07/03/2024 | News release | Archived content
Learn how to create accurate sales forecasts for your sales team or business.
Use this free guide and Excel template to start closing more deals. Easily calculate drop-off rates and learn how to increase conversion and close rates.
Get it NowUpdated: 07/03/24
Published: 07/03/24
The sales forecasting process plays a major role in a business's success. As the senior director of global growth at HubSpot, I know firsthand how important accurate forecasts are to ensure realistic growth projections, improve decision-making, and boost motivation.
In this guide, I'll walk you through how to forecast sales and which forecasting models are available. I've also talked with other experts to gain insights into data-driven sales forecasting and forecasting accuracy.
Ready? Let's dive into it.
Table of Contents
A sales forecast is a prediction of what sales will be for a set time in the future. The best sales forecasts are in-depth reports that include metrics for what a salesperson, team, or company will likely sell weekly, monthly, quarterly, or annually.
Most sales forecasts draw from historical sales data and take demand fluctuations into account. While these can be created manually, most firms use some type of sales forecasting software to help automate the task.
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The goal of sales forecasting is to provide you with information that you can use to make informed business decisions. Sales forecasts impact financial planning, sales targets, marketing strategies, and even staffing.
I've seen sales organizations without detailed forecasts, or with sloppy forecasts, file for bankruptcy when their cash flow predictions failed. Some had to lay off a huge chunk of their staff just to remain operational.
Let's go over some of the main benefits of a sales forecast:
While sales forecasting offers many benefits, it also comes with its own set of challenges, such as an inaccurate pipeline.
"It can be very difficult to forecast if deals in the pipeline do not have accurate ARRs assigned to them or if they are at the wrong stage," says Daniel Harding, director of Australian operations at MaxContactAustralia, a customer engagement software platform.
Other challenges include:
I've developed a set of sales forecasting best practices over the years. These best practices help me stay consistent and produce accurate forecasts for sales planning.
Implementing AI in sales forecasting can help your sales reps close more deals. AI gets a lot of negative press for bad art and poorly written text, but it's an effective sales forecasting tool. According to a HubSpot report, 85% of salespeople using AI reported that it makes their prospecting efforts more effective.
You can also use AI to analyze customer sentiment (how people feel about your brand) and incorporate this data into your forecasts.
You should review and update your forecast regularly to ensure it remains accurate. After all, things like market trends and economic conditions are subject to change. How frequently you do so depends on your industry, but we recommend reviewing your forecasts at least once every month.
Internal and external factors like policy changes and economic conditions can influence your forecasts. If you create a forecast in a vacuum without accounting for company policies and market conditions, the forecast will fail.
There's a common theme throughout sales forecasting methods: Data.
Byron Goodman, head of sales at marketing automation provider Customer.io agrees. "Always focus on the data. If you can't see the deals, take a look at historic trends to determine if a similar situation has occurred before."
It's worth noting that even the most lightweight forecasting options rely on knowing how many opportunities are in each rep's pipeline and the likelihood of the project closing. That's why we created our free Excel template.
It includes:
You can also automate the process with a free CRM from HubSpot. With it, you can track your actual and predicted revenue and automatically log every interaction (email, calls, and social media), making your ability to gauge the likelihood of a deal closing even more accurate.
Easily calculate drop-off rates and learn how to increase conversion and close rates.
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I mentioned the need to consider how internal and external factors can influence the accuracy of a sales forecast. Let's take a look into some of the most common factors that impact sales forecasting.
When reps leave your company voluntarily or are terminated, revenue will decrease unless you have a pipeline of potential hires. Conversely, a large increase in reps joining the company in a short time should increase your sales forecast after a reasonable training period.
Company policy changes also impact your forecast. For instance, if you introduce a policy where discounts end after the 15th of each month, you'll likely see a shift in higher close rates in the first two weeks of the month, followed by fewer sales than normal.
