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.