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Sales forecasting methods small businesses can actually use

Sales forecasting methods small businesses can actually use

You’ve probably turned on CNBC long enough to hear about big companies hitting or missing the “sales forecasts,” and you’ve probably seen company stocks going up or down based on how analytics compare historical data to those forecasts.

But while business forecasting and quantitative analysis is definitely a hot topic for big companies, it’s a foreign concept for most solopreneurs and small businesses.

These organizations often suffer from a “feast or famine” lifecycle and have major difficulties creating accurate sales forecasts — if they create them at all.

But it doesn’t have to be that way.

In this article, you’ll get a crash course in business forecasting as well as forecasting techniques that you can use right now to create a more accurate model for your business.

Ready? Let’s go.

Sales forecasting methods small businesses can actually use

  1. What is a sales forecast?
  2. Why do I need it?
  3. Types of business forecasting techniques
  4. Time-series models
  5. Indicator approach and econometric models
  6. Judgmental forecasting model
  7. The Delphi method
  8. Which forecasting method should I use?
  9. Finally, fill in the blanks

What is a sales forecast?

Simply put, a sales forecast is an indication of your expected sales revenue over a given period of time, like a week, quarter, or year.

The best business forecasting methods use historical data sets, market research, anticipated future trends, and other factors to create predictions with a fairly high degree of accuracy.

From the standpoint of metrics and analysis, if you have a strong set of past data and a historical record of performance, then you can use it to predict future growth.

Of course, sales forecasts can also be woefully incorrect. 

Economic conditions, new product launches, poor decision-making or business management, and unforeseen future events can all create deviations in the predictive models and lead to woefully inaccurate projections.

For a great example of that, consider the COVID-19 pandemic in 2020. Any accurate forecast based on historical data points at the start of 2020 would have been completely inaccurate as sales plummeted and the pandemic took hold by the middle of the year. 

It was so bad that publications like Forbes and HBR were running articles to help readers understand how to handle this in the wake of a full economic meltdown.

While big companies have ways to include fluctuations like this into their predictive models, small businesses won’t need to worry so much about that at this stage.

Even with minor variances, a decent sales forecast can be a powerful business tool to help you ensure that your team is on the right track.

Why do I need it?

Sales forecasts are an important planning tool that you can use to take ownership that business operations that might feel like they’re outside of your ability to control.

Short-term forecasting can help you better understand your sales and proposal process and nail down your ability to set effective revenue goals for your business. 

Long-term forecasts can help you understand business growth over time and teach you how to use actual performance data to optimize your business workflow.

With a great sales forecast, you’ll be able to look six months to a year down the road, see the growth that’s possible, and figure out how to actually get there.

Types of business forecasting techniques

While this article focuses specifically on sales forecasting models and will provide some of the nuts and bolts to help you get started, it’s worth pointing out that there are several forecasting models that you can use to create reliable outcomes.

If you’re doing research, you’re likely to run into a few of these models. A brief description of each is outlined below.

1. Time-series models

If you’re planning to use historical data as the lynchpin to any forecasting model, you’re probably looking at a time-series model

In this method, you’ll use past data as a predictor of future performance and growth.

Just a side note: If you’re a PandaDoc user, you can access up to a year of historical data directly from your dashboard.  

This method is great for businesses where the price of goods remains largely stable and growth is often determined by scaling that the business can largely control.

For example, if you run a cleaning service and your overhead costs (supplies, labor, etc.) have been largely consistent for the past several years, then your ability to grow may be largely dependent on simply scaling your operation and aggressively trying to grow new accounts.

In a scenario like this, growth comes down to the business strategies you implement, so time-series data and an appropriate growth methodology probably makes sense.

Types of business forecasting techniques

2. Indicator approach and econometric models

This method of forecasting looks at supply, demand, and price fluctuations to try and discern indications of growth. 

These models are most often used in academia, research, and governmental policy discussions rather than sales.

Using this model, you’ll need to assess the economic relationship between multiple variables, try to determine the link between those variables, and see how they might impact future business opportunities.

Shipping and freight have proven to be a great example of that as the cost of a shipping container used to import goods skyrocketed from $1500 in May 2020 to over $11,000 in September 2021. 

If your business relies on overseas manufacturing and shipping imports, econometric modeling might have tipped you off to this unexpected cost center within your business.

