Is Your Forecast Too Sunny? How to Improve the Accuracy of Sales Forecasts
As spring moves to summer, the forecast should be for warmer and sunnier weather. What is the forecast for your business? Is the outlook sunny or cloudy?
Do you know what sales you can expect, whether for a team of sales people or within your own business or practice? How do you feel about putting together a forecast? How do the others in your business feel? I wonder why you have these feelings?
Forecasting is vital for any business - well, accurate forecasting is vital!! This is true for professional services as well as commercial organisations. How often are your forecasts accurate? Inaccurate forecasting carries all sorts of hazards. Whether there is a tendency to be too optimistic and sunny with your forecasts, or too downbeat and understating it, there are potential problems for the business. Are people encouraged, or allowed, to be pragmatic about their forecasts or do they feel as though they have to tell you they will do well? Do you tend to think that there are too many factors outside of your control and so it is not worth doing anyway?
Why does it matter? Apart from the reality that sales, whether to existing or new clients, are the lifeblood of your business! Being too optimistic about potential sales can lead to various issues - anticipating revenues which will not happen, planning resources such as people and products, problems with cash flow, panic management! The other end of the equation, under-estimating has its own problems too! Although it can feel good to see sales coming in which were not anticipated, think about the problems they might cause within your own business. Cash flow problems of a different sort, the need to get the resources at short notice, quality of customer or client service and response are all probabilities. Becoming more accurate with your forecasts will help you run a smoother and more profitable organisation.
How do you approach forecasting sales? Tea leaves, roll of the dice, check the stars or ask others for their expectations? There are some basic principles to consider or follow and a variety of methods you can use to help and they should prove more reliable then the ideas above! Although we are presuming you are already an established business, many of the principles will apply even for new start-ups.
First point - look at your records for the previous couple of years and do some analysis.
- What are the average monthly sales? (or revenues if you prefer!)
- Can you break this down to weekly figures, if useful to you?
- Are the any obvious patterns or trends to these? Seasonal or market driven?
- What is the breakdown between new business and repeat business?
- How frequently do existing customers purchase?
- Can you assess average "order" size from each category?
- What are the trends in all of these, year on year?
You may find that looking at a "Z-chart" can help you to take a realistic view of how you are doing. The key line here is the top one, which is created by taking the rolling total from the previous 12 months. It shows how you are really doing on a year-on-year basis and allows for seasonal dips and highs, which can distort the annual figures and cause a knee jerk reaction.
Knowing the trends is a good start. The next stage is to assess and breakdown your actual sales process. What are the specific steps and activities you take to go from identifying potential customers or clients through to getting their commitment? Not only the steps and the best practice activities, but how long does the process take on average? (The sales cycle, sales lead time or whatever phrase suits your business.)
Too often, organisations and sales managers in particular spend too long looking at results, which are effectively historical data and difficult to do anything about! Fundamentally, sales will come from the right levels of activity directed at the right potential clients - using the appropriate skills. If these inputs are wrong, there is an inevitability about the outputs! Getting to grips with your sales process can help you to create the effective measures and control points to improve sales forecasting and sales performance.
An element of forecasting, and good sales planning and management, is the old maxim - "start with the end in mind". What do you need to be generating need to in terms of business? (Revenue, or numbers of units or whatever works for you.) Working back from this you can start to see where your critical checks and controls should be - and how you can assess the probability of getting a sale.
Think about your business - and be clear about the average order size or purchase level of each customer. (If you have several very different product or service groups or lines you may need to do this for each one.) Does this vary for existing and new customers? From this analysis you can see how many sales you need to get each month and what those numbers will be in each category.
Based on the averages, how many orders or customers do you need each month?
How many of these can be relied on for repeat business - and how much new business do you need to obtain?
In order to get to the point of orders coming in you will have to go through a number of stages, which may look something like this:
The stages might have different names within your business, the principle will hold true.
To help your forecasting become more accurate you need to be able to move through the process and assess how things stand at each stage and what is the potential of moving through to the end. The more you can break each stage down into specific activities, the better your ability to see whether you will continue moving through.
You need to initiate some form of sales reporting system to record what are the planned activities and the actual ones which take place. There are many variations available electronically, which can improve efficiency and effectiveness. Most of these will enable you to create your own sales "pipeline" or "funnel" so that you can monitor progress. Basic systems such as ACT, Goldmine or SalesLogix will also allow you and your sales people to develop customer records, keep everything related to the customer in one place, and manage their diaries. You can have an even more thorough tool such as SalesCentric, which can let you incorporate the sales process and activities and carry support material on the customer record. There are ways to use all of them to help with your forecasting, though SalesCentric will probably allow you to be more accurate with it.
Alongside the need to set some form of percentage weighting at each stage, it will help you to know the ratios between each stage of the sales process. The way to go about this is to work backwards!!* As we stated earlier - how many orders (commitments) do you need each month?
* How many proposals will you need to be doing to achieve this number? (and what is the time lapse between presenting them and getting the response?) Do you convert 1 in 3, 1 in 2 or what?
* To get to formal proposals, how many people need to be at the "analysis" stage?
* To be able to do this - how many do you need,,,,,,,,,,you can get the idea!
These numbers will help you to create the right sales controls for yourself. If you are not talking to enough people at the start of the process, you are extremely unlikely to get sufficient sales!
The next phase is to look at each of the stages and think about how you can assess your chances of generating business. What criteria can you use for each one? Past relationships, number of contacts you have, relevant experience, number of competitors in the frame etc.,etc. You will need to work this out for your own organisation. You may then make some decisions about how you progress opportunities. What can you do to increase your chances? When do you decide to pull out of the opportunity?
When you are creating your forecast these percentages and numbers can then be combined to give you the potential - and with some anticipated timescales. For example, if you have Ј150,000 of business being discussed, proposed or tendered you can do the maths. If Ј60,000 is at the 30% stage, that equates to Ј18,000. The other Ј90,000 might be at 50% - giving a potential of Ј45,000. Therefore the forecast would be Ј63,000. You might be able to get more than this if you take action to increase the % probability - but based on a realistic assessment, your forecast is not Ј150,000!! It is having figures like that in mind which can cause problems, being far too sunny! Encourage everyone to use an effective sales planning and reporting process that is relevant for your market, or even insist on it! Then manage that process, correcting problems early on rather than when sales are not happening - and set the weightings for the forecast. Let your sales people give you accurate forecasts, do not compel false optimism. There is no harm in being sunny, just be sure it will happen!!
References: www. salescentric. com, Saleslogix, ACT and Goldmine are available from many suppliers.
Graham Yemm a founding partner of Solutions 4 Training Ltd. During his years as a consultant he has worked with a variety of major companies in the U. K., Europe, USA, the Middle East and Russia in Sales, People and Management Skills. He has had many years of experience tailoring programmes to address organisational issues around sales, account management, negotiations, sales management and customer service - especially focusing on the communication and personal skills aspects.