Quantitative Sales Forecasting - Uses and Benefits for Your Business

Being able to accurately predict and forecast future cash flows is a fundamental part of a successful business. It can allow you to understand how effective your sales team is, but also if positive, it allows you to boost investor confidence. 

One way to predict future sales figures is a method called quantitative sales forecasting. It’s a data-based mathematical process, based on historical sales data, that allows businesses to predict future revenue, and therefore make informed decisions and plan future sales strategies. 

There are a few different ways to use quantitative sales forecasting, with different techniques and methods. Some of those different methods and techniques include:

• Naive Forecasting: This one is pretty self-explanatory, naive forecasting makes an assumption that you’ll continue to make at least the same amount of revenue as you did in the previous period. Meaning if you made £250,000 last year, you assume that your yearly revenue will be at least £250,000 this year. So, logically, this method doesn’t involve a lot of maths since your base assumption is that you’re guaranteed to make the same amount as the previous period. 
• Seasonal Forecasting: This method takes previous historical revenue data from previous seasons to calculate and predict the future cash streams of the same seasons. 

So, if you want to calculate future cash streams for the future summer season? Well,     you’ll have to take previous season data and divide it over the number of periods, and that’ll give you the average revenue.

(Seasonal Data + Seasonal Data…) / Number of Seasons Being Compared

• Revenue Run Rate: Also known as annual run rate or sales run rate, revenue run rate allows you to predict future revenue based on previous periods. You can use different periods of different lengths, for example, if you made £20,000 one month last year, you can multiply that £20,000 by 12 to get a Revenue Run Rate of £240,000

The actual formula for Revenue Run Rate is: 

Revenue in period Y x # of Periods in One Year = Revenue Run Rate 

• Historical Growth Rate: This method aims to predict future growth, as a percentage, by comparing two chosen periods. For example, if you decided to use Q1 (200,000) and Q4 (800,000) earnings, it would look something like this:

800,000 - 200,000 / 200,000 x 100 = 300%

• Linear Regression: By far the most comprehensive look at sales data on this list, linear regression takes a look at a whole set of your previous sales and allows you to get an average that can predict future sales. While this method is the most comprehensive it’s also the most difficult to apply, you’ll want a big set of data points, optimally monthly sales figures going back a couple of years. You’ll also want to use a tool like Excel to plug in all the figures and to come up with a visual model like a graph. 

💡Note: Picking which quantitative sales forecasting method can take a bit of time. That’s why there are incredibly intelligent solutions like SKU Science. SKU Science automatically takes historical sales data and calculates forecasts at the appropriate level. Then, they automatically choose the best-suited forecast for your situation using 644 statistical combinations, trends, and seasonalities. Forecasting your future sales revenue has never been easier! 

As a basic reminder, quantitative methods are based on numbers and therefore are objective. In comparison, qualitative methods are subjective and therefore are more based on decisions and stakeholder opinions. Quantitative methods offer accurate and precise data based on past performance. Although most companies shouldn’t depend on qualitative methods as their only resource for forecasting, they can be helpful in combination with quantitative methods. 

Some examples of qualitative forecasting methods are: 

• Leadership Opinions: Pretty straightforward, this method brings together all members of leadership from each part of the business to put together a broad, encompassing picture and opinion of the current state and future of the company. 
• The Delphi Method: Similar to the previous methods, the Delphi method is a series of anonymous questionnaires given to a handpicked panel of experts within the company. The first questionnaire is to gauge what the experts think, normally after the first questionnaire no consensus is reached. After publishing the responses to the first questionnaire, there is a second questionnaire where respondents normally reach some sort of consensus on the state and direction of the company. If there is no consensus for the second round, a third one takes place. 
• Sales Field Opinions: Instead of expert questionnaires and leaders’ opinions, this method asks your sales representatives in the field what they think. They can provide essential insights since they’re in constant contact with customers.  
• Customer Surveys: Self-explanatory, by going directly to the source, i.e. your customers, you’ll find out what they think about your sales strategy, specifically your customer-oriented strategy. 

Forecasting is important because it can have ripple effects on multiple aspects of your business. Depending on the size, activity, and organisation of your business, forecasting can have effects on all parts of your business, such as: 

• Sales Teams Logistics: Performance measurement, store planning, stock, and product management 
• Operations: Multiple levels of your supply chain are affected by future forecasting, from deciding how much to manufacture, distribute, or even staffing your sales team. 
• Finances: In big companies, sales forecasting can have huge ramifications on stock price and investment decisions

We’d be remiss if we didn’t mention that forecasting isn’t a precise science, forecasting makes assumptions based on past data to predict future events, and it also omits the possibility of changes in the market. As we’ve seen in recent history, over the past three years, you can’t necessarily predict even the near future with a high degree of certainty. 

However, even if it’s not 100% accurate, don’t let that stop you from leveraging its massive potential benefits. Forecasting can give you a nice roadmap for the future performance of your business, even if you have to take a couple of detours along the way.