How to Build a Sales Forecast with Templates, Examples and Formulas

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How to build a reliable sales forecast for your company? If you want an accurate prediction, this involves intuition, predictive analysis and a really good CRM tool. In this guide we’ll walk you through all the steps you need to take to be successful at sales forecasting:

  1. Tools for accurate sales forecasting
  2. Basic formulas to calculate sales forecast
  3. Popular sales forecasting methods
  4. Sales forecasting templates
  5. Factors to consider in a sales forecast

Why do you need a sales forecast?

Sales forecasting helps you gauge your revenues in the immediate future. This can be next month, quarter or year, depending on your definition of a sales period. It helps you manage your supply chain, cash flow and perform strategic planning.

Not doing sales forecasts right is like driving through a dark tunnel with no headlights. Will you reach the other end?

An accurate sales forecast is also a clue to a highly aligned organization. When different business units are on the same page they tend to achieve faster revenue growth and higher margins, as this SiriusDecisions study on sales organizations found out:

Tools for accurate sales forecasting

Before we start you need a clear picture of what tools you’re going to need to help you create an accurate sales forecast. This will include:

  1. Sales cycle. Do you have a clear pipeline with well-defined stages and length of period to close deals?
  2. Closing rate. What’s the probability of closing per sales stage?
  3. Deal value. What’s the value of each deal per sales stage?
  4. CRM. Selecting a reliable CRM software will help you streamline and automate sales forecasting.

The basic math you need to calculate sales forecast

At its base, sales forecasting involves three simple computations:

  1. How much you’ve earned so far
  2. How much you’ll earn more
  3. The sum of both in a given year.

For simplicity we’ll use monthly as our reporting period (you can always adjust this to quarterly, bi-monthly or weekly periods).

Monthly run rate. The average sales revenue per month so far this year. This is the base of your forecast. You calculate it like this:

Sales revenues to date / no. of months to date

Example: If your current total sales revenues as of March is $10,000, divide it by 3 months, so your monthly run rate is $3,333.

 

Forecasted monthly sales. Sales revenues you expect to earn from the remaining months. You calculate it like this:

Monthly run rate x no. of remaining months

Example: $3,333 (monthly run rate) x 9 months (April to December) = $29,997

 

Forecasted annual sales. The total sales revenues you expect this year. You calculate it like this:

Sales revenues to date + Forecasted monthly sales


But before you eagerly run the formulas above, you need to get your numbers right. That means you have to drill down to the causes of the revenues and evaluate them to arrive at a more accurate forecast.

Here, you can turn to proven methods that break down sales forecasting to measurable metrics. Let’s discuss those next.

Types of Forecasting Methods

1. Opportunity stage forecasting

This method uses the probability of deals to close at each sales stage to forecast revenues. As opposed to simply using past sales as basis, it looks into the rate by which the sales were closed.

How it works: You should know the close rate in each sales stage and the deal value. In general, the bottom of the funnel stages should have higher rates than the top of the funnel ones. For example, in initial contact 5% of deals are expected to become customer, while at later stages, such as in the presentation stage, the rate jumps to 40%.

Here’s how you forecast sales using this method:

Forecast = total value of current deals in a stage x close rate


Example: $2,000 worth of deals ready for presentation x 40% close rate = $800 forecasted value per stage.

To get the overall sales forecast simply add all forecasted values per stage.

Pros of this method

  1. Easy to calculate
  2. Leverages recurring trends
  3. Lends to your forecast some statistical truth

Cons of this method

  1. Aging deals may screw up data
  2. Shifts in trends will lead to inaccurate forecast
  3. Relies on sales reps’ feedback

2. Length of sales cycle forecasting

This method also uses close rate to predict sales, but based on the deal’s age. In effect, it addresses the problem in our first method.

How it works: You should know your sales cycle and deal value. The closer the deal to the end of the sales cycle, the higher the close rate. For instance, if your sales cycle is 6 months and the deal is at 3 months, the close rate is 50%.

Here’s how you calculate future sales:

Forecast = deal value x close rate at sales cycle


Example: $1,000 deal value x 10% close rate at two months = $100 forecasted value

Again, to get the overall sales forecast simply add the forecasted values of your current deals.

Pros of this method

  1. It sorts out aging deals
  2. Data is objective

Cons of this method

  1. If you have various sales cycles calculation is complex
  2. It doesn’t work for irregular sales cycles

3. Intuitive forecasting

This method relies on the sales reps’ insight on the chances of closing deals. After all, who better to know the deals than those closest to them.

This suits small businesses or startups. Their people are likely to be more engaged with each other than in big organizations; thus, trust is easy to toss around. Startups especially lack historical data, so they rely on this method.

