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Tuesday 5th Nov 2024

Sales Forecasting and Planning: 4 things you should know

If operational excellence represents the arteries of your business, sales is the heartbeat that feeds your business. And surely you want to know what you’ve got to do to keep it beating?

Sales forecasting and planning is a science. It should not be an experiment nor a ‘finger in the air’, and it most certainly shouldn’t be a ‘well, let’s hope for the best and see what we deliver’. And yet, in my experience, most businesses are poor at sales forecasting and planning. Your sales targets should be stretching but achievable because of the calculated sales forecasting and planning behind how you arrived at them.

 Sales forecasting & planning: 4 things you should know

#1 The default approach to sales forecasting is ‘top-down’

First, the business’s historical performance over the last few years … ‘We’ve grown roughly 10% yearly over the last three years, so let’s target sales with 10% growth again’.

Second, executive or senior leadership has lofty growth ambitions for the business aligned to the 3- or 5-year plan and sets a target cascaded to sales teams with the message… ‘This is what you need to deliver’.

Simply put, the sales targets come from the top.

The types of questions you’ll ask using a top-down approach to your sales forecasting and planning include…

And taking into account external factors that will influence your thinking…

Described above is probably your top-down approach.

You may recognise it because it is the most commonly used sales forecasting and planning approach.

While top-down planning is undoubtedly part of the sales forecasting process, resist implementing this approach in isolation. There is one significant but noticeable risk: the mismatch between what the top ‘think’ can be delivered and what can ‘actually’ be delivered.

Your ‘top-down’ approach is missing the other critical part, the scientific element, the ‘bottom-up’.

#2 A complete and accurate forecast also requires a ‘bottom-up’ approach

There might be a gap or tension in the middle ground between the top-down aspirations and the bottom-up reality. However, it is better to have the discussion in the early part of the year (preferably at the beginning) as part of a proactive planning discussion than to have it when it usually happens in a business: six months or even nine months into the year when you’re already scarily behind on the numbers, on the back foot, and trying to play catch up.

This is where the formula and science come in. You build an accurate picture of what will happen in the middle ground between your top-down AND bottom-up approaches.

#3 Your sales forecasting and planning needs science behind it

Understanding your numbers is imperative in your sales forecasting and planning. Here’s an example to illustrate.

The numbers (£s) in our example
1. Revenue last year 1,000,000
2. 10% year-on-year attrition (100,000)
3. Adjusted position 900,000
4. Forecast annuity/recurring revenue for the new financial year 500,000
5. Maximisation of existing customers 300,000
6. Forecast revenue line (point 4 plus point 5) 800,000
7. Gap to just stand still as a business versus last year (200,000)
8. Aspirational goal of 10% growth this year 100,000
9. Real gap (point 7 plus point 8) (300,000)
10. New Business Acquisition Target 300,000

 

If I were coaching you on your sales planning and forecasting using the above numbers, it would be something like this…

With a revenue line of £1,000,000 last year, the first question I would ask when assessing where your focus should be this year is: What is the natural customer attrition rate in your business?’

No matter how good you are at retention, there is always some attrition, which must be factored in. A low attrition rate demonstrates that you are good at retention; a high attrition rate tells you immediately where you have work to do.

Let’s say attrition is 10%. You know that of the £1,000,000 you achieved last year, you can only expect around £900,000 this year, based on that attrition rate.

The second question: ‘How much of that revenue is locked in as annuity/recurring revenue that will reappear this year?’

Let’s say you have £500,000 locked up in annuity revenue.

The third question is, ‘What’s the potential for growth in the existing customer base?’ Or, put another way, From your existing customer base, how much can you get them to spend more?’

Let’s say you acquired some new customers last year who are now going to deliver the full 12 months of revenue from the beginning of this year, and those customers are worth £300,000 in revenue.

Adding £300,000 to your £500,000 in annuity revenue gives you £800,000 in forecasted revenue for this year. With £800,000 in expected revenue from existing customers (spending more and retaining those you can), you know your acquisition of new customers has to deliver £200,000 to stand still as a business and generate the same £1,000,000 revenue as last year.

The fourth question is: ‘What growth do you want to achieve this year?’

If your goal is to deliver 10% growth this year on top of last year’s revenue achievement, you’ll need to bring in £300,000 of business through new customer acquisitions, £200,000 to close the gap and £100,000 to achieve the 10% growth.

Now that’s the science.

That’s how you’ll identify a customer attrition problem, a customer maximisation gap, or an acquisition challenge.

That’s the detail needed to help you plan your sales targets and focus.

#4 Schedule balcony time for thinking and planning

It’s so easy to get caught on the dance floor of life, continuously doing the same things the same way without making time to stop, think, and explore better options and more effective working methods. Get on the balcony of your business and allow time for thinking and planning.

Whatever your role, you must create quality thinking time to work ‘ON’ business—block 30-minute appointments in your diary for thinking and planning.

Business development and Sales are among the ten drivers or derailers of business growth, with certainty, predictability, and ‘no surprises’ being its critical measures of success. The starting point is the accuracy and rigour of your sales forecasting and planning.

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