Producing sales forecasts is often regarded by many people in organisations with suspicion, dread or even contempt. Why is it that so many people across an organisation can view such a critical part of a companies operation in such a negative way? Sales forecasting is a CRITICAL element of a successful business and the bigger the organisation the more important it becomes. Large public companies are expected to match or exceed their forecast on a quarterly basis and if they don’t their share price takes a beating. Effective sales forecasting is symptomatic of the management team’s understanding of the business that they are running.
Why is so much forecasting like this?
There is a a simple reason and a trick that anyone can adopt that leads to more effective forecasting. Fortunately, it is incredibly simple.
Firstly, why is forecasting regarded with such negative thinking? Usually because it is a waste of time for many of those involved in the process which can look a bit like this:
- Collect Sales people and sales managers low ball forecast in vain effort to make hitting targets and accelerating commissions easier. VP Sales/Sales Director compiles and ‘corrects’ sales forecasts subjectively, then reduce total as much as possible in order to make hitting their targets easier.
- Collate CFO takes numbers and increases them as they are too low, marketing are just about to run a new campaign that will make products sell themselves and there are two new products out anyway that the sales team didn’t know about.
- Ignore Manufacturing/Operations ignore forecast as it is too late to do anything about it anyway and will be wrong. Sales people don’t understand why they have provided information that is then ignored.
In a recent blog post around this topic, one CFO was driven to comment that their chief problem was that not only do sales people lie, they lie at ‘different rates’. This makes the job of forecasting impossible for a CFO… The commentator, (who has clearly had some interesting experiences), does not understand that not only are salespeople generally honest, they are surprisingly consistent in their forecasts and their forecasting can be improved relatively easily.
The key to successful forecasting is to make it meaningful, and to give people feedback.
The process should look more like this if it is to work:
- Collect information from all relevant places. Sales teams obviously impact forecasts but you need input from as many sources as possible, depending on the size and complexity of the business, marketing, product management, distributors, manufacturing, inventory and general market analysis all need to be incorporated into a forecast.
- Clean. Any individual’s forecast will be subjective but surprisingly consistent. Sales people will tend to over- or under-judge their pipeline at a relatively predictable rate. Use data from previous forecasts from individuals, compared against actual results, to try to predict inherent biases on an individual level.
- Discuss and drive the business off the forecast. Use the combined forecast to understand and set priorities for the future at a board level. Iterate the forecast at senior level until there is a consensus on the optimal route for the business. What can you do to minimize potential inventory backlog? Are operations geared to delivering the products sales, marketing and product management expect there is a demand for? Make sure that everyone that inputted into the forecast understands their role in making it happen.
- Feedback and recognition. The most important step in the process. Make sure that you track the accuracy of each individual contribution to the forecast over time. More importantly, make sure that everyone involved in forecasting understands how they did. Hold forecasters to account. Measure the accuracy and consistency of their individual forecasting activity. This is a critical part in enabling you to know how much weight to give individual forecasters in the future. More importantly though, by making this analysis available to the contributors, they will improve their ability to forecast in the future.
While the feedback step seems obvious, it is often missed. Without it, a forecast is unlikely to be as useful to the organisation because the individual contributors to it will feel detached from it and will not be able to improve their own contributions. Feedback provides both data for all people contributing to a forecast that they can use to improve their forecasting ability in the future. More importantly it gives people a heightened sense of ownership of the model.
This blog post was written off the back of our breakfast brainstorm, ‘Sales directors are from Mars, CFOs are from Venus’ held at Red-Gate Software and supported by BDO. CFO breakfast brainstorms are senior level discussion groups for CFOs and Financial Directors of high growth businesses – from venture and private equity backed businesses to AIM and FTSE listed companies.