Thursday 4th Apr 2019
Sales forecasting 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. Your sales targets should be stretching but achievable BECAUSE of the calculated sales forecasting and planning behind how you arrived at them.
Think of it this way. 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?
A ‘top down’ approach is based on two factors.
First, the historical performance of the business over the last few years (‘We’ve grown roughly 10% year on year over the last three years, so let’s target sales with 10% growth again’) or second, the executive, or senior leadership have lofty growth ambitions for the business aligned to the 3- or 5-year plan and set a target which is 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 include…
What does growth look like from both a revenue and profitability perspective over the last three years? What are the trends?
Which products and services are really performing? Which aren’t?
What are our growth ambitions and aspirational goals?
And taking into account external factors that will influence your thinking…
What major milestone events are going to take place this year that could have an impact?
What are the trends in our industry?
What are our competitors up to? Who is growing, what are they doing and what can we learn from them?
That is your top down approach.
You probably recognise it because it is by far the most commonly used approach to sales forecasting and planning.
Now while top down planning is undoubtedly part of the sales forecasting process, resist implementing this approach in isolation.
You see there is one significant, but obvious risk. Namely the mismatch between what the top ‘think’ can be delivered versus what can ‘actually’ be delivered.
Your ‘top down’ approach is missing the other critical part, the scientific element, the ‘bottom up’.
The key to effective planning and forecasting is to adopt a top down/ bottom up approach, and allow the two ways of thinking to meet in the middle.
Now, there might be a gap or tension in the middle ground between the top down aspirations and what the bottom up approach is saying can realistically be delivered. However, it is better to have the discussion in 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 comes in and you start to build an accurate picture of what is going to happen in the middle ground of your top down/bottom up approach.
Understanding your numbers is imperative in your sales forecasting and planning so let me share this example to bring it to life…
|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 new financial year||500,000|
|5. Maximization 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 with a revenue line last year of £1,000,000, the first question I would ask, in 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 and that has to 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%. Right away, you know that of the £1,000,000 you achieved last year, you can only expect around £900,000 this year, based on that rate of attrition.
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.
Okay, so the next 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 that your acquisition of new customers, has to deliver £200,000 just to stand still as a business and generate the same £1,000,000 revenue as last 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 or a customer maximisation gap or a customer acquisition challenge.
That’s the detail needed to help you plan your sales targets and focus.
Do you know your business reality?
Is your sales forecasting and planning REALLY fit for purpose?
If you’re in any doubt then check out The Business Growth Pathway™. It’s an online sales strategy tool I’ve developed that will help you:
✔ Sense check your current thinking
✔ Create a step-by-step actionable sales plan
✔ Make sure your sales targets become a reality, not just a pipe-dream
Your first sales strategy assessment is FREE, get it here.
BD & Sales is most definitely one of the ten drivers or de-railers of your business growth with certainty, predictability, and ‘no surprises’ being its key measures of success. And the starting point is the accuracy and rigor of your sales forecasting.