Statistically, everyone you know is bad at forecasting sales. Ask 100 sales leaders to estimate sales for the next quarter, and 93 of them won't be able to give you an answer that's within 5%, even with less than 2 weeks to go.
An astounding 80% can't get better than 75% accuracy, and 2 out of 3 companies don't have a defined sales forecasting formula at all, which basically means they're guessing. Interestingly, these numbers seem to be pretty broadly accepted. After all, a mere 45% of sales managers report high confidence in their sales forecast data.
This is a really big deal, and if you're in the 7% who actually knows what's going on with your sales performance, it's like having a superpower. Of the tiny minority of companies that use a structured sales forecast, 97% report hitting their sales targets, a good chunk up from just 55% for the random guessers.
Working with accurate forecasts makes you 10% more likely to grow year over year, and you're twice as likely to be a leader in your field. It's not an exaggeration to say that a competent sales forecast method effectively acts as your brand differentiator, and it can give you a leg up while your competitors are groping in the dark.
This article will not only help you gain confidence in using the right sales forecasting formula for you, but also set you up with the tools to use it correctly. There's more than one approach to forecasting, and they're not interchangeable, but by the bottom of this page, you should have what you need to get started.
With a solid forecasting process and the right salespeople, you can move from the 93% who are succeeding by luck into the top few who know what they're doing.
What Is a Sales Forecast Formula?
At first blush, a sales forecast is almost embarrassingly simple. It's really just a math equation. Take the number of customers you expect next month/quarter/year, multiply that number by how much money you think they'll spend, and boom—you have a sales forecast. Obviously, it's not that simple in practice, and the devil is in the details since even small errors can blow your whole equation out of the water.
All kinds of stuff can affect your future sales. Seasonality, market fluctuations, shipwrecks in the Suez Canal, sudden trade wars, the public on Twitter deciding your brand is immoral for whatever reason, or an unexpected banking crunch that leaves you short on credit can all wreck your core premises and leave your sales forecast flopping. Much of what you learn about the different sales forecasting formulas is really about building smart assumptions into your forecast, accounting for variables, and landing on a reliable figure even when the world is nuts.
Why Is Sales Forecasting Important?
This matters for a lot of reasons. While it's true that 93% of sales teams are working without a structured sales forecast methodology, that doesn't mean it's the right approach to take or that you can get by without one.
Solid sales forecasting methods provide an equally solid baseline for setting achievable sales quotas. They make you look smart in front of the boss, and they help with new product development and rollout as you hit deadline after deadline.
Accurately forecasting sales helps with a lot of other things as well. Here are a few.
Creating and Publishing Accurate Financial Documents
Your financials should be in order, but a surprising number of sales teams seem not to know this. Keeping accurate records is an end in itself, but it's also a basic requirement of your sales department. The ability to properly predict where sales are going year over year is one of the major justifications for having a sales management team in the first place.
Keeping Your Budget Disciplined
Next year's budget is always a pot of gold at the end of a rainbow, and every company suffers from the temptation to endlessly chase it. All the little things that would be nice to have—from free donuts on Mondays to a massive capital investment in 16-ton earth-moving equipment—need to find a place in the budget for next year, and there has to be money to pay for it. Spending some time this year getting a realistic feel for the resources you'll actually have, as opposed to what you hope to have, grounds the budgeting process and keeps expectations reasonable.
If you sell physical items, from shoelaces to strike fighters, those items take up space in a warehouse somewhere, and that isn't free. An accurate sales forecast informs your purchasing decisions and helps create a smooth product flow from the factory to the shipping floor with as little lost in carrying charges as possible. Getting within about 5% of your sales also helps prevent a costly inventory build-out that leaves you saddled with thousands of units of last year's product you have to sell at a discount to make room for the latest model.
Staying Out of Court
Regulating businesses is a big part of what governments do. While you're probably not going to jail for sloppy sales forecast data, it looks bad when regulators audit your books and find consistent inaccuracies in your projections. Stakeholders outside of the government, such as shareholders and independent auditing firms, or the C-suite at your company who want to see financial reports before they sign them, also have a reasonable expectation of receiving realistic numbers. Investors have an especially keen interest since they can argue they only bought stock because you were forecasting record sales.
Businesses need realistic data to grow intelligently. While any company can blunder into a few good sales cycles, brands that perform consistently, quarter after quarter and year over year, usually do it on purpose. Making accurate and reliable forecasts is a huge part of making smart growth decisions, breaking into new markets, setting benchmarks for success, and allocating resources to the best places.
Your Foolproof Sales Forecasting Methods
Okay, you're sold on sales forecasting and its importance. So how do you do it? There are a few ways you can go about it, and some are better than others, depending on how your business is set up. Here are the seven top sales forecasting formulas, with the easiest ones first so you can try those if you're new to this.
Remember, no matter how you get to the final sales projection, all you're really doing is multiplying the number of customers by the average sales volume. These are just methods for making sure your numbers aren't junk going into the process. Pick a few and fool around with them to see which ones you can count on.
The Simple 3-Step Method
This is the easiest one, so try it first.
