Is There Value In Business Forecasting?
By Larry Girouard
The Business Avionix Company
Does your company have a sales forecast for 2017? Most small businesses spend little time forecasting sales for the upcoming year. The one thing you can say with 100% certainty about a business forecast is that it will be wrong. So, why expend a lot of sweat equity on developing it? What’s the use?
From my perspective, the sales forecast is one of the most important exercises that a company can perform. It is the one document that provides a roadmap that describes where the company is going. Most managers and employees spend their time within the confines of the business’ (SP?) four walls. They process paperwork, assemble products, sit in meetings and the like, with little or no view regarding where the company is going, and what value their contribution is to the bigger picture.
Think about this >> any self-sustaining company must cover their basic operating costs, inventory costs, salaries, marketing expenses and other expenses that arise on a day-to-day basis. In order to better plan for these expenses the company must have a good sense for where revenue has historically been generated and where new business is coming from. This sales information must be presented with some detail to be of any real value for planning purposes.
Early in my career I was VP of Sales for a small manufacturing plant with annual sales of around $20M. Every year, just prior to the start of the fourth quarter, I was asked for next year’s sales forecast, with an expanded view toward both the 3 and 5 year forecasts. It was not enough to report that we expected to grow 5%-10%. I wish it were that simple. The company wanted to know the forecast with details such as, sales by customer, sales for each product within a customer, new product sales initiatives and the expected sales levels for those products, the timing for these product sales, pricing and price increases for each product, and so on.
Developing the company’s operating budget for the upcoming year was based on these sales projections. It provide operations and finance with the foundation for determining manpower and new equipment requirements, the need for a 2nd shift, negotiating raw material purchasing requirements and the like.
While the forecast paints the picture for what the market will need from the company in the coming year, if it is guaranteed to be wrong, where is the value? Actually, forecasting is far from being a back of the envelop guess, especially if you expect it to have any value for business planning. Good forecasting is based on past sales history records, direct input by contacting the company’s largest customers (those that make up 80% of the company’s business), and looking at market trends that impact the products/services you sell. This will result in the forecast model beginning to approach reality.
Many of your larger customers will be forecasting their next year sales, and if asked, will tell you what their expectations are for the purchase of products, or services, that your company provides. You need only to ask them. Most will be happy to provide that information because they want you to be in the best position to service their needs in the coming year.
The bottom line is that there are many methodologies that can be applied to forecasting that improves their accuracy year after year. As a result forecasts become a very valuable tool for business planning. For example, tracking sales patterns in your business over the past 5-10 years will reveal the seasonal peaks and valleys for the sales of different products throughout the year. While management may already know this intuitively, applying a mathematical model to these variations in the form of a forecast allows the finance department to better anticipate cash flow requirements, and the issues that can be impacted by cash flow, well before they happen.
Controlling the Sales Function
Beyond the value of the forecast to business operations and finance, it also provides a very powerful management tool for tracking the actions of the sale department. One of the biggest challenges of a business owner is controlling the sales function. Sales people generally do not like to be pinned down. While this may well be the nature of sales people, a detailed forecast is a great way to frame their behavior and actions. Meeting forecasts must be an integral part of their job descriptions.
The sales function is responsible for, and accountable to, the forecast each month, quarter and annually. Since nothing happens until something is sold, the internal operation of the company is fully dependent on the sales department’s execution of the sales forecast. In the absence of a sales forecast, the sales department remains rudderless, aimlessly wandering from customer to customer without any real direction, or focus.
If you expect your sales force to be effective, they must perform to a game plan of some kind. The forecast provides the framework and timeline for their activity, and is essential in holding the sales department accountable to the rest of the organization. The debate that seems to continue in many companies between sales and operations is when sales states to operations, “Why don’t you make what we sell”, and operations retorts, “Why don’t you sell what we make?” The sales forecast, to a large degree, mitigates this debate.
Finally, a company operating without a detailed forecast is flying blind in a land filled with the very rugged terrain of competition. A forecast is essential in navigating the competitive landscape because it becomes a powerful tool for discussing strategy and tactics.
The value of having a forecast is to better understand internal operating cost demands, improve communications from the sales department, and help to focus corporate outreach at the expense of competition. The power of a well-designed forecast cannot be overstated. Start your forecast today! The return on your invested time will be profound.