This model is the most technical because it relies on statistical models and broad datasets to determine buyer appetite and causal indications that signal a surge in consumer demand.

If you’re a small business without access to economists, artificial intelligence platforms, and decent number-crunching tools, this method may not be for you.

3. Judgmental forecasting model

The most subjective model available, judgmental forecasting steps back from quantitative methods and instead relies on forecaster intuition to make appropriate predictions.

If you’re a numbers-driven individual, taking this approach might seem somewhat beyond the pale, but judgmental forecasting is a great fit when a lack of information means that quantitative forecasting isn’t an option.

While all forecasting methods are truly just educated guesses, judgmental forecasting relies on the expertise and intuition of the forecaster to make the right decision.

If you haven’t been tracking the metrics required to create an accurate forecast, or if a major sea change in your industry renders your current data sets invalid, you may be left to take an educated guess and pick a direction.

Gathering new data and using it as a reference point can increase the accuracy of judgmental forecasting, but this methodology is typically overtaken quickly by quantitative models once enough sales data is available.

4. The Delphi method

Named after the high priestess of the Temple of Apollo, known as the Oracle of Delphi, this method of forecasting relies on predictions made by a panel of experts.

The assumption being made through this qualitative method of forecasting is that these experts can leverage their industry expertise to predict with a greater level of accuracy how a market will change.

Often, these experts will fill out a questionnaire or answer a series of questions put forth by the company in order to arrive at the best course of action for the organization.

Which forecasting method should I use?

The forecasting method for you will depend on the data and resources that you have available for your business.

If you’ve been tracking metrics that you would like to change, it’s easy to do a time-series analysis, make a policy change in line with your objective, and monitor the moving average over time.

Lacking sufficient data, you may have no choice but to adopt a judgmental forecasting model, make your best guess, and start tracking the metrics and data points that make the most sense to help you make an informed decision.

Some of these metrics might be obvious. 

PandaDoc reporting tools can help you track everything from the number of sales documents that your reps close and the amount of revenue earned from each document to exactly how documents and deals move through your sales pipeline.

But, while sales activity is one aspect to monitor, you’ll still need to consult other tools to best determine where you might close other opportunity gaps in order to maximize profits.

Getting started with sales and quantitative forecasting

Before you ever get into forecasting sales, you have to understand how you obtain the basic elements of a sale.

Here’s a very simple look at those basics.

  1. Leads. These are people who go from unaware of your business to a trackable lead (e.g., they subscribe to your mailing list, you reach out to them directly, or you advertise). There are several ways to obtain leads but, once you have them, you’ll need to convert them.
  2. Qualified Prospects. All your leads won’t become customers. There has to be some process to qualify which leads are ready to hear your pitch and potentially become buyers.
  3. Clients/Customers. Out of those prospects, you’ll have a percentage (should be a decent one) that will “close.” This means they will sign a deal, buy your products, etc.
basic elements of a sale

Knowing your numbers

You have to trace down where the money is coming from. This might sound like a cop drama but, if you can follow the money, you can solve most cash flow problems in your business.

You find your numbers by asking yourself questions and getting the facts.

 Forecasting questions

If you’re trying to answer these questions and just can’t — don’t worry. 

You may have to make judgment calls based on what you’re seeing and conduct a trend analysis over time as you begin to compile that data.

Set your target (dates and dollars)

“Begin with the end in mind” seems to be a term coined in the book 7 Habits of Highly Effective People.

Regardless of where it came from, it’s a very effective starting point for forecasting the future sales of your business. After you find out your current numbers, you’ll have a realistic view of how quickly you can grow your business.

For instance, if you’re making $8,000 a month on average; it may be possible to increase that to $12,000-$16,000 per month within the next 12 months. But $100k per month in the same time frame would be a stretch.

Make sense? Set a goal that you think can be achieved and then run it through a few tests.

Understanding the process

Those questions might include:

1. How can I increase my leads?

Increasing your sales by 50% is likely going to take at least 50% more leads. This means that you have to take your current lead generation and see if you can increase it.

Sometimes, this can be done by leveraging sales automation tools in order to free up resources for lead sourcing.  Other times, it may require additional spending in your marketing and ad budgets.

