Sales Best Practices

What is a Sales Forecast: Definition, Importance, and How to Build One

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Serena Miller

Content Marketing Manager

Proper forecasting is essential for any sales organization. It’s a process that enables data-driven business decisions, helps revenue leaders identify new opportunities, and provides a clear picture of projected revenue.

Even so, building accurate sales forecasts is complex if you don’t know where to start, or if you’re not leveraging the types of tools that yield precise results.

In an August 2021 commissioned study conducted by Forrester on behalf of Outreach, almost one-third of B2B sales leaders said their forecasts were derived by selecting key deals and adding in qualitative analysis to arrive at their final number. 

However, this static and unscientific approach to forecasting makes it impossible to drive predictable business growth. If you’re not accurately and consistently forecasting your sales, you could be missing out on key insights that impact budget, hiring, scalability, and — ultimately — cash flow.

Here, we’ll take a deep dive into what a sales forecast is, how forecasting can benefit your organization, and how Outreach helps revenue teams bring science to the the traditional approach to sales forecasting. 

What is A Sales Forecast?

A sales forecast predicts expected revenue over a given period of time. When used correctly, sales forecasts help teams to accurately estimate how much product or service they’ll sell, which helps to keep the expectations of reps, managers, leaders and other stakeholders on the same page.

Sometimes, the concept of a sales forecast is conflated with other related terms, like sales goal setting. But the two are actually quite distinct: sales goal setting is an expression of what you’d like to occur, while a sales forecast predicts what will actually happen — regardless of what you may have wanted to achieve.

Depending on the unique elements of your business (like age, size, existing systems of record, etc.), the level of detail and accuracy with which you forecast will vary. Forecasts are limited by their inputs, so you can only expect a high degree of precision if you have enough clean data to use.

Extremely accurate forecasts also require a range of complicated calculations, which is why many businesses have turned to technology for support. Some common tools include:

Why does sales forecasting matter?

If you already have clearly defined goals, a strong sales process, and a healthy pipeline, you might wonder if creating accurate forecasts is worth the effort. In short: yes, confident sales forecasting is an absolutely critical component of a company’s growth. 

Accurate forecasts support business growth

Consistent forecasting can improve both internal and external operations by helping your business:

  • Efficiently plan for demand - In order to make sound decisions regarding hiring, supply chain management, and inventory, you need a clear understanding of what your operation will need to run smoothly. Because forecasts act as precise pictures of expected sales, each department within your business can use them to fully address staffing needs, product development, and budget before these factors ever become an issue.
  • Make informed business investments - Whether you’re looking to develop a new product or boost customer service through increasing your staff, you first need the funds to actually cover those costs. Sales forecasting helps you better estimate incoming profit vs. anticipated costs, so you can make wise investments in the growth of your business without the risk of mismanaging your capital.
  • Quickly uncover and resolve potential problems - Proper forecasting gives you transparency into your sales pipeline, so you can quickly identify trends that might otherwise cause significant issues.
  • Improve your sales process - Your sales process should be modified based on what works and what doesn’t. Identifying areas that take longer than they should, have low conversion rates, or don’t meet customers’ needs is essential for refining your playbooks and closing more deals.

Multiple teams contribute to the forecasting process

Each sales organization is unique, so the person or team responsible for creating the forecasts often varies from one business to the next. In some instances, each sales rep is responsible for committing the deals they believe are likely to close. In others, revenue operations managers or sales leaders build forecasts to more objectively categorize and project their reps’ performance.

Regardless of who builds them, decision makers and stakeholders use sales forecasts to make choices about an organization's growth, how they’ll strategize that growth, and what kind of timeline they’ll need to succeed. Predictions in both short- and long-term performance help businesses uncover potential opportunities that help them scale.

Sales managers who rely on their reps to commit deals that feed into the forecast also find great value in confident forecasts, as they help ensure that reps’ deals are on track to close for the quarter. Managers need an easy way to gauge potential risk in their teams’ pipeline so they can focus on deals that are slipping, and forecasts provide them with the visibility to do just that.

Forecasts impact a variety of other departments, too. Product leaders rely on sales forecasts to evaluate and prepare for product demand, while finance teams use them to make investments. Sales forecasts are highly valuable to HR departments, too, as they’re frequently used to determine staffing needs.

Getting it right is easier said than done

That means getting it right (and doing so consistently) is a critical part of a business’s growth. In fact, sales organizations that utilize a formal, structured forecasting process increase their win rates of forecasted deals by 25% versus those that take a less formal approach.

