Sales forecasting Basics for Beginners. How to Sales Forecasting?

People commonly dream of knowing the future. It’s ok for an individual to do rough weighing up. However, for business, an accurate forecast is often a matter of survival. Business requires precise and reliable sales forecasting tools. Unfortunately, numerous studies have proven that the cost of predictions from soothsayers, shamans, and other magical representatives is an inefficient disbursement of funds. Although, we strive to know the future! Thankfully, we live in the era of science. And here’s what it says.

Probability Theory

In the deep Middle Ages, the French canon Richard de Furnival correctly calculated a total number of possible variants of points that are given after throwing three six-sided dice. He also indicated the number of combinations at which each of these sums can be obtained. Thus, a very controversial, but nonetheless quite effective theory was laid – the probability theory.

It is well-known fact that if a coin is flipped, it is impossible to reliably determine which side it will land on to the ground. However, if it is flipped a thousand, or say ten thousand times, in half of the outcomes it will lay the obverse and, accordingly, in half of the cases – by the reverse. An expected distribution is 50/50.

CRM Foundation

The founders of CRM, Robert and Keith Kestenbaum, decided to use the same simple principle at the day when in the 1980s they began to collect data about customers. Their consumer behavior and purchases. Robert and Kate decided to enter the data into a computer. The only question was. What’s next?

To begin with, the Kestenbaums came up with the idea of sending targeted messages to customers. For example, a person bought a towel holder – wouldn’t it be logical to offer him/her to buy a couple of towels (doesn’t that seem obvious nowadays?). But this was only the first step! Then Robert and Keith figured out. Why not try to estimate how much different customers will buy from the store in a certain period of time, based on their consumer behavior?

It came to be the door to Narnia! Thereby, we all have gained access to the most mysterious and murky area of modern science and technology – the area of determining the probability of key events for business. Closing a deal, performing a targeted action by one or another client. On the basis of these presumptive data, predict the company’s revenue.

Prerequisites

At this point, you might have a clue what is this story all about. But don’t rush with conclusions. The concept of sales forecasting is all about probability. The probability of an event that can happen. And might not happen. There should be some data in place, which could help determine first of all, if there are no well-defined sales steps in your business and there is no way to track the stage of your prospect, it is impossible to determine the probability of closing a deal. Simply put, without a working CRM, you can’t forecast an outcome.

Business process

The key concept of sales forecasting is determining the business process. You should have a clear picture of the business process. Its consecutiveness and clearly state its stages. Without the clear determination of sales stages, there is no place for a precise sales forecast. You could have the best CRM in the whole universe, but you should decide on HOW you are selling. Sales stage consecutiveness is essential.

Sales forecast essential elements

Sales forecasting starts with the stages of the purchase funnel. Let’s assume we have three of them:

• Stage 1 – Lead
• Stage 2 – Prospect
• Stage 3 – Customer

If at the first stage we had 100 leads and out of these 100 leads we got 3 clients who actually bought a product, then our total conversion on the funnel is 3%. Further, if at the beginning we had 100 leads and 30 people moved from stage 1 (leads) to stage 2 (potential client), then the conversion of this stage is 30%. Finally, if from stage 2 three customers moved to stage 3 (namely, out of 30 potential customers we got 3 clients), then the conversion of the second stage is 10%. Well, the conversion at the last step will be 100%, because the client is the one who has already bought from us.

Stay safe with CRM

What does this scheme bring us? We get the opportunity in the future to calculate the probability with which each consumer will make a purchase, at each particular stage. For example, coming to the office on Monday morning and making the first cup of coffee, we request a report from the CRM system and see that at the moment we have 100 people in the pipeline at the stage leads. This gives us confidence that we will have three new clients in the nearest future.

Then we request a report on potential customers, and we see that we have 30 people at the moment, which means three more almost guaranteed purchases.
You can turn your desk chair and enjoy your morning coffee while gazing out at the hustle and bustle of the streets through a wall-to-wall window. Now comes the fun part! Let’s say our average sale is € 100. That is, at stage 3, each client with the probability of 100% brings 100 euros. This is the sum of the total conversion at stage 3 of the purchase funnel.

