to inaccurate forecasting of sales. Once we have put that aside, let us look at the wide range of methods that can contribute to an accurate forecast of sales.
5. Past sales data
Under this way of sales forecasting, the past year sales of the firm are studied, and by making certain changes in the last year’s sales. This is done by adding or deducting a certain percentage to or from last year’s sales, the forecasts are made. This way is simple and easy to adopt. It is also the most widely used method. It is also a harmless method for companies engaged in more or less stable industries.
6. An opinion survey of the sales team
Under this way of sales forecasting, an opinion survey of the sales force is led. Based on the opinion survey, an approximation of the revenue of the firm is made. This is a very good way of sales forecasting because the salesmen has a good idea of the market conditions. Furthermore, it is inexpensive.
7. Survey of buyer’s intentions
Under this way of sales forecasting, first, a list of all potential or prospective buyers is drawn up. Then, a face to face interview with a selected group of potential buyers is conducted. On the basis of the interview, the buyers’ intentions are ascertained and an estimate of the sales of the products of the firm is made. This way is a practical method of sales forecasting.
8. Length of the sales cycle
Estimating by the length of your sales cycle is a quantitative method that helps you predict when a deal is likely to close. Rather than analyzing success rates based on stage, this method makes assessments based on the age of the deal. It involves your team to crunch how long your average sales cycle is.
The basic formula for the average sales cycle is Total # of Days to Close Deals / # of Closed Deals.
9. Usage of products analysis
Under this way, a firm takes on a census of a number of products or closely related brands already in use in the market, and based on such a census, makes the sales forecast for its own products. This way is based on two assumptions. First, it assumes that the future market for a product will vary in direct proportion to the quantity already in use. Secondly, it assumes that the present customer of the product of concern will continue to use the same in the future.
The methods mentioned above are widely used around the world by many different firms to forecast their respective sales. These methods are not the only methods out there to forecast sales but are most commonly used. A clear distinction as to which method is the most recommendable is not possible. It all depends upon the firm, the market they operate in and their personal preference!
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