When it comes to planning out the future of your business, the most reliable source for prediction is a look at past sales. Quantitative sales forecasting is one of the most objective ways that you can predict where your business will be in the near future and beyond.
Although no method is a magical crystal ball that will be 100% accurate, sales forecasting allows you to get a general idea of where your business is headed. It does not take complicated in-depth statistical analysis to get an overall look into your sales department and see the direction that it is heading. Rather, using simple sales forecasting methods can let you know how your sales team is doing and what may need to be adjusted.
But what is the best method of sales forecasting? In this article, we’ll break down what quantitative sales forecasting is, why you need it, the top methods you can apply today and examples of a sales forecasting template you can use to get started.
What Is Sales Forecasting?
The valuable data from sales forecasting arms companies with the ability to make informed business decisions, helping drive all facets of the company from sales efforts to operations and everything in between. Sales forecasting provides a solid foundation for almost all other planning and budgeting activities in a business.
Sales forecasting is typically split into two categories: quantitative and qualitative. Although they both have the same goal of predicting future sales and gaining deeper insight, they use two very different methods. Here is a quick look at each one:
The Quantitative Sales Forecasting Method
Quantitative sales forecasting is a type of sales forecasting that is strictly objective and focuses on hard numerical sales data collected over the past months, and even years. This data is used to calculate future sales, revenue, and expenses. Quantitative methods are more focused on the numbers to give the most accurate prediction over any other variable.
Quantitative forecasting allows companies to easily pinpoint trends that have been occurring previously and may continue to occur. These trends are then used to derive formulas that will help you forecast future sales. With quantitative methods, the sales forecasts that are created have clear data to support them.
Thus, these types of forecasting methods are highly dependent on a clean and accurate data set of previous sales numbers, analysis of historic performance, and complete visibility into your sales pipeline.
The Qualitative Sales Forecasting Method
Qualitative sales forecasting is a type of sales forecasting that is entirely subjective and brings human emotion into the equation. With qualitative sales forecasting, business leaders use intuition, experience, and feedback from customers to make predictions about where sales are headed. An advantage with these types of methods is that they can factor in external events that would affect sales, like fluctuations in consumer spending/earnings, changes in government policies, new industry innovations, etc.
Qualitative methods are a highly emotional and sometimes unreliable form of sales forecasting. This is why they are typically used by new businesses that do not have previous data to analyze, by businesses in industries that see significant fluctuations, and/or in combination with quantitative forecasting methods.
In this article, we will be focusing on the quantitative side of forecasting because, when you have previous sales data to utilize, it can be the most reliable means of predicting your future sales. Although it will not be able to predict certain market fluctuations and will not predict numbers down to the dollar, it is often the more accurate way to put together forecasts.
The Top 6 Sales Forecasting Methods
Thankfully, sales forecasting methods do not need to be complicated. With basic math skills, you can use your past information to come up with predictions for your future sales and revenue. Here are some of the top quantitative forecasting methods as well as some sales forecast examples:
Naive Approach (aka Naive Forecast)
The most cost-effective forecasting model that can serve as a comparison point and start to determine future growth
The naive approach is the quantitative forecasting method that will most often serve as a starting point, helping to begin to determine the future growth and sales goals.
Simply put, using the naive forecast would mean you forecast that the next period’s numbers will be the same as the previous period or that next period’s numbers will be what was sold in the previous year during the same period. For example, if the next period is the month of September, you would forecast that the month’s sales will be the same as last September’s.
Just as unsophisticated as the name implies, there are no formulas used with this method and it does not factor in any adjustment. It also does not attempt to establish causal factors. The naive forecast will give you a baseline to compare with forecasts generated by more sophisticated techniques.
Straight-Line Method (aka Historical Growth Rate)
The easiest forecasting method to calculate future sales while factoring in growth
This is the simplest of all the methods to calculate future sales and factor any growth into the equation. Straight-line forecasting is sometimes referred to as the historical growth rate and can give you a rough look at where sales will be based on past growth rate.
The simple formula looks something like this:
|Previous period’s sales revenue x (1 + % rate of sales growth) = next period’s revenue
Say, for example, you were trying to predict next month’s sales based on the fact that sales are growing by 30% each month and revenue last month was $100,000.
So in this case, the formula would be:
|$100,000 x (1 + 30%) = $130,000
There are many options available online for a basic sales forecast template to use with this method (and many of the other methods we go over below). A good example is this template from Smartsheet, available in both Excel version and Google Sheets version.
The most complete sales forecasting method when there is not much annual fluctuation
Another commonly used method, linear regression allows you to get an average based on the charted progress of your sales. This will give you a great average to use to evaluate the direction things are heading.