However, our focus is not on that, the concern is the opportunity to find out what conversion into cash we will get from people who have not bought anything yet – an assessment of client prospects.

Sales forecast monetary value

Actually, there are many ways this can be done: sophisticated mathematical models, long questionnaires for potential clients or focus groups, involvement of artificial intelligence. For the sake of the experiment, we use the most simple method – historical data. If we know that a client brings 100 euros, and the conversion of leads amounts to 3%, then it turns out that each of our leads makes a guaranteed 3 euros. The number of leads we have attracted in the last hour, in the last day, in the last week can be viewed – and thus a forecast of future income can be gotten.

The same thing comes with potential clients, who we have at stage 2: each potential client will buy with the probability of 10% for the amount of 100 euros. This means we can predict future income: each potential client makes 10 euros of future income. Naturally, the more leads and potential clients we have, the more accurate the predictions will be: just like with a flip of a coin, the more tosses we make, the closer the distribution will be to 50/50.

Now we complicate the concept a bit: let’s take not 3, but 5 stages of the funnel and may the conversion from each stage be 80%. If at stage 1 there are 100 people in our funnel, then the result is the following conversion from stage to stage:
100 people – 80 people – 64 people – 51 people – 40 people.

If we invert these numbers, it will make a percentage conversion – the probability of a sale at each stage:
40% – 51% – 64% – 80% – 100%

To wit, each lead at the 1st stage of the funnel is 40% of the deal closing, at the second – 51%, and so on. May the average check be the same as in the previous example – 100 euros. This means that the conversion of each lead into cash at stage 1 is 40 euros. And if on Monday morning we got about 6 new leads, we most likely predict an income of 240 euros.

Sales process is essential for sales forecast

As you can imagine, we can now calculate whatever we like: the likely amount at any stage, the probability of sales at any stage for any period for any number of leads or potential clients. In addition, if all leads, all potential clients are processed in exactly the same way, the forecast accuracy approaches 100%. Is there a pitfall? It stands to reason! For this system to work properly, we must have a well-managed business process. Sales managers should act in the same way, work according to the same scenarios – sales scripts. Only under such conditions can we maintain a proper level of accuracy. The second point – it is necessary to record all the information, which means a CRM system is required.

Calculating customer value in sales pipeline

As soon as we start forecasting sales, a desire to collect as many different numbers as possible raises. The data stream is growing like a snowball! And that is a good thing! If a business really commences getting involved in the collection of information, it receives a tremendous benefit from the investment: 6 euros of income for each invested euro. Where else can you get a 600% return on investment? It’s a Klondike! Therefore, companies that digitize properly are growing by leaps and bounds.

New data can lead to surprising insights of management. For example, it suddenly occurs to someone that since the value of customers in the funnel is not identical, then different employees should work with them. Namely: the higher the probability of closing a deal with a client, the more professional employees who work with him should be! Let’s take the numbers from the last example: our lead at stage 1 brings 40 euros, and a potential client at the penultimate stage – 80 euros. That’s twice the money! Therefore, more competent employees should work with this client at the penultimate stage than at the first.

Prioritisation in sales forecasting everyting

Right, this approach can lead to the fact of dropping out more leads at stage 1. However, less money is spent on working with them than on those who reached stage 4. At the very least, the number of leads at stage 1 can be raised – it is easier and cheaper than losing soon-to-be customers at stage 4. Thus, literally by snapping a finger – just redistributing responsibilities among the existing staff – we can suddenly be able to greatly increase conversions in the last stages.

And hence direct income! What has just been described is just one of the possible positive effects of sales forecasting. And we have only slightly lifted the veil. As a matter of the fact, long-term consequences will be countless – you will seriously start to build your company in a new way.

How to start with sales forecasting

As it was mentioned before, the most important thing is to agree on a business process beforehand. Unless the main business process and all its stages are clearly identified, the forecasting will not pan out. Secondly, it is necessary to implement CRM (preferably Salesforce 😉) to keep track of the numbers.