If your company enters a new territory, it can take time for the sales reps to get familiar with the area and build their pipelines. Likewise, if a rep moves to a different established territory it will take time to settle in. Your forecast should reflect an expected dip in closing rates to account for those changes.
Whatever the competition is doing will impact your win rate. For example, if they slash their prices, introduce a new product, or ramp up their marketing efforts, your reps may need to discount more aggressively or risk losing business.
If there are supply chain disruptions, raw material shortages, or even new discoveries of raw material, it affects everything from the bottom up. Market changes significantly impact your sales performance and should also be included in your forecasts.
Likewise, market changes for your customers also affect your bottom line. Tom Snyder, founder and managing partner of Funnel Clarity, a sales consulting and training company, says, "If there's a shock to the market your buyer is in, it will certainly affect how your prospect views a buying decision."
The state of the economy often has a large effect on your forecasts. Upswings and downturns both have impacts. Whether it's a recession, inflation, or bull market, it will change the spending power of your clients and their comfort level with investments.
New laws and mandates can either help or hurt your business. Sometimes, they create demand for your product, such as security software sales improving after a mandate for stronger customer data security. Likewise, new regulations for emissions controls could make prospects reluctant to buy equipment that may need modifications soon to be in compliance.
I've also seen how product changes can impact a business's sales forecasts. These changes could be rolling out a highly requested feature or removing a feature that doesn't live up to expectations. Your team members can leverage these changes to shorten their sales cycle and close more deals.
Some items have seasonal demands based on the nature of the product. Others might be in higher demand due to holidays or because your customers are more likely to be taking vacation at certain times of the year. Sales forecasts should account for seasonal swings in demand.
Guided by my sales forecasting best practices, I use the following steps when creating forecasts to ensure an accurate sales forecast.
The first thing you need to do is document your sales process. Think about it. If your team doesn't use the same stages, steps, and definitions, how will you be able to predict the likelihood of an opportunity closing and repeat the success? I set out guidelines for my team for how to determine what step of the sales funnel leads are in, including when they enter and exit the funnel.
Creating a documented sales process is explained in-depth in our guide.
Next, you'll need to set goals and quotas for individual sales reps and the team as a whole. This will give your team a definition of success and a baseline to make your forecasts.
You can use data from your CRM to set your quotas. Be sure to gather data on how your team performed weekly, monthly, quarterly, and annually to discover trends.
Investing in a CRM can go a long way in helping you predict future revenue growth accurately. That's because it gives you complete visibility into your pipeline. As Snyder says, "Momentum during a sales cycle is built by the buyers' actions, not the sellers' actions. Therefore, sales stages and forecasting milestones must be based on buyer actions."
A CRM system also allows sales managers to assess the performance of individual reps.
I recommend using one even if your business is new.
There are many CRMs in the market, but HubSpot CRM is my favorite. It allows sales managers to track sales activity in real time. And the best part? It's 100% free.
There are many sales forecasting methods available, and it's essential to choose one that aligns well with your business model. You'll need to consider things like the age of your business, your budget, size of your sales team, and the amount of available data before proceeding with a forecasting method.
I'm covering the six most popular sales forecasting methods a little further down to help you choose the best one for your business.
While understanding past sales data is critical for creating a viable sales forecast, I've found that other departments can also provide data you can incorporate into your sales forecasts. Working with other departments also promotes a collaborative work environment.
Collaborative work promotes buy-in, making reps more motivated to meet sales goals.
Goodman elaborates on cross-functional collaboration: "You can often get granular insight into your business's future performance by partnering with a team such as Revenue Ops."
Now, you can finally dig into previous sales forecasts and current data and compare to find discrepancies.
Ask yourself:
Regardless of your chosen sales forecasting method, keep your sales reps informed and communicate often. This is another good reason to invest in a CRM - it keeps your reps updated about every interaction with leads and with each other. After all, they are the closest to and most familiar with your prospects and overall sales performance as a company.
