What is Business Forecasting?
Business forecasting is used to predict future sales revenue for an organization. Business forecasting methods assist with crucial business management tasks including decision making and business plan formulation.
Various questions for companies to carefully consider before choosing a business forecasting model include-
- Are you a small business or large corporation?
- How are your unit sales measured?
- Do you want to predict future sales for next year or next month? What time period or time periods are you seeking to better anticipate sales for?
- Do you have past data available and is that data collected free from errors?
- How extensive of a time period do you want to dedicate to the forecasting process?
- What are your short term and long term objectives?
- Do you have an established business plan or do you need to create one? If you do have one, does your business plan require any updates?
- Do you have any future events such as releasing a new product or opening a new storefront planned?
- What cash flow is needed for any future business plans?
- Were there recent changes in your supply chain or do you forecast future changes?
Examples of Different Business Forecasting Techniques
There are many different business forecasting techniques available to choose from. Some business professionals choose to use a combination of forecasting methods collaboratively for optimal accuracy.
An important distinction between business forecasting models are quantitative forecasting and qualitative forecasting techniques. While quantitative forecasting focuses on historical data heavily, qualitative forecasting is based on immeasurable information.
Widely used quantitative and qualitative business forecasting methods include-
- Intuitive forecasting method- The intuitive forecasting process requests feedback from sales representatives directly in order to predict future sales. Proponents for intuitive forecasting argue that sales reps understand the sales process more intimately than anybody else on staff and as a result, their opinions should be heavily weighted.
The downsides of using an intuitive forecasting model are that it is completely subjective and impossible to scale or replicate. Sales reps possess an inherent bias when they attempt to predict future events, and that bias is one that your business's unit sales may not end up reinforcing.
The confidence of your sales reps may make them outstanding company assets while they are out on the field, but that same confidence and optimism could be detrimental when used to forecast future revenue. In fact, case studies have shown that even with just two weeks left in the fiscal quarter, only 7% of sales leaders can forecast sales revenue within a 5% accuracy range.
An organization might use intuitive forecasting if they have only been in business for a limited time period or their data collected is heavily erroneous. A benefit of this forecasting technique is that it increases employee accountability and demonstrates to your sales reps that you trust them.
- Historical forecasting- If your business has past data available, historical forecasting is a great forecasting model choice. Business professionals commonly consider this method as the fastest and easiest business forecasting technique.
The historical forecasting method assumes that future sales will be the same, if not higher than they were in a similar time period by matching historical data to future dates. This forecasting model can be applied to predict sales for any desired future time period whether next year or next month.
One consequence of historical forecasting is its failure to incorporate buyer demand or seasonal variations. Due to this, the results of historical forecasting are widely used as a benchmark instead of a foundation or instead as a supplementary forecasting method.
- Length of sales cycle forecasting- The length of sales cycle forecasting method is completely objective and can be applied to multiple sales cycles simultaneously. Using the age of specific sales opportunities, the length of sales cycle forecasting predicts the likelihood of a sale closing and when it is expected to close.
For this forecasting model to be effective, your sales and marketing teams must work well collaboratively. Another requirement for this forecasting technique to be successful is for all data collected to be reliable and error-free.
A common criticism of the length of sales cycle forecasting is the lack of attention to deal size or opportunity type.
- Multivariable analysis forecasting- Considered the most complex sales forecasting method, multivariable analysis forecasting comprehensively evaluates sales representative performance, average sales cycle length, and the probability of sales closing. In order to use this forecasting model, historical data must be pristine, as even a slight error can be disastrous.
Smaller businesses may not be able to perform multivariable analysis forecasting due to the extensive time and labor required. However, for large corporations that seek a highly accurate prediction of future events multivariable analysis forecasting is a great forecasting model option.