Sales Forecasting Is The Achilles Heel Of Business Planning

Forecasting future sales is one of the most difficult areas for many companies. The challenge is to produce consistent and accurate advance information which can be used by production, stock and service managers to plan for future demands.

In practise, much of the forecasting work currently undertaken is very random, if not haphazard guess work. It is based on highly subjective reports of the sales people, often under short term pressure to predict acceptable levels of achievement in order to meet targets.

As a result much of the medium-to-long-term sales order forecasts are often made up of business projections based on nothing more scientific than optimistic guess work rather than on disciplined and realistic assessment of likely conversion of sales from individual customers.

Companies spend thousands of pounds and hundreds of man hours on their annual, quarterly and monthly budgeting and forecasting activities.

Financial management techniques and systems have developed apace in recent years but these have little input into the forecasting process, especially predicting short and long term sales.

The pressure for accuracy is growing. Jobs, investment and expenditure depend on making the right assumptions and predictions. Too often companies fail to spot in advance negative trends or competitive activity which impinge on their ability to win new orders.

Most forecasting, in the widest sense, is based on historic information with some allowance for highly subjective judgements such as the economic climate, trends in the industry etc.

The Achilles heel of even the most significant business planning methodology is an almost uncritical acceptance of what the sales team predict as imminent or long term business opportunities and their value.

Companies put complex and time consuming reporting procedures in place to capture data but can be extremely uncritical of the quality of the information itself which is provided.

Frequently the sales predictions – short, medium and long term – are highly suspect. They depend on the sales team’s personal, often highly subjective views, and often reflect the pressure for ‘certain sales levels to be achieved’

Predicting the real chance of winning a particular order will change the closer the customer gets to placing the order. Two or three months ahead the sales men will report the order as ‘in the bag’, closer to, the odds will often be reduced or even discounted. There is no discipline or consistency in the process. Orders ‘lost’ now will be replaced by ‘new’ opportunities conveniently two or three months down the line. These new ‘orders’ will be lost as the time for their confirmation gets closer. Thus, the organisation never has a realistic assessment of its potential sales.

What is missing is a management awareness of what is really happening to ‘vapour sales opportunities’ and a complete lack of system and discipline in predicting the real possibility of winning specific orders consistently. These ‘vapour sales opportunities’ represent unsubstantiated sales opportunities which can amount to anything up to half of the ‘pipeline’ business being reported to management from month to month.

Sales teams are relying on a base level of business coming in to cover up poor predictions and to replace lost orders previously anticipated. This is one reason that organisations frequently fail to spot downturns or changes in their business environment.

The solution is a proper structuring of reporting procedures. Apart from eliminating unqualified business this process can help the organisation be more responsive to real business and focus on genuine problems and opportunities which the process identifies.

Inspect What You Expect – Business Planning is Key

“Inspect what you expect” is a fairly tired saying; but no less true than it ever was. I manage a team blog that my co-workers and I regularly contribute to. Last week I noticed that our traffic from Google Search had fallen dramatically. This is a concern because organic Google search results are free traffic to our website, and they had suddenly disappeared. So I started investigating, and learned a lot.

But why is this important to you? It illustrates the wisdom of the earlier saying. If a process or an activity is important to you, you probably have expectations about its outcome. And you can’t assume that the outcome will just naturally result. You have to monitor and manage the process or activity to ensure that the results are what you expect.

I work with about one hundred organizations every year, and I am amazed how many of them do not develop operating budgets. It seems like a simple thing to do, but people don’t do it. And if they do have a budget, it is regarded as a historical document; rarely to be examined or referenced.

On the other hand, the most successful business people I know, create, revise, monitor, share, and analyze their operating budgets on a weekly and daily basis. I once worked for a daily newspaper, and the business manager planned the size and advertising space for each daily paper a year in advance. He analyzed the advertising content of each daily publishing and compared it to his expectations throughout the year.

As a Controller for a company with huge working capital requirements, I modeled customer cash receipts on a daily basis, months in advance. As the company went about its business, I could tell in the first week whether I was going to have a problem, instead of waiting for week four or five of the month. This gave me a big advantage in managing the business.