And finally, the third is to have your company actually carry out this process. Not for show, as is often customary in companies located in the CIS: first, an employee does all the work in an old-fashioned way, and then he opens CRM and fills in something there to get paid with a bonus. In such a case, nothing will work – the data will be lost, distorted, hence forecasting should not be expected. To make it run, it is necessary that the whole life of the company really takes place in CRM. To prevent an employee from pressing the button that will make a client a cup of coffee until the data about the client are entered into the system.

Furthermore: remember, even when the sales forecasting starts to come true at some point, that is not a win yet! If you got the first accurate forecast, congratulate yourself and keep on working! Because if you lie on oars at the very moment, the system will start to glitch again. Although, to be frank, it will hardly be possible to avoid this: eventually, you will definitely lie on oats, and the system will definitely start to malfunction. The next point: the more data employees will be forced to enter into the system manually, the more likely they will enter not all, and the less accurate the forecasts will be. Therefore, expect that forecasting will actually work only at the moment when all the necessary information will be entered into the system automatically.

Company digital transformation

Let me tell you about the process of future digitalization in search of forecasting – how it is most likely to go in practical terms. Initially, you should enter all the data manually. It is impossible to immediately implement at least some decent level of automation: first, you need to undergo a certain point of system optimization. As well as there is no way to skip a couple of grades: even if you are a child prodigy and able to deal with the program of each year in 2 weeks, you still have to spend these two weeks in the 2nd grade, then in the 3rd, etc.

Then you will understand how everything works and make a robot that will enter data into the system. This is where you get the first more or less accurate forecasts! General jubilation is obligatory, champagne is optional. After a while, it will come out that the robot does not work quite correctly and occasionally enters inaccurate data. Then you will hire a person who will monitor the accuracy of data entry. The one will exhaust everyone in the company! He will be hated like Covid-19.

Fortunately, after a time, his work will bear fruit – and you will come to think about true automation of data entry. Now champagne will certainly prove useful because from this moment the process will become irreversible. You will probably still make mistakes, face failures, and foolish blunders – but at this point, you will already be following the path of real digital transformation.

Costs of sales forecasting

Now you probably want to ask me: so why reinvent the wheel if everyone has already passed this route? Why not move straight to the last step? How many sales forecasting will cost? The trouble is that it’s not a question of money! The transformation of a company from analog to digital is a process. The path. It must be pursued, instant teleportation, in this case, is impossible. Why? Because you have to use simple solutions first and check their performance. Only after that, it will be possible to complicate them and build upon – once general competence grows. How long will this journey take? In my experience, the average period is five years. It will take five years from the moment you start implementing CRM until the day when the system itself learns to collect data with minimal employee involvement.

This period seems fantastic to many people. Indeed, does it make sense to get down to business if the project goes far beyond the planning horizon? Fortunately, the path starts with the first step – just at the first step, you can get a significant return on investment! Certainly, a perfect lay of the land requires time and patience, but the first improvements can be felt in a few months.

Another stumbling block that is often stumbled over on the path to the digital future is something like a bonk for marathon runners. When you have to redo the same thing over and over again, the leaders begin to have uncertainty, which turns into bad suspicion. Then he says: let us evaluate the feasibility of the investment and makes sure the company goes around in circles and terminates the whole project. Unfortunately, you have to go around in circles – especially since these are not circles, but an upward spiral movement. We get new information (sometimes it comes at a great cost) – we return to basics, do it over and over again until we finally bring about a system that works really smoothly and accurately.

You may ask why a consultant does not give the company executives a heads-up that such a development is more than possible? Believe it or not: I am giving a heads-up! Although, they usually don’t take my notices seriously. I do not say directly: you will redo everything in six months – I forewarn that this may happen, and most likely it will happen – but they do not believe.
They hustle and try to find a cheaper estimate. These are not our clients – but we still have to work with them.

The role of leadership

If the company does not have a strong leader who is ready to take responsibility for changes and silence the dissatisfied – alas, the project is doomed!
It is better that leadership represents not only one person but a close-knit team. A good group of leaders comes from a budget holder, a product owner, an operational leader of a team. When each of them is engaged in digital transformation in their area, the result can be achieved earlier.
If you feel the leadership potential, the gates to the knowledge of the future are open for you!