Sales Forecasting – Introduction

Sales Forecasting is the process of using a company’s sales records over the past years to predict the short-term or long-term sales performance of that company in the future. This is one of the pillars of proper financial planning. As with any prediction-related process, risk and uncertainty are unavoidable in Sales Forecasting too.

Hence, it’s considered a good practice for Sales forecasting teams to mention the degree of uncertainties in their forecast. Sales Forecasting is a globally-conducted corporate practice where a number of objectives are identified, action-plans are chalked out as well as budgets and resources are allotted to them.

The first step to proper Sales Forecasting is to know the things that fall within your domain directly as a salesperson. This usually relates to your sales staff, clients and prospects. Other factors to consider during the setup of a forecast are the negative ones like − uncertainty, abrupt changes in consumer shopping patterns, etc.

One of the most common yet basic challenges that the management of companies face in making business sales forecasts is that their usual approach is a “top to down” one. This approach leaves very little scope for interaction with the sales manager and the salespersons during the data collection process.

An Example of Faulty Sales Forecasting

Many Sales Forecasting reports give numbers like “this prospect will provide $200 million in terms of revenue to the company and the company’s profit will be $80 million, from which the Sales Department’s profit will be $10 million.” Unfortunately, no one ever cares to understand where this number came from. Many times, it just so happens that this number is nothing but an arbitrary marking of revenues and profits based on simple theoretical calculation.

Simple Calculation

For instance, your company had earned a revenue of $120 million in the previous year and the company’s profit was $32 million. What the forecasters did was to simply use the same numbers to do a relational pegging and upped the figures by 25%. They did this without even bothering to ask the people working in the field about the ground reality.

This type of a faulty planning results in widely incorrect predications and losses in investment oriented expenditures. And this happens because such planning lacks one of the building blocks of SMART planning, i.e., being realistic.

Sales Forecasting cannot be conducted out of thin air. There is no magical trick for an effective sales forecast. Only by the sheer combination of previous performances and future assumptions that come out to be ”very strategic” guesses, which are framed after considering the data that is based on ground reality and not projections.