Take a look at this sales forecast example which depicts the linear regression method in a graph format:
This can also be achieved pretty quickly through a sales forecast Excel spreadsheet of your data using the TREND function (directions are here).
Although some months’ sales may be higher and others lower, tracking each month will give you a good average that can be determined. This average will make seeing your company trends and predicting where you will be much easier.
It can be difficult to simply look at numbers and equations in line item form to get a good prediction. Graphing it out visually in a linear regression chart will help you to see more clearly the trends in your business.
The best sales forecasting method for time-relevant sales goals
The run rate method is another simple equation that is an average of past sales data and can have a big impact on your sales predictions. It is represented by:
|Total revenue / sum of past sales periods
Really. It’s that simple.
It is best used when you are tracking sales for a set period. For example, if you have a sales goal to meet by the end of the year, it can help you to see whether you are staying on target.
Let’s say that you are in May and you’ve sold $50,000 worth of product, but you want to see what you will make by the end of the year if trends continue.
Since averages are broken down monthly, you can calculate that you are making $10,000 a month and have 7 months left in the year:
|7 X $10,000 = $70,000
When you add that total to what you have already made:
|$50,000 + $70,000 = $120,000
So, you can somewhat predict $120,000 in total sales revenue for the year based on this run rate.
The run rate method can also be used if you are needing to break down your forecast further and predict the sales revenue by individual products. Here is another sales forecast template from Smartsheet that you can use to get started in that scenario, available in Excel format.
In many cases, when you are trying to forecast sales revenue for the remainder of a set period, the run rate method works best, thus making goal tracking and ensuring you hit the goals easier to do.
Simple Moving Average
A more accurate method for forecasting short term trends which can also account for steady increases in revenue
This quantitative method is very similar to the run rate method but deals with a dynamic period and therefore creates a dynamic average. When using this method to forecast, the period you will be pulling data from moves forward depending on the timeframe you are dealing with. The sales data from several consecutive past periods will be combined to provide a reasonable sales forecast for the next period.
The formula that you will be using is:
|The sum of previous periods sales / total number of time periods included = next period’s forecasted sales
For example, let’s say you want to determine forecasted sales for the next 6 months. You have the sales data from the past 30 months to use in putting together your forecast. So this gives you exactly five 6-month periods to work with.
We’ll use the chart below for this forecasting example:
|6 Month Period
The first place to start is to determine the simple moving average for the first 18 months of your data (the first three 6-month periods). These would be labeled in the chart as 6-month periods 1 through 3.
So, you would add the revenue from the first three 6-month periods to put on line 3 under total revenue. Then divide this number by three, since you are using three 6-month periods, to give you the first simple moving average (or shifting average) number. This figure is then put in line 3 under the “Shifting Average” column.
Now, to get the next simple moving average you would just move forward one 6-month period. So, you repeat the process for periods 2 through 4. This simple moving average would then be put in line 4 under the “Shifting Average” column.
Then, you would repeat the process one more time for periods 3 through 5. This simple moving average would then be put in line 5 under the “Shifting Average” column.
So when determining your forecasted sales revenue for the next period (the 6th period in the chart), you simply use the shifting average figure from period 5. So, in this example, the forecasted revenue for the next 6 months would be $155,018.33.
The simple moving average can be used for many different periods depending on your needs, whether you are wanting to forecast sales for the next month to forecasting sales for the next year or anything in between.
If you are wanting to structure your forecast by the month and use this forecasting method, this sales projection template from Smartsheet can help you quickly get started. You can use either the Excel version or the Google Sheets version.
With this simple moving average method, you can factor in and account for steady increases in revenue to help make your forecast for the next period even more accurate.
Funnel and Pipeline Forecasting
Use with a quantitative method above to use a pipeline of prospects and leads to predict future sales
If your company has invested in a CRM or other sales funnel software, put that data to work. Leads and prospects in the sales funnel or sales pipeline can help predict future sales. Tracking time in each stage and conversion rates can help your team determine when they’ll progress to the next stage and, ultimately, to the purchase stage.
Use Sales Forecasting Methods to Predict Sales and Drive Growth
While quantitative sales forecasting methods are data-driven objective ways to predict future sales, qualitative methods should also be taken into consideration. Government regulations, changing economies, pandemics and many other factors should be considered to determine if it will positively or negatively affect sales.
Taking a look into your future is essential for sales. If you want to grow your company, utilizing effective sales forecasting methods will prove invaluable. These methods made up of simple data and math will help you to get a basic look into where you are headed and if you will meet your goals.
Backed by solid numbers and insight, you can also better direct the future of your sales and make informed decisions to help your company remain profitable. Give these methods a try today!