The second component of Sales Cycle Management (SCM) is Sales Forecasting. Many times, salespeople and sales managers do not take a realistic view of how many sales they can undertake during a particular time period. This view makes time spent on Opportunity Management less worthwhile, and makes a traditional sales pipeline stale. What are the benefits of Sales Forecasting?
When you take the time to forecast, you’ll be able to analyze past sales, annual growth, and sales and growth as opposed to industry competitors. In addition to this, forecasting allows you to more closely analyze your price and cost structure, which means you have a better idea of where profit starts to kick in. In other words, a realistic sales forecast can allow you to virtually guarantee profit. When you look at the numbers, sales forecasting is a great way to look at the future from an objective standpoint. But how do you go about creating a sales forecast?
The first piece is to have an accurate record of past sales. For some organizations, this is easy, but for others, record keeping may have been less than accurate. Collect the most solid past data you can, going back several years if possible. From the past and current standpoint, it’s a good idea to understand what factors, both internal and external, have acted on sales and continue to act on sales. Make a list of these factors, just to be sure they are understood. For example, external factors could range from seasonal demand for the product or service, general economic conditions, to the activity of competitors – and their product, as well as consumer conditions such as income and employment. But what about internal factors, such as labor conditions, the organization’s credit policy, and inventory? Are there changes in the manufacturing process, price, or production numbers at any point? Once you’ve determined what factors act upon your sales, you can ask further, more detailed questions about the sales forecast itself.
First, what products or services are you going to be forecasting? Are they grouped or separate? In most cases, it’s a good idea to create at least separate product or service groupings for the forecast – this way, your forecast will start out as precise as possible. Next, ask about the time frame of the forecast. How far in the future can you realistically go? Third, consider frequency. What is the frequency of actually creating the forecast, and what is the frequency of review and/or revision? Finally, it’s a good idea to come up with an acceptable margin of error based on cost, expense, and profit. The margin of error is also a good test of the realism of the forecast. At this point in sales forecasting, you may have to take an analytical look at account records, financial statements, sales reporting, and post sale activities. For example, you’ll want to look at all of the activity that occurred up to the point of sale and after to get a good idea of cost and expense. These sales records should be part of your Opportunity Management system, anyway.
As you move forward, you must finally determine if you’d like to see a qualitative or quantitative forecast. In simple terms, quantitative analysis takes into account all of the factors we’ve discussed and makes an estimation of sales based on those factors. The qualitative analysis will use a mathematical formula to create a numbers-based sales forecast. If your organization is smaller, you may want to try a quantitative approach first, as a realistic starting point. This is especially true if your financial staff is smaller. In larger organizations with a larger financial staff, a qualitative approach is possible. When looking at these approaches, keep in mind that a stable, consistent product can use a standard mathematical formula for forecasting. On the other hand, an unstable product may find a forecast in varied mathematical formulas.
However you decide to move forward with your sales forecast, you’ll be taking a less realistic pipeline and rooting it to more realistic sales possibilities. Once you’ve created your forecast, you’ll be ready to move to the next component of SCM, Account Planning.