Dig into your CRM for your existing sales data, fudge the numbers for seasonality, build in a 10% buffer because everything is more expensive in the future, and project what amounts to last year's data into next year. The formula for this is:
- Step 1: Average monthly sales rate = Total sales until now, divided by total number of months
- Step 2: Average monthly sales rate times 12 (months) = Possible revenue for next year
- Step 3: Total sales revenue plus possible revenue for next year = Annual sales forecast
You'll notice this assumes nothing much ever changes—next year will be a repeat of this year—and the numbers you have in your CRM are 100% reliable. That's three assumptions that haven't really been all that safe for anyone since 2019.
The Historical Method
This one is a five-step process, so it's more scientific by default. It also looks harder, even though it's not, so you can use it for presentations to the CFO:
- Step 1: Pull together several years worth of past sales data for a decently representative baseline.
- Step 2: Calculate the sales growth curve over the lookback period.
- Step 3: Wheel out Ye Olde Excel Spreadsheets and plot that curve to look at the trend you've been on.
- Step 4: Make notes in the margins about stuff that affected your sales (for example, the trade war, global pandemics, riots in your city, panic buying of your brand of toilet paper/surgical masks). This lets you nudge the figures around based on whether those things are still going on or could happen again.
- Step 5: Make guesses about what your future growth will be.
This isn't totally uninformed speculation, especially if you're honest and careful about step 4, but there's still guesswork in it, and it's easy to go wrong based on your hopes and fears.
The Opportunity Stage Method
This sales forecasting formula works with the probability that your sales rep will close a deal based on historical success at every stage of the sales cycle. The key figure it gives is the close rate of your company. It works best when you have one product (i.e. strike fighters), or one type of product, such as cars, since the selling process will be basically the same for everything in the inventory. It works like so:
- Step 1: Chart how many sales interactions your reps engaged in at every stage, from cold calling to financing to closing the deal. Work out the percentages of sales that passed through each stage of the funnel to close.
- Step 2: Look up the total value of the deals that closed.
- Step 3: Sales forecast = Total value of current deals x close rate
This formula has the advantage of being really granular, so you can spot areas for improvement. Its shortcoming is, like the others, it basically assumes next year will be the same as last year. It can fall short in a dynamic, fast-moving industry or in one with wild swings in demand (like strike fighters).
Okay, this one is a joke, but it's shockingly accurate because it requires you to ask actual experts about their expertise and trust the answers you get. Here it is:
- Step 1: Ask your sales reps how much they think they're going to sell next cycle.
- Step 2: Add everyone's answers together.
Seriously, that's it. It works really well, and because it seems too simple to work at all, you have a built-in excuse in case it falls short. Use this for internal purposes only, and never tell the C-suite that you just asked around to get your projections.
Not only does this method have the coolest-sounding name, it's also the most complicated and, therefore, scientific. There's no single approved way to do multivariate analysis, but you can use your judgment about including some or all of the other methods, averaging them out, running a P-value analysis, computing statistical probability, averaging over quarters or decades (whichever you like), and factoring in expert analysis of extraneous variables.
Pick this one if your department has the budget for a consultant. It has the advantage that you can honestly arrive at any numbers you need and still survive an audit because the figures look like you made a good-faith effort toward accuracy.
The Bottom-Up Method
Bottom-up is good for fast-growing companies and businesses that just secured first-round financing. It's all about growth estimates, and it works well when you have margins of error you can slide with. Here's the formula:
- Step 1: Estimate how many customers you can reach in the next cycle.
- Step 2: Estimate how much they'll spend.
- Step 3: Multiply these together: Number of customers (projected) x average sales volume (also projected)
There are issues here with estimates, but assuming you're making conservative guesses, you shouldn't be too far off. Bottom-up is a fine back-of-the-envelope approach to new product development and should be mostly used internally.
The New Business Method
Your brand is brand-new, and you have no idea what your sales will be. If you're a startup with zero historical data to draw from, borrow some from a competitor. The new business method just relies on sales data from similar businesses in similar fields, adjusted against their actual sales over a given time period.
How To Improve Sales Forecasting Accuracy
Choose the Best Method
Which method you choose will depend on a lot of factors. Whether you're using the sales forecast internally or externally, the size and nature of your brand, and even whether you can trust estimates from your reps, all affect your choice of forecast method. There's no single best forecast method for sales, but with a bit of trial and error (mostly error), you can find the best fit for you.
Continuously Qualify Your Pipeline
Of course, all the projections in the world are meaningless if you're not actually, you know, selling. Remember to continuously qualify your sales pipeline and keep on top of changes that can pull the rug out from under you. Any major disruption can play with the most careful forecast, making all your work for nothing. Remember that an opportunity isn't a sale unless you close deals.
Consider Sales Forecasting Tools
You need the right tools for the job. That's as true for sales managers as it is for carpenters and mechanics. Plenty of sales forecasting programs exist that can automate your projections and take a lot of the guesswork and drudgery out of it. Have a look at our list of the best sales forecasting software on the market today.
Spreadsheets, historical data, this template, that template, new businesses, small businesses, red businesses, blue businesses—no matter how much experience you have in the sales process, there's always more to learn. Now that you're in the elite 7% who know what they're doing with sales projections, keep up to speed on what's happening by subscribing to our newsletter.