I was talking about sales forecasting with a friend of mine and he posed the question – “What’s the problem with significantly exceeding your forecast”? I answered his question with another question – if you are a golfer this analogy will hit home.
Would you rather hit a 5 iron consistently 190 yards give or take a few yards or would you rather hit randomly between 170 – 210 yards. The obvious answer is consistently hit it 190 yards. If you’re not a golfer, the figure below illustrates the point.
If your company is having a hard time predicting sales, you’re not alone. According to The Hackett Group, only 1 in 6 companies (16.7%) regularly predict sales within 5% of forecast. The selling power did a great job explaining the problems associated with over and under forecasting sales. The following summarizes his points.
Forecast Greater than Sales
Let’s use an the Selling Power’s example to illustrate the problem associated this situation. If a company has $50 million in revenues, a 10 percent over-forecast represents $5 million. What is the impact of this forecasting error?
- If you’re company produces a product, it needs to carry an additional $5 million in inventory. If you’re a service company, you’ll need to increase your staff to accommodate your forecasted demand. Let’s focus on companies that sell products at 50% margin. That’s $2.5 million in cash flow that the company could invest in other opportunities. The company could put the $2.5 million into tax-free bonds and earn $250,000 on that money per year.
- The company has to finance that inventory. At a 6 percent interest rate, the cost is $150,000.
- Excess inventory is likely to inflate the company’s payroll by 10 percent, which translates to about $500,000 in additional payroll expenses.
In this case, the financial waste of a 10 percent over-forecast translates into $900,000, which means that for every percentage point by which the company’s sales forecasting is improved, the company could save $90,000 a year.
Forecast Less than sales
Many companies would love to have this problem. However, missing the mark in the other direction can be more costly because it could result in a poor customer experience. People love to share stories about bad experiences.
- If there isn’t enough inventory, the order may be lost. If your product has a fairly long lead time, let’s assume 50% of your customers cancel their orders. For a $50 million dollar company, that’s $2.5 million in lost revenue.
- For companies with little excess capacity, the orders that do ship have a higher cost of goods sold due to overtime and express shipping costs.
- It’s likely that products will have a higher defect rate if the company is pushed to its capacity limits.
- If customers receive their orders late or with defects, customer satisfaction will drop. If you’re lucky, they will only tell 5 or 6 people.
The cost of exceeding forecast is difficult to quantify as it may take months for all the associated costs to surface. Exceeding forecast beyond a company’s capacity can be more damaging then missing your forecast.
What’s the Solution
Sales is a process just like order to cash. The better you understand and manage your sales process, the closer your forecast will match actual sales enabling your company to improve profitability.
It’s not surprising sales performance is top of mind with executives. Many are tired of the recession excuse as a reason for lack of growth. Excuses or blaming someone or something is the kiss of death because you no longer believe you are in control of your own fate. You need to take control and don’t accept excuses. Executives also need to help sales improve and yelling is not an effective improvement technique.
Recession can be a positive. Many of your competitors stick their head in the sand and wait for good times to come – if they survive that long. Identify cost effective marketing techniques to keep your brand in front of current customers and prospects.
Building a quality pipeline and closing sales is about doing the little things well and providing a consistent experience (positive as well) for prospects. Keep in mind prospects are evaluating how your team handles the sales process. They assume you are showing your best hand at this time. Prospects believe once you close the deal, attention is likely to degrade. Since you already have their money, they assume you’ll move on to the next deal.
Sales follow a process just like fulfilling an order. There are steps your team needs to go through and you need to ensure they follow the steps. Also, apply best practices within each step – the old adage garbage in – garbage out applies to sales management as well. When the heat is on, sales people will show deals progressing even when they aren’t. Surprises are sure to follow as projections don’t even come close to what actually happens. It’s imperative that your company not only implements a sales management tool, but requires sales team to record relevant information about the deal as well as key contacts. If they haven’t identified how your product or service can help a prospect, the opportunity is not qualified.
I’m not saying implement a rigid sales process and never change, but it’s impossible to manage sales if you don’t track and analyze the process. Identify your top sales people and determine what makes them more successful than the others. Use this as your starting sales process. Resist the temptation to alter sales management until you’ve given it enough time. Silver bullets don’t exist. Do the little things well and sales will come.