Forecasting Success: How to Calculate Sales Projections Accurately
A sales and marketing team is the key to the success of companies. No matter how good the team is, without a sales strategy, businesses fail to succeed. When present business strategies don’t work, a sales forecast is helpful. A sales forecast displays the future business revenue and profit based on historical records. Based on the potential of the sales projections, businesses make necessary adjustments. The article highlights how to calculate sales projections and enhance performance. Sales forecasting helps organizations set goals, budget, and refine their sales cycle.
Tracking the Business Data
Without understanding past sales, organizations fail to base their predictions. The historical data includes:
- Number of products sold every month
- Monthly revenue of every product
- Number of products canceled or returned (helps to make an accurate sales calculation)
Elements to monitor accurate sales predictions
- The average sales cycle
- Total number of sales representatives
- Growth percentage
Organizations use the data differently when forecasting sales. The calculation for projected sales revenue is easy. Organizations have to utilize the revenue from the previous month, multiply it by 12, and make adjustments depending on the seasons.
Setting the Metrics
Before calculating the sales forecast, organizations should ask basic questions.
What is the product or service the organization is selling and forecasting?
Answering the question helps organizations decide the accurate assessment. An organization assesses the future trends of a product or service and decides whether it is worth continuing. Furthermore, answering the question also helps to predict the future sales of a new product or service.
What is the tenure of making the projections?
An organization makes sales projections ranging from six months to five years. The complexity of the sales projects depends on the functioning of the organization and the performance of the sales team.
How much will the organization sell the products/services for?
Setting the metrics of products/services (via units, hours, and memberships) helps to understand how to calculate sales projections. It helps to calculate revenue based on the price per unit.
How long is the sales cycle?
The sales cycle indicates the time to make the average sales from the start till the end. Depending on the sale of products, the sales cycle is different for every organization. The steps in the sales cycle involve:
- Generating leads
- Making the initial contacts
- Making the offer
- Negotiations
- Closing the deals
Selecting a Forecasting Method
There are two forecasting methods that organizations apply.
Top-Down Method
To leverage the top-down forecasting method, consider the total market size. The next step involves estimating the percentage, the organization captures. The method works well for organizations with fluctuating revenue. Furthermore, it is ideal for new businesses with minimum data to work with.
Bottom-Up Method
The method estimates the total product units the organization sells in the sales cycle and then multiplies it with the average cost per product unit. As the business expands, it includes variables like sales reps, department expenses, and the webpage views. The forecasting method uses business data to anticipate specific outcomes.
To find out how to calculate sales projections, organizations should pick the method that works best for them.
Calculating the Sales Forecast
Apart from using the top-down and bottom-up methods, there is another method of calculating sales forecasting. The steps involve:
- Dividing the sales revenue for a year by the number of months and calculating the average monthly sales.
- Multiplying the average monthly sales by the number of months to calculate the sales revenue forecast.
- Adding the sales revenue to the sales revenue forecast and calculating the yearly sales projection.
The generalized format of estimating the future sales revenue for a year is to multiple the total sales revenue from the past year.
Conclusion
Understanding how to calculate sales projections is the foundation of success. As the sales team generates leads and close deals, the sales pipeline helps to track them. Sales forecast anticipates the future revenue leveraging the previous business records. The sales projection helps better business planning by determining the amount to allocate towards new products and services. Sales forecasting helps organizations assess financial projections and make adjustments in business plans. Additionally, it determines how much organizations expect to sell in a give time frame, helps with resource management and contributes to business goal setting.
