Weighted Moving Average Method Forecasting Example Paper
How to use Weighted Moving Average to forccast the futurc? Plcase give an example to illustrate the equation and the meanings.
This solution was written by a subject matter expert. It’s designed to help students like you learn core concepts. Weighted Moving Average Method Forecasting Example Paper
If you want happy customers and cash in your account, you need to get familiar with weighted average forecasting.
Similar to a weighted grade in your college English class, the weighted average formula is placing more “weight” on certain months and then averaging the usage with those weights taken into consideration.
Weighted Average Forecasting is a method that determines how much inventory to keep on hand based on an item’s past performance and an assigned “weight” or emphasis. The formula works well for items that regularly sell, with sales in at least 8 of the prior 12 periods. For products with regular, recurring usage, demand will likely increase or decrease in the same months year after year, giving demand planners a good idea of what they’ll need on hand.
Calculating the value of a weighted sales pipeline is straightforward. Multiply the value of each deal by the probability of closing to get a forecasted value. And sum up the forecasted values to get a weighted value of the overall pipeline.
For example, here’s the weighted revenue formula if you’ve got three deals in the sales pipeline.
Forecasted Revenue 1 = Deal 1 Value x Probability of Closing
Forecasted Revenue 2 = Deal 2 Value x Probability of Closing
Forecasted Revenue 3 = Deal 3 Value x Probability of Closing
Weighted Revenue = Forecasted Revenue 1 + Forecasted Revenue 2 + Forecasted Revenue 3
You need to assign higher weights to proposals more likely to close in the weighted sales pipeline report.
But how do you assess which deal is more likely to close?
You can rely on the sales stages. How many sales stages has a lead passed through? The further a deal is in your pipeline, the more likely it’ll result in you closing the deal.
For instance, you can assign a 50% chance of deal closing if a deal is at stage four in your eight-stage sales process. Similarly, stage five will have a 63% chance.
But not all sales stages are equal. The difference between the prospecting stage and lead qualification stage is much smaller than the one between the lead qualification stage and the trial stage.
That’s why you need to define your own weights for each stage, depending on your sales data.
For example, say your CRM sales pipeline has the following deal stages: Weighted Moving Average Method Forecasting Example Paper
- Lead qualification
- Closed Won
- Lost opportunity
Based on your data, you can assign the following percentages to each stage:
- Prospecting: 10%
- Lead qualification: 25%
- Trial: 50%
- Proposal: 60%
- Negotiations: 75%
- Closed Won: 100%
- Lost opportunity: 0%
Let’s find out how these weights affect your sales pipeline revenue.
Assume you have the deals in five different sales pipeline stages: Weighted Moving Average Method Forecasting Example Paper
- Deal Set 1: Prospecting — $100,000
- Deal Set 2: Lead qualification — $50,000
- Deal Set 3: Trial — $150,000
- Deal Set 4: Proposal — $80,000
- Deal Set 5: Negotiations — $60,000
Let’s plug these values into the weighted revenue formula:
Forecasted Revenue 1 = $100,000 x 10% = $10,000
Forecasted Revenue 2 = $50,000 x 25% = $12,500
Forecasted Revenue 3 = $150,000 x 50% = $75,000
Forecasted Revenue 4 = $80,000 x 60% = $48,000
Forecasted Revenue 5 = $60,000 x 75% = $45,000
Weighted Revenue = $10,000 + $12,500 + $75,000 + $48,000 + $45,000 = $190,500
This means you can assume your sales team will make almost $175,500 in the near future.
You can also look at weighted revenue on a monthly or quarterly by going into your CRM and filtering the data by the expected close date.
For instance, say you filtered the data in the above example by quarter and got the following: Weighted Moving Average Method Forecasting Example Paper
- Prospecting — $30,000
- Lead qualification — $10,000
- Trial — $50,000
- Proposal — $20,000
- Negotiations — $5,000
You can plug these values into the formula to get the quarterly estimated revenue:
Quarterly Weighted Revenue = ($30,000 x 10%) + ($10,000 x 25%) + ($50,000 x 50%) + ($20,000 x 60%) + ($5,000 x 75%) = $46,250
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