Gather regular feedback from your team about what's working and what's not. Hold your reps accountable for their performance against your sales quotas and sales forecasts.
Easily calculate drop-off rates and learn how to increase conversion and close rates.
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Not all sales forecasting methods are created equal. Here are the forecasting methods I've found to be most useful over the course of my career.
Opportunity stage forecasting is one of my favorite forecasting methods as it's easy to implement - you can predict the likelihood of a deal closing based on where the prospect is in the sales pipeline.
I recommend breaking down the pipeline into various stages (e.g., Qualify, Demo, and Quote). The further along a prospect is in the pipeline, the better your chances of closing the deal.
With this forecasting method, I've also been able to predict the value of an opportunity. Let's say the probability of closing a deal is 20%, and the deal is worth $1,000; the forecasted amount would be $200.
The downside to using this method is that it doesn't take into account how long a prospect has been at a particular stage. For example, a prospect that's been at the demo stage for a week will be treated the same as one that's been at the same stage for a month.
Pros
Cons
Best for: Businesses with busy sales pipelines.
Length of sales cycle forecasting is pretty straightforward; it looks at the age of opportunities to determine how likely a deal is to close.
In other words, your sales cycle length (how long a lead takes to convert into a customer) is what matters with this forecasting method. For example, if your sales cycle length is six months and an opportunity has been in the works for three months, there's a 50% chance the sales rep will seal the deal.
I like this method because of its objective - you won't have to rely on the rep's feedback or gut feeling to predict sales outcomes. However, to get the most accurate forecasts, you'll need to carefully track how and when leads enter your sales pipelines.
One more thing: ensure your CRM integrates with your marketing software and automatically logs interactions. Otherwise, your reps will spend a lot of time manually entering data, decreasing the chances that they'll take the time to do it.
Pros
Cons
Best for: Businesses that carefully monitor when and how prospects enter the sales pipeline.
As the name implies, this method uses intuition to predict future sales. And while it might be tempting to rely on a sales rep's instincts, I urge caution when doing so since it's prone to personal biases.
That being said, if you're a new business with little to no historical data, you might have to rely on this method.
Pros
Cons
Best for: New businesses or startups without past sales data.
I find that historical forecasting is one of the simplest ways to forecast sales, as it relies on past sales data to predict future sales. By using sales data from previous months, quarters, and years, you can make slight adjustments to predict how much you're likely to sell in the same periods in the future.
For example, let's say your business made $50,000 last October; you'd assume you'd make a similar amount this October.
While it's a straightforward way of forecasting future sales, it won't do you any good if your data is inaccurate. Furthermore, this forecasting method doesn't consider seasonality, and it assumes that buyer demand is constant.
Pros
Cons
Best for: Businesses with consistent buyer demand.
Unlike other forecasting methods I've covered, multivariable analysis incorporates multiple variables to forecast future sales. These include:
It's one of the most sophisticated and accurate forecasting methods available because of the variety of data used. However, that means you'll need detailed records and sales forecasting software to help you manage it.
Pros
Cons
Best for: Businesses with sufficient expertise and resources.
With this forecasting method, you launch a new product or service to a small segment of people to see how well it performs, then use that data to estimate its future sales to a larger audience.
Unfortunately, this method can be quite costly to implement, so if budget is a concern, I recommend implementing a different method, such as historical forecasting or intuitive forecasting. You should also keep in mind that not all markets are the same when using this forecasting method.
Pros
Cons
Best for: More established businesses launching new additions to product lines.
Sales forecasting is a powerful tool you can use to build a business that stands the test of time. Follow my best practices, take into account internal and external factors, and use the right forecasting method for you to get a more accurate sales forecast.
Editor's note: This post was originally written in July 2023 and has been updated for comprehensiveness.
This article was written by a human, but our team uses AI in our editorial process. Check out our full disclosure to learn more about how we use AI.