If you’re devoting your time to a business, you really need to develop an operating budget and monitor your actual results against the budget.

Every business will have its own business drivers that should be budgeted. It’s up to you to identify what they are and how best to quantify them. And a budget does not have to be tracking just money. You likely have non-monetary business drivers that affect your business results, such as new client sign-ups, lost clients, employee turnover, etc. Budget these items as well.

It’s up to you on whether you want to share the budget with others. But my experience is that a budget becomes a much more effective tool if others are involved.

Finally track your actual results against the budget. Do it on a daily basis, if that makes sense; it probably does. Analyze the results. You will find variances that are unanticipated results, and variances that indicate inadequate expectations.

If you determine that your expectations are incorrect, change the budget. There’s nothing wrong with that.

If you plan and monitor your business activities you will find that it’s much easier to manage your business and reach your goals.

I work with small and medium sized businesses, analyzing their current and future systems needs. I work primarily with business application software such as ERP, CRM, and Information Worker (IW).

How to Hire a Business Planning Consultant

There are certain things that must be considered before you hire a business planning consultant: The following are some of the most important things to consider when hiring a consultant:

You must have a contractual agreement. The consulting agreement sets out the parameters of the relationship, specifies the services to be performed, and sets forth the timeframe in which the work needs to be completed. Both parties should sign the agreement.

You must check the consultant’s background. The skills and abilities of consultants vary widely. You should conduct your due diligence and check references to help you determine if the consultant is right for your business.

Be sure that no one in-house can do the job. Companies commonly fail to consider the various skills of their employees before hiring a consultant. Take the time to re-read the resumes of your staff before you spend more money than necessary to hire a consultant.

Be sure to check the compensation scale. Check the going rate in the industry and do some research to find out the pay range for the services you require before overpaying a consultant.

The payment for expenses should be spelled out in the consulting agreement. The consultant will expect his or her expenses to be covered, and these should be discussed in advance and spelled out in the consulting agreement so they do not come as a surprise when they appear on the invoice.

Be sure the consultant is available on the time schedule you require. Make sure the consultant is available to work on your project on your schedule. If the consultant accepts your job but cannot start for three weeks, you need to know that in advance to be certain that your deadlines will be met.

Conduct a thorough hiring interview. Take the interview process very seriously with consultants just as you would do with prospective employees. A consultant you hire will be involved in the future of your business, and it is imperative that you conduct a comprehensive interview.

Have the consultant sign a letter of confidentiality. Consultants are free agents, and you need to keep in mind that they may work for your competition after completing your project. Therefore, you must have a signed letter of confidentiality from the consultant to protect your trade secrets and confidential information.

Clearly describe the project. Be sure that the consultant and you are not on the same page from the start to avoids misunderstandings and complications later on.

Introduce the consultant to your staff. Your employees start need to know who this person is and why they are asking for files or asking about certain projects. Introduce the consultant to your regular employees, especially those with whom he or she will be working.

The consultant must have marketing and finance skills and experience. They must understand the U.S. industrial and business climate. They must understand your company and the industry. They must know who your competitors are and how they do business. Be sure the consultant shows you the research they have done in preparing your business plan.

The consultant must do more than just write a business plan. A business plan needs to reflect a carefully thought-out business strategy for growth and profitability. Your business plan consultant must work with you to develop and refine your business strategy. The consultant needs to meet with you several times to learn, think through, and discuss your marketing, financial and operating strategies.

Before you hire a consultant, do your research and look at the work the consultant has done in the past. Be sure the consultant has the academic credentials and experience necessary to do a comprehensive business plan. Be sure the consultant knows how to prepare a business plan that will meet your needs, whether it is for raising capital, applying for business loans, meeting IRS requirements, or supporting grant requests.

Jo Ann Joy, Esq., MBA, CEO
The future of your business starts here!

You may contact Jo Ann by phone at (602) 663-7007, by fax at (602) 324-7582, by email at joannjoy@Indigo Business, and by mail at 2313 East Ocotillo Rd., Phoenix, AZ 85016. I have many published articles, and I will send any article to you free of charge. Most consultations are free.