If you’re using Facebook or LinkedIn ads, can you double the ad spend and keep the click-through rate?

If you don’t think your current method will yield the number of leads needed to reach your goal, you’ll have to add other methods.

Could you add cold email outreach to your inbound strategy? Or can you simply ask for referrals and get some more clients (if you sell something like high-dollar consulting services)?

2. What infrastructure will this increase take?

More sales mean more clients. And more clients mean more deliverables. More leads mean more conversations.

Of course, all of this takes place in the same 24/7/365, and you’ll have to solve problems surrounding increased efficiency and higher overhead. This is a crucial problem to consider because, even if you can accurately forecast six months to a year down the road, if you can’t service the business coming in, your forecast might outlive your company!

Boosting efficiency

Increasing efficiency is a matter of shortening the pre- and post-sale process.

This might mean doing calls to ensure that each new client is aware of how things are going to go.

You could also streamline paperwork by using templates and use services that improve the velocity at which deals and contracts are signed. (invoicing, proposals, agreements, standard procedures, etc.).

Polish up your processes before you try to increase your leads, that way your system and your team are better able to accommodate this new operational change.

Handling overhead

Increasing overhead is a matter of figuring out whether or not the current staff can handle the business you predicted with your forecast goal.

If not, hiring new workers or contractors may be necessary. Figure out the staffing/freelancing/contracting power you’ll need before you start sending out twice the number of proposals.

Finally, fill in the blanks

You have where you are and where you want to go. It’s like an algebra equation. You’ve got to fill in the holes to finish the DNA of your increased revenue.

If you understand your situation and goals well enough, this should be the exhilarating part.

It’s best if we explained this with an example. Let’s get into the thick of the numbers.

Company: A small digital marketing agency specializing in Web Design and SEO.

Current Revenue: $20,000-$22,000/mo

Revenue Target: $40,000/mo

Goal Timeframe: 6 months

Other essentials

Number of Clients: Average of three new web design clients/mo and 10 recurring SEO clients

Average Income/Client: $4,000 avg web design client. $1000/mo avg SEO recurring client

Details: On average, 50% of new web design clients convert to being SEO client. The average SEO client lasts six months before canceling service. The objective is to find new web design clients and funnel those clients into SEO clients.

Obviously, there are a ton of ways that you can increase sales here. That’s my main strategy in this post.

Let’s go over the most likely forecast.

Example forecast

If you double the websites to six ($24,000/mo) and close 3 new SEO clients at $1000 each, then BAM! Even with clients leaving after six months, within a year, you’re close to that $40,000/mo target.

And you can start achieving this in the very next month.

Let’s show our work in detail.

Month One

$24,000/mo in Web Design revenue

$3,000/mo in new SEO revenue

$8,000/mo in current SEO revenue (assuming the average of 2 canceling services each month).

Total: $35,000

Month Two

$24,000/mo in Web Design revenue

$3,000/mo in new SEO revenue

$9,000/mo in current SEO revenue (assuming the average of 2 canceling services each month).

Total: $36,000

Month Three

$24,000/mo in Web Design revenue

$3,000/mo in new SEO revenue

$10,000/mo in current SEO revenue (assuming the average of 2 canceling services each month).

Total: $37,000

You get the idea?

Fast forward to month six, and you’ve got $40,000/mo. All by moving through the forecasting process and doubling the amount of web design clients over a reasonable period of time.

Granted, this growth will take work. But, as I hope you can see, it’s possible, and no complex formulas or excel spreadsheets are required.

If you know your ideal customer, you’ll know how to sell. Everyone knows that in the modern world of sales.

But what’s lesser-known is that, if you know enough about your current customers and what you want to achieve in your business, you can leverage your existing success in order to create new growth.

All you need to know are your numbers and your goals.

Happy forecasting!

Originally published October 9, 2017, updated December 6, 2021

Disclaimer

Parties other than PandaDoc may provide products, services, recommendations, or views on PandaDoc’s site (“Third Party Materials”). PandaDoc is not responsible for examining or evaluating such Third Party Materials, and does not provide any warranties relating to the Third Party Materials. Links to such Third Party Materials are for your convenience and does not constitute an endorsement of such Third Party Materials.

Justin is the Founder of LeadFuze, a B2B lead generation platform.

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