Predicting Sales Based on Historical Data and Market Trends
Sales and revenue are the lifeblood of any for-profit business, and the ability to predict them is critical to making strategic and management decisions with eyes wide open. As the new year gets into full swing, our team has assembled a comprehensive guide to help you understand and implement effective sales forecasting methods.
Why sales forecasting matters
You wouldn’t venture outdoors without knowing the weather forecast and being informed about how to dress and prepare. Just the same, you can’t expect to fully succeed in business without a well-informed financial forecast. Intelligent sales and revenue forecasting allows business leaders to:
- Anticipate revenue and cash flow
- Set realistic revenue and growth goals
- Benchmark performance with competitors
- Align inventory and production levels with demand
- Establish budget and resource allocation parameters
- Make informed investment and hiring decisions
So where do you begin? The best way to predict the future is to analyze the past, so look at historical sales and revenue data to get started.
Step 1: Gather historical sales data
By leveraging historical data and filtering it through the lens of emerging market trends and conditions, executive leaders can create accurate projections to guide strategic plans. Start by collecting sales data from previous reporting periods—monthly, quarterly and yearly. Key metrics to analyze include:
- Sales volume by product or service
- Total sales revenue
- Pricing history
- Customer buying behavior
- Seasonal patterns or fluctuations
Accounting software and CRM systems are valuable tools for compiling and organizing this data. Ask our team for help in sorting out which platforms might be best for your business.
Step 2: Identify relevant market trends
While looking in the rearview mirror for historical perspective is important, you’ll also need to look forward to navigate the road ahead. Understanding market trends is crucial for refining your projections. Consider these factors:
- Industry performance: Are there any broader trends or disruptions in your industry?
- Economic conditions: Inflation rates, employment levels, and consumer confidence can have significant impact on purchase behaviors.
- Competitor activity: Are your competitors launching new products, changing pricing strategies or making other big changes to address market conditions?
- Technological advancements: Innovations may influence customer preferences or impact your operational efficiency.
Combine this qualitative analysis with historical quantitative data to create a more robust sales projection.
Step 3: Choose a Forecasting Method
When it comes to forecasting methods, it’s not one-size-fits-all. Different approaches suit different business needs. Here are three common methods to consider:
- Trend Analysis:
Use historical sales data to identify patterns and project future sales. For example, if sales increased by 10% each quarter over the past year, you might anticipate a similar growth rate for the upcoming quarter. - Moving Averages:
Smooth out fluctuations by averaging sales data over a set number of periods. This method helps identify underlying trends without being skewed by anomalies. - Regression Analysis:
Examine the relationship between sales and other variables, such as marketing spend, pricing changes, or economic indicators. This statistical approach provides insights into how external factors influence sales.
Step 4: Adjust for external factors
While historical data is invaluable, you must filter that data through your own observation and assessment of external market trends and forces that can have significant impacts. Consider factors like these for starters:
- Promotional campaigns: Consider the potential impact on sales of any planned price discounts or marketing initiatives.
- Supply chain issues: Delays or shortages can impact pricing strategies and affect demand for products.
- Competitor analysis: Take stock of your competitors’ initiatives and how they might impact your sales. Be cautious about engaging in pricing wars; it can result in a race to the bottom.
- Regulatory changes: New laws or tax policies could affect consumer behavior and/or prices.
- Consumer preferences: Are new or improved products displacing your current offerings? How quickly will this result in an impact on sales and revenue?
Incorporating these variables and others into your forecast will qualify your forecasts much more effectively than historic quantitative data alone.
Step 5: Validate and refine your forecast
Your forecast isn’t set in stone; it’s a snapshot in time that needs to be updated and refined to give you the most accurate look at the market and the best actions you should take. Review your forecast for accuracy by:
- Comparing it to previous projections to spot inconsistencies or emerging trends
- Conducting “what-if” analysis to see how changes in key variables affect outcomes
- Seeking input from your sales, marketing and finance teams for additional perspectives, as well as looking for external assessments from industry experts, analysts or consultants
Step 6: Monitor and adjust as needed
Sales forecasting isn’t a one-and-done, set-it-and-forget-it task. Markets can change on a dime, and it’s important to continually analyze the variables and regularly update your projections to reflect real-time data and changing conditions. Monitoring performance against forecasts allows businesses to pivot quickly, capitalize on new opportunities, minimize threats and stave off losses.
Step 7: Just do it!
If forecasting has been an area of weakness, make it your mission to embrace it as a core component of strategic and financial planning. The more you exercise your forecasting acumen, the more adept you’ll become at anticipating the effects of market forces and the better you’ll be able to make the right moves for your business in a timely way. It’ll make a difference for your future!