Getting to grips with sales forecasting is crucial, especially when up to half of UK SMEs are struggling to access additional finance in 2024 [1]. Using data to predict when sales will increase or decrease allows a business to plan, prepare and act accordingly.
Sales forecasting methods
A sales forecast can be based on historical company data, but it may also use external data. This can include inflation figures and market or industry trends.
Custom Neon, which provides bespoke lighting and décor products, relies on forecasting for everything, from marketing strategy to pricing decisions, explains Jake Munday, the company’s CEO. “We forecast sales revenue up to 12 months ahead using a combination of past trading data and external data like market conditions and inflation,” he says. “That data is critical in helping us decide when the right time is to run a promotion, or what demand might look like when we expand into a new market.”
Financial forecasting in sales can help business leaders anticipate peaks and troughs in demand, and ensure effective cash flow management readiness. The American Express® Business Platinum Card has a payment period of up to 54 days, giving you more control over your cash flow and when you make your payments¹.
What's more, Amex® Business Platinum Cardmembers get a £150 annual statement credit with Dell Technologies that can be used towards computers, monitors and other tech solutions to help your business meet increased demand².
Opportunity stage method
This common method of sales forecasting predicts future business opportunities based on the likelihood that specific deals in your business pipeline will result in a sale.
How it works
The opportunity stage method uses historical data to predict the likelihood of a business deal resulting in sales revenue based on its stages in the sales cycle, such as lead generation, demonstrations, or negotiations.
The opportunity stage method works well for companies with long or complex sales processes. This might include software businesses or marketing agencies.
Opportunity stage example
A software company identifies six stages of the sales cycle and can use historical data to calculate what proportion of prospects at each stage will convert into customers.
A £100,000 deal at a qualification stage might have a 10% chance of closing and will therefore add £10,000 to the revenue forecast. The same deal at the proposal stage might have a 50% chance of closing, and would therefore contribute £50,000 to the sales forecast.
Pros and cons
Opportunity sales forecasting is relatively simple to calculate and can help companies know where to focus their resources and sales budgets. Additionally, it provides insights into the performance of a sales team.
However, it can encourage businesses to take a short-term view. This is because it assigns more importance to later-stage activity, and less to early-stage sales activity.
Length of sales cycle
Sales cycle forecasting predicts future revenue based on how long it typically takes to close a sale with a customer. If your company knows that it usually takes 60 days for a customer to move from initial contact to business revenue, this can be used to produce an effective sales forecast.
How it works
Sales cycle forecasting works similarly to opportunity stage forecasting in that companies start by clearly defining each stage of the sales process, from lead qualification to proposal, negotiation and closing. The business then calculates the typical length of each stage, based on past performance.
Length of sales example
A design agency has mapped its sales process and knows that the process of lead generation, qualification, demonstration, proposal, negotiation and contract finalisation typically takes 2 weeks for each stage and 12 weeks in total.
The company then forecasts revenue based on how many deals are currently at each stage in the sales cycle, and when revenue will likely be realised. For example, if there are four deals worth £50,000, all at the proposal stage with a 50% chance of closing, this stage contributes £100,000 to forecasted revenue.
Pros and cons
Sales cycle forecasting helps business owners to effectively allocate resources, predict cash flow and better understand their sales processes.
The key downside is that it needs reliable, consistent data. In a slow economy, sales cycles may be longer. Or, the sales process may change as the business grows, making it hard to keep forecasts accurate.
Historical sales forecasting
If you want to predict how many specific products your business will sell in May versus October, then a simple way to do this is to look at how much was sold last May or October and assume this year will be the same, or better. It is this idea which informs the historical sales forecasting method.
How it works
Most companies can calculate a historical sales forecast relatively quickly using accounts software, which can generate reports and forecasts, says Bowan. “Historical sales forecasts are ideal for smaller companies without specialist financial support, but they do rely on you having enough trading data to make the forecast work,” she says.
Historical sales forecast example
If a company sold £50,000 of stationery products in January last year, but £100,000 in September, then they might assume similar revenue for those months this year.
If the business is growing at 20% annually, they could adjust the forecast to take account of growth and assume revenue for January would be £50,000 + 20%, or £60,000.
Pros and Cons
One considerable advantage of historical forecasting is that it’s quick, easy and simple to understand. Unlike previously discussed methods, historical sales forecasting is based on actual past performance data. By analysing historical sales metrics, businesses can identify and leverage trends, seasonality and other patterns that influence sales.
The downside is that it is limited because it relies upon a company having good historical data from the outset. Moreover, it doesn’t take account of broader changes between periods. For example, your company might have grown, introduced new products, or increased prices. “Some SMEs will not have a lot of historical data, [and] in that case, you need to check and monitor more frequently, even if it’s looking back one month and forecasting forward one month, that’s important,” says Bowan.
Sales forecasting best practices
Keep forecasts up-to-date and monitor religiously
Sales forecasting data requires continual tracking, monitoring and adjustment. The winds of economic change can easily batter a business. Having up-to-date information means you're less likely to be caught by surprise, says Bowan. “Tracking the data means you can be proactive and respond to situations as and when they happen. Not having up-to-date forecasting means you’re limiting your options, and you risk exacerbating situations when problems come up.”
Use forecasts to plan for challenging economic circumstances
Forecasts will often show growth in your business, but they will also give you a warning of potential difficult periods. “Forecasting is a great reminder of what things look like during tougher times, and you can make early decisions about how to reduce costs, perhaps by giving smaller bonuses now or planning major purchases or bill payments at times when you have more cash flow rather than less,” says Bowan.
1. The maximum payment period on purchases is 54 calendar days and is obtained only if you spend on the first day of the new statement period and repay the balance in full on the due date. If you'd prefer a Card with no annual fee, rewards or other features, an alternative option is available – the Business Basic Card.
2. Once you have enrolled your Card Account, you’ll get up to £75 in statement credits between January and June, and the same between July and December for United Kingdom purchases with Dell Technologies on your Business Platinum Card – up to £150 in statement credits annually. Terms and conditions apply.
Sources
[1] British Chamber of Commerce, Access To Finance Challenge For SMEs, April 2024