How it works: It requires no more than asking your sales reps when they think the deal will close and how much.

Pros of this method

  1. It leverages the insight of the people involved in the deal most
  2. It’s simple to conduct.

Cons of this method

  1. Vulnerable to overoptimism or abuse
  2. No scalable way to verify data integrity

4. Historical forecasting

Some call this the lazy way to forecast sales, but it works for others. The idea is to assume the same result will happen month over month, at least. This works best for subscription-based business.

How it works: For example, last month’s MRR is $500, so you assume the same values for the succeeding months. You can also assume the same sales velocity applies each month. So, if you’ve been increasing sales by 5% month to month, and your current monthly run rate is $500, your next month’s forecast is:

$500 current monthly run rate x 5% sales velocity = $25 additional sales

$25 + $500 = $525 forecasted sales next month


Pros of this method

  1. Quick to calculate
  2. Predictable

Cons of this method

  1. Doesn’t factor in seasonal shifts, external events
  2. Assumes demand is constant

5. Multivariable analysis

This is the most complex method in our how to build a sales forecast guide, but the most accurate, too. It uses the various methods above and adds predictive analytics. In short, you combine data in:

  1. Probability of closing deals
  2. Sales cycle
  3. Sales reps’ insights
  4. Historical data

Here the math gets convoluted and, if you’re like us, you might feel overwhelmed running numbers on different metrics.

Can you imagine calculating the value of deals closed, guaranteed to close and likely to close for this month if you have hundreds of prospects? That means tracking each deal size MRR and close rate for each sale stage and plotting them across the sales cycle. You also need to consider MRR by client, adding another layer to the math.

You can sweat it out with a manual process or there’s a better way: we highly recommend you use a reliable CRM software for multivariable forecasting. Check out our what is CRM software guide to learn more about these solutions and how they can help.

study by the Aberdeen Group shows that 82% of companies that heavily use CRM achieve their overall quota vs. 65% of companies that don’t leverage CRM much. Similarly, 60% of the former’s sales reps achieve their sales quota vs. 50% of the latter’s sales reps.

You’ll realize that tracking actual and predicted revenue using a high-quality CRM tool like HubSpot CRM will make it simplified and automated, allowing you stay on top of your game. You can also see where your current sales against your monthly quota.

Furthermore, HubSpot CRM logs sales activities automatically, such as calls, emails and social media posts. It also gives you total visibility across your pipeline, which helps you track deals and surface their associated records with ease.

It’s easy to track your deals, closed deals and leads on HubSpot, a great free CRM.

Overall, this tool provides the context to gauge your sales reps’ closing rate with more accuracy. Moreover, HubSpot CRM is a completely free CRM. If you want to try it out you can easily sign up for HubSpot CRM here.

Sales forecasting templates

If you’re not ready for a CRM push and want to stick with spreadsheets, or you’re just starting out, you can at least level up the process by using a sales forecasting templates. A template puts structure to your data. It also disciplines your team to standardize data gathering and reporting.

You can find plenty of templates on the internet. For one, HubSpot is offering a free sales forecasting template, which you can immediately used for any of the first four methods we discussed. It organizes prospects, forecasts monthly revenue and tracks yearly revenue goal. You stay on top of your quota.

Factors that impact your sales forecast

Sales forecasting goes beyond deals and closing rate. A lot of things beyond your team and control will affect your ability to predict with accuracy. You need to consider these factors and adjust your forecast where needed.

  1. Seasonality. Demand usually go through high and low seasons, meaning, you won’t have the same month-to-month results.
  2. Marketing spend. Post campaigns can create a spike in sales. Find out what the marketing team is up to.
  3. Market shifts. This can be changes in consumer behavior, technological disruption and social trends.
  4. Competition. What your competitors are planning soon can impact on your future sales. Examples are: a price cut, new product launching and major brand campaign.
  5. Internal changes. Changes in your product, brand and organization impact on your future sales. For example, the product gets a facelift or rebranding or price adjustment or your company downsizes its sales team.
  6. Top management. Strategic decisions and plans may also impact on your forecast. For instance, mergers & acquisitions, IPOs and new round of fund seeding all have direct or indirect effect on your future sales.

Moreover, always be open to refine your forecast as new opportunities pop up or threats derail your original target. An accurate and honest low-level forecast is always better than an impressive but bloated target. False hope costs money.

Remember, even though nobody can predict the future, you can gauge it with the right intuition, the right formulas,  data and a reliable CRM tool. If you’re unsure which tool will work best for your company check out our list of top 20 CRM software in 2018.

We hope this guide on how to build a sales forecast will help you achieve a more reliable goal when you work on your next project. If you need some extra help, you can always try out more accurate sales forecasting by signing up for free HubSpot CRM tool.

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