The sales forecast is the single most important number in the company. It dictates how a business can invest and grow. There’s just one problem: It’s really hard to get right. And even when you do get it right, chances are you’ll grow out of that solution and have to readjust as you scale.
Yet no matter how mature your company is or how fast it grows, one thing remains certain: It is absolutely critical to nail your sales forecast.
What is a Sales Forecast?
A sales forecast is a roadmap that guides the company to where it aspires to be. Your sales forecast predicts how much revenue each sales rep, team, or division expects to bring in within a given time period. Sales forecasts use current sales activity data and historical trends to evaluate which deals in your pipeline will close—and at what value—over the course of a quarter, month, or year.
It enables revenue teams to prioritize actions that the organization will need to execute to reach its desired goal. Forecasting sales with the right model and sales forecasting method is vital to the success of any given company, small business or multinational enterprise.
To help get you started with sales forecasting, we’ve put together this step-by-step guide. Click the links below to jump to the section. You’ll learn how to think about the critical steps in establishing your forecast, including:
- Start with the goals of your forecast
- Understand your average sales cycle
- Getting buy-in is critical to your forecast
- Formalize your sales process
- Look at historical data
- Establish seasonality
- Determine your sales forecast maturity
The ultimate result? More reliability and efficiency in every area of your business.
Set Sales Forecasting Goals
Before you start your sales forecast, you need to define the goals, which can include (but are not limited to): ARR, new logos, number of products sold and renewals.
Your sales forecast goals typically depend on the stage of your organization. If you’re an early stage startup, you might be very focused on obtaining new logos to increase customer base and get market validation, regardless of the ARR. A more mature company with multiple product lines may focus on number of products sold in a particular line versus another.
Let’s dive a little deeper.
Annual Recurring Revenue
If you’re in the SaaS business, you’re most likely looking closely at your ARR or annual recurring revenue. ARR is the sum of contracted revenue that the company is going to recognize in any given fiscal year.
ARR basically tells a company how much they can expect to receive from customers in one year and is used to evaluate a company’s growth, which is why it’s often used for long-term forecasting. ARR looks at both net new bookings and upsells, though you can certainly calculate them separately.
The common way ARR is calculated is by taking total value of a contract divided by the number of contract years.
For a 3-year contract totaling $60,000, it would be $60,000/3 = $20,000.
When looking at multiple contracts, you would just add up the total ARR. So if you have a 3-year contract totaling $60,000, a 2-year contract totaling $50,000 and a 5-year contract totaling $100,000, you would add up $20,000, $25,000 and $20,000 to get $65,000 in ARR.
New Logos
New logos mean new business and it goes without saying that new business is important for the long-term growth of a company. There are a few reasons a company may want to focus on new logos for their forecast:
Maybe the company is young and their goal is to build influence and validation in the marketplace. They may place value in customer base over ARR to show prospects they have earned the trust of those customers.
If a company’s strategy is to ‘land and expand’, getting new logos in the door at any cost may be the top priority. In this scenario, a company may opt for minimal initial contracts with the belief that they will be able to upsell that new customer for additional ARR.
Number of Products Sold
Another option to consider for sales forecasting is the number of products sold or available for sale. Also the types of products available can also make a difference. If you sell slightly different bundles of products depending on the vertical, this might affect your sales forecast. For example, let’s say your hospitality industry customers buy at a lower price than your retail industry customers. The number of products you would need to grow would be much larger otherwise.
Forecasting with product in mind allows you to predict sales for each business line is running and if you can re-invest funds into R&D or even develop a new product to bolster your offerings.
Thinking about the end business goal in mind gives you a better direction for developing your forecast.
Understand Your Average Sales Cycle
How long does it take your organization to close a deal? Understanding your average sales cycle is a critical piece in the sales forecasting process because your forecast is really based on the velocity of your business.
Let’s take a look at several different time periods:
- Weekly: Highly-transactional companies will forecast on a weekly basis.
- Monthly: For sales cycles that last around 30-60 days, a monthly forecast would work best.
- Quarterly: Companies with longer sales cycles tend to forecast on a quarterly basis.
Your forecast really depends on the average sales cycle that best matches your business. And if you play in several verticals, you might even have differences in time periods when building forecasts.
Get Buy-In from Finance, HR, Marketing, and Sales
Forecasting can mean different things for different people — and each team and team member will have a different reason for using the forecast. However, they all should be bought into the idea that an accurate sales forecast is critical for organizational success.
Finance, HR, marketing and product all rely on sales forecast accuracy to make confident business decisions.
Reps may think the sales forecast is just a number for the higher-ups, but they are mistaken. This approach ignores the important fact that the forecast is not just a number, but a process — and one that starts at the bottom. You need to make sure every team and every member of that team not only has an understanding of what the sales forecast is but how they will contribute to it.
A single source of truth, available to all teams in the revenue operations organization, not only encourages buy-in but also gives them full transparency to make collective decisions. Formalize your sales forecast in a document or, even better, a Revenue Operations Platform that encourages compliance.
Formalize Your Sales Process and Definitions
The next step is to build a clear sales process and sales definitions that every member of every team follows with consistency.
