Unless you have contracts in hand, projecting sales has always (and maybe always will) be difficult.
But should it be that difficult?
I have found, much to my chagrin, that most of the
How do you handle the art and science of sales projecting?
Projecting Sales, should be easy.... should be...
Answers
I think this is a great question. We always looked at historical sales trends and made our best estimate based on what markets had done over the course of a couple years.
This year I approached it a bit differently. I looked at what I wanted the bottom line to be and formulated our sales forecasts off of what we needed to hit that target.
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So you did a bottom to top projection.
Did you morph your variable costs and GPM to achieve sale projections that would work during the exercise (compared to historical and markets)?
Speaking of markets, your market (Wireless) is well documented with marketing data. What would you do if you were in a less documented industry?
Wayne:
I have worked for several, direct sales companies. Ones that were growing by leaps and bounds. And thus, sales projections were iffy at best.
But here is how one handled it, albeit due to an insightful
The sales department had a sales forecasting team. They put together proforma sales numbers.
Our marketing department conducted focus group studies to support the sales projections and, most importantly, forecast product mix because the gross margins by product line were all over the place.
The sales projection was used by the corp as the incentive base projection for the sales department. But, in finance, reporting to our fortune 200 owners, we dampened down the sales projections and worked up a more conservative product mix based on historical activity and principals of conservatism. This is what we used internally and externally for budgeting and planning purposes. We had variable and fixed cost components tied to that level of sales based on what it would take to support them.
Sales never did hit those lofty goals they projected. But they were probably a good incentive tool to drive our international sales force.
And, finance never missed a budget by much. At least not enough to get our CFO - who was actually an employee of our fortune 200 owners - fired.
I often quoted a fantastic college lecturer I once had, who had taken a small sales company who landed a giant contract through bankruptcy. They ended up bankrupt because the company chiefs were so enamored of the giant contract they landed that they didn't hesitate to gear up for a production level that never materialized and sent them into insolvency.
This professor introduced that story by saying: "The role of the CFO is to temper the enthusiasm of sales and marketing."
I've never forgotten it after having to live through it.
In construction, what we tend to do is take out remaining contract revenue at the end of a period and add to it any new jobs that are expected to start. Expected jobs are estimated to start a month after the production team says the jobs will start. Based on historical data, jobs never start when production says.
Also, construction draws and cost don't alway line up with expectations either. Even if billings could be pinned pointed precisely, that doesn't mean the recognized revenue would be the same. Being on percent-of-completion revenue method, we could bill 1,000,000 one month but only be able to recognize $850,000 if that's all the cost we have.
We typically take the contract revenue, divide on a straight line basis. Then take the first month at half the original straight line. In the month of December we've noted work slows due to the holiday season. Therefore, in December we will typically take 75% of the straight line total. The reduced amounts are added to the remaining months creating a new straight line amount taking out the two months that are expected to be lower.
Since I'm not quite sure that makes sense, below is what it would look like on a million dollar contract over 10 months (for illustrative purposes only). It won't be exact, but it is one of the best baselines we've come up with.
Contract 1,000,000
August 50,000
September 109,375
October 109,375
November 109,375
December 75,000
January 109,375
February 109,375
March 109,375
April 109,375
May 109,375
Interesting topic Wayne - furthered by a discussion of sales forecasting and quota assignment by Finance Professionals. As I am starting my 5th decade in the sales profession, I offer my 2 cents (and please don't increase my 2 cents to 2.3 cents for next fiscal year). The origin of annual sales quota/forecasts IMO often originates outside of the sales organization. Rather than "asking" what level of sales attainment we can achieve; we are usual "told". And because the originating number is rarely "mine" to begin with, it is very difficult to accurate forecast precisely how I will attain it. Not complaining mind you - sales is the arm of the company expected to "get there" and many times we are not exactly sure of how or when we will arrive. But we're up for the challenge as witnessed by our acceptance of a variable compensation. Sales forecasting - maybe not always accurate; but usually exciting LoL! Thx, GAP
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Gary, interesting concept. Being told vs telling is a forecast of interesting times (mostly aggravating as failure to achieve the goals seems to be the normal result).
What would you do if you were actually asked...
Forecasting sales is always tough and I have learned that you need to address biases in sales forecasts. Sometimes the forecasts are way too lofty and you have to bring them down to earth. Other times there is a lot of sandbagging and you need to smoke that out as well.
Note that a forecast that is too conservative can be just as damaging to a company as one that is too high. This is because an overly conservative forecast can keep the company from moving forward with other needed investments and also can lead to overcompensation and reduced accountability when you pay or evaluate performance on overly low goals. This to me is a key point and one that CFOs need to overcome given their inherent
A few things that work:
1. Review historical trends as Christie mentioned above, and evaluate a forecast in light of those trends.
2. Sit down with your sales executive and figure out what a good sales rep who is working diligently and intelligently should produce then measure regularly against that expectation.
3. Tell your sales people and sales executive to pretend that there is a pool of money available for the person who comes up with the closest estimate to actual sales performance. This is a good way to weed out bias one way or the other. Involve the CEO in this exercise so that there is accountability if it is too far off. Publish the forecast internally to the CEO,
4. Always look back to see how you did against your forecast and make sure those preparing the forecast know how they did and know that you will be checking.
5. Hope for good luck.
Thanks for asking Wayne LoL! In the sales profession IMO it is our ability to sustain all of the right activities that is the key to success. Revenue simply arrives along the way. Unsettling for those not in the profession, but give me a rep that can sustain a high level of the right selling activities and I'll take my chances in meeting/exceeding company revenue needs. Thx, GAP
To address Gary's valid point: when the sales team has been given targets to which they are ultimately responsible for achieving, they should also be given a supplementary set of data (KPIs) that formulates HOW to achieve target sales.
This resolves a couple of issues: provides for shared ownership of the target between sales team and finance team; provides valuable business intel into the drivers of performance as well as providing intel into the predictive quality of the original forecast; allows sales team insight into how sales targets were formulated to begin with (so that the two teams can collaborate on assumptive inputs and expected outcomes). Which in turn, should eliminate the tendency for sand-bagging and piking that typically occurs in forecasts.
Sales forecasts should not just be developed based on $ trends, but every driver that goes into earning those $'s. And to Lyle's point, the sales team needs to hold the finance team accountable to a forecast analysis/review, to determine both the validity and relative veracity of the forecasted data. Uncovered issues could mean the finance team needs to change their methodology and assumptions.
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