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