One of the most important reports describing the current situation and development trend of the business is the sales forecast. It provides the best outlook on future sales and their temporal realization. A well compiled, realistic forecast provides guidelines for the other operative functions of the company: purchasing, production, storage, logistics, billing and cash flow.
Short or long term forecast?
Sales can be forecasted on short or long term. When sales are forecasted for long term, they can be approached from a market share point of view. This is a more comprehensive approach, where shares of the whole market or a segment can be calculated. However, a long-term sales forecast cannot be used as a basis for profit or cash flow forecast, since market shares, and especially their temporal realization, are too inaccurate on a short time span. This presentation focuses on short term forecasting, which is more important for day-to-day management.
Different forecast models
Empiric forecast is an operational model where the persons responsible for sales (usually the management) build a forecast based on experience and outlook on the future sales of the company. The basis usually consists of outlook received from salespersons and basic data that is modified to be more credible and realistic based on experience.
Sales pipeline is a tool best suited for project-based business, and it requires that a systematic process has been made. Up-to-date information, classified in a consistent way, is critical here.
Below is an example of a sales pipeline and classification made for project-based business:
Depending on the nature of the business and the sales process, there can be more or fewer sales levels than in the example above. Probability represents the average probability of a close date on the forecast period for the sales stage. When compiling the forecast, cases with high probability (above: ‘committed’ and ‘order’) are usually included in the calculation. These are included in the forecast with their weighted probability.
If for example, the company has two sales opportunities included in the forecast calculation, these amount to weighed sales of 260K € and sales margin of 94K € for the forecast.
If the close date contains, based on sales history, uncertainties, sales possibilities can be further multiplied by a suitable safety factor. Realistic coefficients are obtained by analyzing the sales history of the company and by practicing the forecasting process.
Time series and trend methods
When long-term history information on sales is available, time series and trend methods can be used for forecasting. These include for example rolling average and weighed rolling average, and different exponential smoothing models. Regression models can also be used in forecasts, when the goal is to model/forecast for example the effect of price and marketing investment on total sales.
Other forecast methods include for example the Delphi method, where a nominated coordinator collects and combines the forecast made by several persons into a package, which is then sent for comments by the same group several times, until a consensus outlook is achieved.
One good method for forecasting total sales is to measure the average hit-rate, for example 30 leads = 1 sale, or 20 % of offers lead to a sale. Calculation measures such as these give a rough estimate on the total future sales, when the classified sales opportunities are systematically added together (for example tender base).
No single method is necessarily the best on its own. The method best suited for the business of the company should be selected. Also, using two methods in parallel, for example a forecast based on sales pipeline, confirmed using time series or trend method, is often an excellent combination.
Factors affecting the forecast
Many internal and external factors affect the compiling of a realistic sales forecast.
- Availability of goods and raw materials
- Products in stock
- Production/delivery capacity
- Sales budget and goals
- Strategy: growth-oriented or progress by current volumes?
- Experience and background of the author(s) of the forecast
- Life span of the products and/or services offered
- Number of salespersons
- Marketing investments
- New products yes/no
- Customer types (one-time or continuous customer)
- New customers/lost customers
- Sales channels available, and increases or decreases in them
- Development outlook of the line of business: growing or shrinking?
- Seasonal changes
- Operations of competitors
- General mood of the economy (economic up- or downturn)
- Consumption patterns and their changes
- Effect of fashion
- Political factors, elections etc.
In order to make the final forecast as realistic as possible, three sales forecast scenarios should be constructed:
- Best case
- Base case
- Worst case
In the Best Case alternative, all positive expectations are fulfilled, leading to an ideal outcome. By deducting the wildest positive successes from it, the Base Case alternative is obtained, which usually ends up as the official forecast. In the Worst Case alternative, even some of the so called sure sales are deducted completely or included only partially. After constructing this alternative, small realism checks are usually made to the Base Case. Scenario building helps to increase the accurary of forecasting.
Development of the forecasting process
The forecasting process should be constructed as a systematically progressing monthly operation. When a new forecast is being made, the previous forecast and comparison with the actual outturn is used for reference. The differences are systematically analyzed, which means that after ca. 6 months of work the forecast starts to be quite accurate. The experience and expertise of the forecasters increase, and the success increases their motivation.
A well-made and realistic sales forecast provides management with the tools to react in time to future events. If the forecast seems negative, alternatives are usually either to strongly increase investments in sales resources, marketing investments and campaigns, or to decrease the overall resources of the company to a level corresponding to demand. Correspondingly, in a positive situation the focus is on ensuring adequate production capacity, strengthening the order-delivery chain and obtaining the necessary resource base (personnel and financing)
Sales forecast and sales margin forecast form the base of all other forecasting. When the order-delivery organization of the company receives a sales forecast, it can provide its own forecast for delivery, which then provides a realistic base for the future turnover and profit forecast.
Revise Oy helps to build a systematic forecasting process based on the business needs of the customer company, together with the associated professional tools. These enable integrating realistic forecasting as a part of normal and regular operations and management system. Please contact us for an offer.