How to Effectively Forecast (Part 1)

There have been a couple of my favorite philosophers that I would like to quote here to begin this topic: 

  1. The person attempting to travel two (or more) roads at once will get nowhere.
    Xun Zi
  2. I would rather be lucky than good.  Casey Stengel 

The problem with either of these fine quotes is the issue of limited resources.  Limited resources such as time and money mean that there are choices to be made and these choices should be after careful consideration.  This is the starting point for this article and thought process. 

Truly if the businessperson can focus on some type of goal then the path to that goal is execution of the plan.  Forecasting is meant to begin the journey not to distract from the execution of the plan. 

Step one to forecast effectively involves the sales forecast.  I have invited some respected friends to help me write this and subsequest articles, which will be in several parts. 

Allan Himmelstein is a sales consultant with his own company Sales Coach AZ http://www.salescoachaz.com/ .  I have worked with Allan on several projects and educational sessions.  His technique is on target and very effective with generating additional sales.  Allan wrote this part of the article. 

Throughout my career, one of the most dreaded activities was sales forecasting.  It is a dreaded but a necessary evil.  Your sales people must be involved.  Only they have firsthand knowledge of the account.  If done properly, there are many aspects that cannot only help your business, but help the sales people perform better.  Don’t you want your salespeople thinking like business owners?  

The strangest experience in forecasting was when I was with a German company and I projected only $100,000 in sales and actually had $600,000.  They nearly killed me for selling too much.  I thought they were crazy.  

After some discussion, I started seeing their point.  The effect on the company was enormous.  If they would have known, they could have gotten new people.  If they would have known, they could have gotten new equipment to produce product, and even more important projected their cash flow.  

Sales forecasting is part science and part guesswork.  There has to be a system in place to help the salesperson and sales management to forecast at least 80% of the sales in a simple succinct manner.  Part of the problem is that some sales people are eternally optimistic, and others do not want to stick their necks out, so they forecast low.  Without a system, you have no way of knowing and it becomes pure guesswork.  At the same time, you do not want it taking too much time away from sales efforts.  Or is that an excuse, hmmmm?  

A CFO can really give you great forecasting tools.  However, you will need to include subjective points like the following:  

  1. Historically what has your major accounts done?
  2. If the account buys the same products next year, why will there be an increase or decrease?
  3. Are there any new products in the pipeline?
  4. What actions need to be taken before the sale is being made?  Ie. Specifications, pilot plant testing, pricing acceptance, contract signing.
  5. Who needs to help within in the organization and when?
  6. If everything is successful, when can the first order be expected?
  7. How much will that first order be?
  8. What is the yearly potential?
  9. What other new accounts do you expect and their volume?   

No matter what expect a minimum of 10-20% deviation from their forecast.  Anything more and they do not know their business.

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