When it comes to planning out the future of your business, the most reliable source for prediction is a look at your sales past. Quantitative sales forecasting is one of the most objective ways that you can predict where your business will be in the near future.
Although no method is a magical crystal ball, sales forecasting allows you to get a general idea of where your business is headed. It does not take in-depth statistical analysis to get an overall look into your sales department and see the direction that it is heading. Rather, using simple sales forecast methods can let you know how your sales team is doing.
Here is a breakdown of what quantitative sales forecasting is, why you need it and the top methods you can apply today.
What is Sales Forecasting?
Sales forecasting is typically split into two categories: quantitative and qualitative. Although they both have the same goal of predicting future sales, they use two different methods. Here is a quick look at each one:
Quantitative This type of sales forecasting uses hard data collected over the past months, and even years, to calculate future expenses and revenue. This method is more focused on the numbers to give the most accurate prediction.
Qualitative This is a type of sales forecasting that takes human emotion into the equation. Business leaders use intuition, experience, and feedback from clients in order to make predictions about where they are headed. Because this is a highly emotional and unreliable form of sales forecasting, it is typically used by new businesses that do not have data to analyze.
In this article, we will be focusing on the quantitative side of forecasting because it is the most reliable means of getting the most specific predictions in your sales. Although it will not be able to predict certain market fluctuations and will not get predictions down to the dollar, it is the more accurate way to look at future sales.
Why Use Quantitative Sales Forecasting?
There are several reasons you might want to take a serious look into sales forecasting, including:
Objectivity It can be hard, especially for small businesses, to get an objective look at how their sales are doing and where it is going. Especially when seeing lackluster sales, it might be too easy for a business to try to stick with ignorance. Hard data, on the other hand, will give you the ammunition you need to get a real look at what is going and allow you to make a real plan for the future.
Patterns Finding patterns is crucial for sales. Is there a new growing area that sales are continuing to grow in? Are sales on a product plateauing as the market becomes saturated? Quantitative forecasting allows you to see all of this.
Attract When you have hard data that shows growth, you have a powerful means for attracting and engaging external stakeholders. Being able to give the most specific predictions will allow you to secure loans, bring on partners and find investors.
Top Methods of Quantitative Forecasting
Thankfully, sales forecasting methods do not need to be complicated. With basic math skills, you can use your past information to come up with predictions for your future sales and revenue.
Historical growth rate This is the simplest of all the methods to calculate future sales. It is sometimes referred to as the straight-line method and can give you a rough look at where sales will be based on past growth rate.
A simple formula would look something like this:
(x) month’s sales x (1 + % rate of sales growth) = next month’s sales
Say, for example, you were trying to predict next month’s sales based on the fact that sales are growing by 30% each month and revenue last month was $100,000
$100,000 x (1 + 30%) = $130,000
Linear Regression Another commonly used method, linear regression allows you to get an average based on the charted progress of your sales. This will give you a great average to look at the direction things are heading. This can also be achieved pretty quickly through an Excel spreadsheet of your data (directions are here)
For example, take a look at this graph
Although some months may be higher and others lower, graphing each month will give you a good average that can be graphed out. This average will make seeing your company trends and predicting where you will be much easier.
It can be difficult to look simply at numbers and equations to get a good prediction. Graphing it out in a linear regression will help you to see more clearly the trends in your business.
Run Rate Run rate is another simple equation that can have a big impact on your sales predictions. The run rate is:
Total revenue/ sum of past sales periods
Really. It’s that simple.
It is best used when you are tracking sales for a set period of time. For example, if you have a sales goal to meet by the end of the year, it can help you to see whether you are staying on target.
Let’s say that you are in May and you’ve sold $50,000 worth of product, but you want to see what you will make by the end of the year if trends continue.
Since averages are broken down monthly, you can calculate that you are making $10,000 a month and have 7 months left in the year:
7 X $10,000 = $70,000
When you add that total to what you have already made:
$50,000 + $70,000 = $120,000
You can somewhat predict $120,000 in revenue for the year based on this run rate. This can make tracking goals and making sure you hit them easier to do.
Use Quantitative Sales Forecasting to Grow Your Business
Taking a look into your future is essential for sales. If you want to grow your sales team and keep them accountable, simple data and math will help you to get a basic look into where you are headed and if you will meet your goals. Give it a try today!