Is Your Sales Forecast Too Sunny?
Quick SummaryHow to improve the accuracy of your sales forecasts
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! We had one client, an IT dealer who also handled copiers etc who had a massive overstock problem after a newly appointed Sales Director pushed the sales team to unrealistic forecasts – and then added a bit more for luck!! He did not last for long, once the reasons for the problem emerged! 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?
Whatever your business – sales is still arithmetic! Forecasting, monitoring and control are interconnected and numbers are a key part of them all.
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. With one financial services organisation they recognised that their products could be broken down into 3 groups which varied in size of average order/fee from about £120 - £2000+, oh, and the average "lead" time from initial contact to order was from 3 days to 18 months depending on the group. This had a significant impact on activity targeting and their control processes!!) 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.
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! An overseas client transformed their sales performance, growing over 60% year on year for 3 years when they identified these numbers and ratios – and focussed on managing the activity levels.
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 £150,000 of business being discussed, proposed or tendered you can do the maths. If £60,000 is at the 30% stage, that equates to £18,000. The other £90,000 might be at 50% - giving a potential of £45,000. Therefore the forecast would be £63,000. 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 £150,000!! 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!!
www.salescentric.com, www.salestrak.co.uk, Saleslogix, ACT and Goldmine are available from many suppliers.
Your thoughts matter to others - more than you can imagine.
More Articles published by Graham
23 Free | Ad-Free | Full-Text Business Papers
LeadershipToo many organisations are "over-managed and under-led" to quote Warren Bennis. There is a difference between leadership and management. 50 | 3.73 K | 7 min
Sales - GeneralHow many sales teams suffer because their sales manager is not doing their job at the right "level"? Sales figures suffer, sales people suffer and the ... 50 | 3.58 K | 8 min
Health and FitnessIt is estimated that about 60% of GBP 23bn in lost productivity in the UK is from presenteeism! 50 | 4.36 K | 6 min
Success BuildingThe simple answer to the above is, "both"! It depends on a number of things. Perhaps the first thing to explore is your reaction to seeing those three ... 50 | 4.84 K | 15 min
Sales - GeneralIt is not about having some new magic method for selling, it is about applying the things you have perhaps forgotten. 50 | 3.16 K | 9 min
Sales - GeneralIf you are involved with sales, how do you feel when you hear phrases such as, "Can you do anything about your price" or, "You'll have to do better than ... 51 | 3.12 K | 7 min
Stress ManagementStress and mental health are not issues which managers should ignore. They cost the organisation money, both directly and indirectly. 50 | 2.84 K | 6 min
Personal DevelopmentNot only are there a lot of potential risks arising from the spread of stress within an organisation, it costs a great deal of money! 50 | 4.04 K | 10 min
Stress ManagementDecent management communication and support, plus personal development for the people can combine to help prevent a lot of the issues which lead to pressure ... 56 | 3.17 K | 6 min
Personal DevelopmentA look at why developing greater resilience matters. 60 | 3.3 K | 7 min
CommunicationHow many times have you said something and realised that the person, or people, on the receiving end have not fully understood what you meant or headed ... 52 | 5.44 K | 9 min
Change ManagementA challenge for most managers is to initiate or implement change programmes - and lead people through them, whether in the way they work or what they do. In this, lies one of your major challenges... 50 | 4.45 K | 10 min
Success BuildingWhen you are a leader in a business you face a number of challenges at different levels. Ask yourself how much focus you put on to these... 50 | 4.52 K | 7 min
Change ManagementTwo key dimensions to successful, and effective, change initiatives 50 | 5.1 K | 10 min
Corporate CultureWhen a company's culture is not right with what is needed for strategic success, the culture has to be changed as rapidly as can be managed! 50 | 3.77 K | 8 min
Negotiation Skills, TechniquesEnhance your negotiation skills to keep afloat in tough times 50 | 2.99 K | 9 min
Presentation SkillsHave you had this feeling before? Rest assured you are not alone. You might be one of the many who would rate your fear of public speaking alongside or ... 50 | 14.67 K | 17 min
Sales - GeneralThe benefits of having a defined sales process 50 | 5.68 K | 8 min
CoachingSome differences and grey areas where Coaching or Mentoring overlap 60 | 3.17 K | 4 min
Stress ManagementMost organisations and many managers within them are probably aware of the costs and consequences of stress and stress related problems. They may have ... 50 | 2.84 K | 7 min
CoachingWho tells the boss that they can improve their management or leadership? How do they look at themselves objectively and identify what areas they can improve and the benefits of doing so? 50 | 3.05 K | 8 min
LeadershipHow do you prefer to "control and influence" others? 417 | 30.62 K | 6 min
Sales - GeneralAre you hitting or beating your sales target or quota? If not, are you blaming the market, the customers or your competition? If you are making your target ... 50 | 2.67 K | 8 min
More 'Sales - Specialised' Articles
5 more Articles that may interest you, too...
By Allan M.
As marketplaces and customers change then the move to account management is to be welcomed but is the move enough to really capture increased sales and market share?4.18 K | 50
By Frank F.
Its now time for your first appointment; you've got your prospects, you've made the appointment on the phone and you're going out to see your clients. Now one of the things you've got to think about before you even go out there is how important dressing for success is...4.23 K | 50
By Chris F.
Sales training is just for sales people, right? Wrong.5.97 K | 60
By GERARD A.
Managing credit and collecting money are the 2 most important and vital factors which decide the fate of any business.10.65 K | 50