But accurate sales forecasting is art and science — and many organizations don’t have the necessary skills. Less than 50% of sales leaders and sellers have confidence in their organization’s forecasting accuracy, as poor data quality and quantity threaten the precision of their process. These limitations are a result of some unfortunately common challenges among businesses, including:

  • A lack of accurate, up-to-date data in their CRM
  • An inability to identify and monitor key deal signals
  • A lack of visibility into the numbers/math that drive their forecasts
  • Manual, error-prone data entry processes

Sales Forecast Methods

Leveraging the proper tools can certainly help ensure forecasting accuracy, but you must also consider which method is right for your business. Forecasting isn’t a one-size-fits-all process: it’s a balancing act that requires a thorough understanding of context, relevance, and available data.

Thus, it’s important to keep in mind that there are some key factors you should take into account before settling on a particular forecasting method, including:

  • The availability of historical data
  • What time period the forecast will cover
  • The realistic timeline for developing the forecast
  • How accurate the forecast needs to be
  • The purpose of the forecast

    Once you’ve nailed down these considerations, you can more easily determine the forecast method that best suits your needs. There are several popular sales forecast methods from which to choose, each of which offers a distinct advantage:

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    How to Create a Sales Forecast

    The forecasting process should be tailored to your unique business, based on your specific goals, available data, sales process, and tools for support. But to help get you started, we’ve outlined the most critical steps you should follow when building your forecast:

    Choose a Sales Forecast Method

    In the past, many organizations relied on qualitative methods for forecasting. But the art of selling has become much more of a science, with the emergence of tools and technologies that help form data-driven insights.

    Competitive sales organizations should implement a forecasting method that uses reliable, actionable data to better inform business decisions moving forward. Revenue leaders can’t afford to use the inaccurate “guesstimation” methods of the past if they want to deliver predictable growth.

    As you consider your options for forecasting methods, keep in mind that a quantitative, scientific, data-driven approach (backed by powerful analytics, user-friendly dashboards, and tools for complete pipeline visibility) is key to unlocking a clear competitive advantage.

    Acknowledge Sales Forecast Assumptions

    Your team’s performance — and the factors that impact that performance — are likely dynamic. As you build your sales forecasts, don’t forget that they’re based on assumptions instead of facts that are set in stone. They’re not crystal balls that can reveal the future, but they do offer helpful predictions based on an accumulation of information. Thus, you should make sure you have an up-to-date understanding of the following factors:

    • Your products/services - You probably modify the cost of your products and services (and the products and services themselves) over time to better serve your customers and improve profitability. Make sure you take these changes into account, including any new product launches, current product updates, price or sales channel adjustments, and cost of production, labor, and materials.
    • Market conditions/state of your industry - The industry in which your business operates can impact your growth, so it’s important not to ignore broader conditions and trends. Take a look at overarching changes in the economy, number of viable competitors, and size of your current and potential customer base.
    • Regulatory changes - Some companies must operate under certain industry laws or regulations, so make sure you’re always up-to-date with any relevant legislation.
    • Marketing inputs - Sales and marketing alignment can be challenging to achieve, but doing so can make forecasting that much easier. Bringing the two together can help you better understand how specific marketing activities (e.g. new marketing campaigns, changing advertising budgets, new marketing channels) impact overall sales performance, so make sure you take them into account.

      Create Your Forecast

      Armed with the specific elements needed for an accurate prediction, you’re now finally ready to build your sales forecast! It’s important to note that the following forecasting steps are just a starting point, as they reflect a simplified approach to the process. Of course, enterprise-level organizations require a more intricate approach that takes into account other market complexities.

      If you’re a beginner, here are some basic steps to get you started with building a forecast:

      • List out the goods and services you sell
      • Estimate how much of each you expect to sell
      • Define the unit price or dollar value of each good or service sold
      • Multiply the number sold by the price
      • Determine how much it will cost to produce and sell each good or service
      • Multiply this cost by the estimated sales volume
      • Subtract the total cost from the total sales

        Once you have a fully defined sales forecast, you can leverage the results to drive your business goals.

        Sales Forecast Examples: How to Commit with Confidence

        The traditional approach to sales forecasting is filled with gaps, particularly for teams who use disparate systems and processes to manage the revenue cycle. Without a consolidated view of pipeline health and buyer insights, revenue leaders must guess their forecast, so they are perpetually at risk of surprise outcomes. They have dozens of dashboards, but they’re not sure they can trust the data. Instead, they are forced to rely on the gut intuitions of their whole team to inform their forecasting models.

        But with a single, unified platform for support, forecasting can shift from a critical gap to a seamless, highly-valuable component of your business. Outreach Commit delivers real-time pipeline data and buyer engagement signals to bring science to the art of forecasting, enabling revenue leaders to go from guessing the future to changing it with recommended actions.

         


        Want to learn more? Listen in on a conversation with Outreach's SVP of Revenue Excellence and Operations Harish Mohan and Director of Product Management Adam Cuzzort to hear how Revenue Innovators are transforming the forecasting process — or request a demo.