A good sales team always puts the customer first — not the other way around. Study and define your buyer’s journey and then develop a sales process and sales cycle that complement it. Establish how many stages your sales cycle will include and the criteria that qualify a deal in each one.
For example, let’s say your prospects typically buy more in November/December when they have end-of-year funds that need to be used up. If you reached out to a prospect in July and they weren’t quite ready at the time to move to a closed deal due to funds not being available at the moment, you might want to set up a stage where you can track it as a stalled account and create a task to reach back out in late September/early October.
So you would have created the opportunity in July, decided to designate the opportunity as a “Stalled account due to current budget” and then re-assess the opportunity later on in the year. Even if the opportunity ends up as a closed/lost, following this process helps you understand whether these types of deals are still worth the time and effort — and how to properly incorporate them into your forecast.
Your organization must make process a policy. You should train every rep on your sales process, circulate definitions and process to your sales team consistently, and train your managers to consistently review and reinforce the process in their one-on-one sales meetings with sales reps.
Uniformity is the only way toward widespread adoption. Without a formal sales process, it is much harder to make an accurate sales forecast because you cannot easily predict how deals are moving through each stage, especially as your organization scales.
If you have multiple teams across the United States or around the world, sales process adoption becomes even more critical in order to create accurate sales forecasts.
Revenue Operations Platforms can assist sales teams implement their sales process and make sure reps are compliant, alerting when deals haven’t been updated properly or show risk based on historic data.
Look at Historical Data and Reports
Once you have your overall sales run rate, you have to reflect on previous historical data. You want to make sure you didn’t just have an exceptional quarter or year that then skews your numbers. You should pull all available reports that look at critical sales forecasting metrics:
- Average annual contract value or ACV
- Conversion rates
- Average deal cycle
- Quota
- Attainment
- Sales pipeline
- Sales linearity
- Deal slippage
- Pipeline coverage
- Sales Activity data
- CRM Score
While you can look at these numbers at an aggregate level, it’s also important to drill down into individual performance. It’s a good time to reflect and see how individual members of your sales team are executing on their deals and provide coaching to those who may be falling behind.
With this historical data, you should be able inspect your in-quarter and out-quarter pipeline and improve sales effectiveness across the board. For example, if you see your conversion rates are dropping, sales and marketing can figure out if there is a lead quality issue or lack of proper follow-up.
Predictive analytics can play a big role here because it helps you understand historical data to make future sales predictions. Clari’s Time Series Forecasting enables teams to connect their Salesforce to Clari, where we start ingesting all of your CRM and activity signals and snapshotting them in real time.
Our AI and analytics engine then automatically discovers insights in a user-friendly way that is perfectly integrated with your sales forecasting process.
Establish Seasonality and Big Market Events to Forecast Sales
Seasonality is defined as an anticipated positive or negative impact to sales performance due to industry events such as summertime vacations. You can easily do this as part of the previous exercise by making sure you’re looking for trends over a given period of time. We all know that it’s hard to close deals in the fourth quarter, so your forecast should reflect that slowdown and your team should be ready to adapt by making sure you have a solid plan in Q2 to make up for it, for example.
This is where historical data plays a big part. Look at seasonality over the last 3-4 years and ask yourself how much did you close the same time last year?
If major industry conferences dramatically influence the revenue you generate — or perhaps there is some industry-wide legislation on the horizon that introduces additional regulation, include that into your forecast as well.
Determine Your Sales Forecast Maturity
How do you calculate sales forecast? What is a sales forecast example? What are the methods of sales forecasting?
All these questions matter and can have a huge impact on the success of your forecasting efforts. We have found that most organizations work through several stages of forecasting maturity on their journey to a defined and accurate sales forecasting process.
Not all companies and revenue teams are ready for the most mature stage of sales forecasting, but for those who want the highest level of sales forecasting accuracy should look to emulate the most mature companies. If you are the early stage where you are using verbal reports and static spreadsheets, you’re limiting yourself to an inaccurate forecast and lots of manual labor that is prone to error.
- Notebook: Built from written notes on conversations with sales reps, highly reliant on word of mouth
- Spreadsheets: Static file that is updated individually by each rep, requires manual consolidation and prone to error
- CRM: Dependent on proper data management by the rep, which isn’t fool-proof all the time and lacks visibility
- CRM + Spreadsheets + BI: Takes data that already exists in the CRM or manual spreadsheets and presents it in a visual BI tool, which still relies on potentially bad or incomplete data
- Automated activity tracking: Uses artificial intelligence and automation to capture sales activity data increasing data hygiene for every opportunity for better visibility into the health of the deal
- Predictive analytics: Uses AI to forecast based on past sales data, current activities and other data
- Revenue Operations Platform: Harnesses automation and AI to manage revenue creation, growth and retention processes, eliminating do-it-yourself spreadsheets, reports, and off-line conversations to give you better forecast accuracy, more visibility into your pipeline, and control over your revenue. Learn how to improve sales forecasts with Clari.
Grow Your Sales Forecasting Maturity with Predictive Analytics
Find out how a Revenue Operations Platform like Clari can help take your sales forecast to a higher level. Schedule a free demo today to learn more.