Why is a sales forecast so important?

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Buiding accurate sales forecasts is one of the most important exercise in every company. Or it should be. Large companies and listed companies invest an incredible energy throughout the year, in order to get the most accurate sales forecast as possible. Sales forecast is also one the easiest document to understand and probably the most commented internally and externally one. The importance of the sales forecast is such that big companies pay time-series in-house financial experts just to make sure they have the best world-in-class sales forecast. You can find here everything about sales forecasting.

Internally, the sales forecasts is driving all the departments of the company.

Why CEO, CFO and all C-level love sales forecasts

At a C-level, the management team need to have an accurate sales forecast, regularly updated. A good sales forecast helps the CEO assess if the company is going in the right direction and if it's not losing any market share and keeps beating the competition.  The market is growing, so should be the company. Calculating the market share requires a lot of external data points and a good triangulation capability, but estimating the current market share and its evolution are key to understand if the company is not losing track.

Every good CEO should know what coming in in terms of new customers as well as this could have massive impact on PR, customer services and so on. The sales forecast document also helps the Chief Product Manager to assess the level of demand expected for their products and give an indication on where product developpement will need to focus: for instance, launching new products to address specific markets or address targeted segment of the population.

The CFO is maybe the one who will pay the most attention to the sales forecast. He will invest a huge amount of time challenging its accuracy as it constitutes the topline: break-even point determination, working capital required, stock rotation, impact on EBITDA and many other financial ratios. In companies where fixed costs are extremly high, CFOs will monitor even more carefully the evolution of the sales: The level of turnover required is very to reach the break-even point - and gross margins, due to the cost of the fuel, are very small. Any unexpected sales variation could costs millions to the company.

Sales forecast versus actual performance

The comparison of the sales forecast and the actuals helps understand short term performance of the company - and if the company is on track with the initial budget. Generally, the finance department will produce daily, weekly, quarterly and yearly reporting were the sales volume (in $) will be compared to the initial sales forecast. A company needs first to invest some money before generating it: hire sales people, buy products, acquire machines. Getting the sales projection right is key to reach the break-even point and start generating profits.

Any growth softness or unexpected actuals vs budget variation should and will be commented. Variations between actuals and sales forecast should be carefully monitored to understand if the operations are working as expected.

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One goal for everyone

The sales forecast as a management tool. Sharing a common goal is critical. Sales volume are however not aspirational (with the exception of the sales rep who keep dreaming about their bonus). Sales forecast however helps aligning the team around a clear objective and help defining what is success in a company. Managers and company leaders will get an objective to achieve. While there will be intense discuss around the validity of the sales forecast, once defined, the sales forecast and sales objectives will create alignement.

At an operational level, sales forecast is the north star

Sales forecast is for the sales team first

First department concerned, the sales department: sales rep need also to have a reasonable quota being set and know how much to sell. The sales teams need to have a quota to achieve (monthly quota and quarterly quota are the most common timeframe to set up sales objectives). A good sales forecast should be strechy enough to push the team and make sure that every sales opportunitiy will be explored and not left aside.

However, a sales forecast shouldn't be set too high as high quota will demotivate the sales team as they appear to be unachievable. In this sense, sales forecasting appears to be at the junction of science and art. Sales rep portfolio will need to be adjusted according to historical level of sales and portfolio sales potential. Re-forecasts need to be made and adjustement performed as the year goes by: sales rep leave, new sales rep go, backbook customers unexpectedly churn. Sales quota need to be re-defined.

The sales pipeline and how many prospect leads needed is directly related to the sales forecast. When deals should be closed? At which sales stage are the current prospects? The lead gen departement  -or the sales team - will need to adapt and size the pipeline size to hit their sales objective. This might imply purchasing more traffic on internet to get more hot prospects signing-up via the online form, or attending more sales fairs.

Why marketing needs to understand the sales forecast as well

The marketing team will need to support the sales activity and sales forecast helps adjusting marketing actions required. Hence, the marketing department will closely look at the seasonalities embedded in the sales forecast, but also factor in when product releases are supposed to come live and drive incremental sales volume.

Marketing is about knowing the market and support sales people: any marketing spending budget should be related to the sales activity forecasted. Marketers should know what is expected by the company for each line of revenue and gaps should be identified quickly - E.g. A country launch but very little marketing budget set or a black friday sales peak planned but very no co-marketing action planned.

Purchases are driven by the sales forecast

Purchasing department will also use the sales forecast as a guideline to determine when orders need to be made. Let's consider the case of a fashion retailer. Clothes needs sometimes to be purchased several weeks in advance in order to count on an average 6-8 weeks shipping period, before clothers come to stores and can be sold. Depending on the breakdown level of the sales forecast, but knowing which product category or market will experience a sales peak and when is key for the success of a purchasing department. The purchase department, as a function support, needs to know if the company plans to accelerate on the sales side at a specific quarter or week.

Like in photography, the purchasing department is the negative of the sales department. A mis-communication or a mis-comprehension of the sales forecast by the purchasing department and you might end up with a lot of stocks, consuming your cashflow. Other departments could get an interest into knowing the latest sales forecast. Customer service is one of them. If a massive sales campaign should trigger massive subcriptions, then customer service should know about it. Customer service should anticipate more workforce; modify the planning or train the workforce consequently.

Sales forecast is closely monitored by external investors

A company fully "in control"

Externally, the sales forecast outlook will be closely monitored by financial investors, banks or institutional investors. Sales previsions have a direct impact on the company valuation, earnings per share  (EPS) estimation and stock price. Having a good sales forecasting - and delivering against it - shows to investors that the company is in control of its activity and basically generates what has been committed. If an investor had to put $100, that the company plans a sales ROI at let's say $110 and delivers $110.01, then the risk for the investor to put this initial investment amount would have been limited. Investors like when the risk is under control. If you want to understand how to make a sales forecast or if you need a statistical way to help doing your sales forecast, you should read our product page!

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