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How Better Sales Forecasting Can Improve Your Profits

Jan15_1

Salespeople are the headlights of every business. They have an insider’s perspective of their customers and prospects. They are the first to know about what customers plan to buy in the future.

Unfortunately, many companies are struggling to translate their salespeople’s predictions into a reliable financial plan. Just last week I spoke with the CEO of a company that employs more than 50 salespeople, and he said, “Salespeople are eternal optimists, and when I see their forecasts, I automatically cut them in half.” When I asked him, “How many times has your reduced number been accurate?” he said, “Never.”

My next question was, “How far off are your projections every month?” He said, “Our best guess usually brings us within 10 percent.”

Over-forecasting

Now let’s do the math so we can determine the financial impact of this forecasting error. If a company has $50 million in revenues, a 10 percent over-forecast represents $5 million. The big question is, what’s the true cost of this error?

First: The company has to carry an additional $5 million worth of product in its inventory. That’s $5 million in cash flow that the company could invest in other opportunities. The company could put the $5 million into tax-free bonds and earn $500,000 on that money per year.

Second: The company has to finance that inventory. At a 6 percent interest rate, the cost is $300,000.

Third: Producing the excess inventory is likely to inflate the company’s payroll by 10 percent, which translates to about $500,000 in additional payroll expenses. In this case, the financial waste of a 10 percent over-forecast translates into $1.3 million, which means that for every percentage point by which the company’s sales forecasting is improved, the company could save $130,000 a year.

Under-forecasting

Let’s say the forecasting error goes in the other direction. What are the costs of under-forecasting?

First, if there isn’t enough inventory, the order may be lost. Let’s say 50 percent of the company’s customers cancel their orders. That would be a $2.5 million loss in revenues.

Second, if the order is delayed, there is increased pressure to accelerate production, which often means overtime plus express shipping costs.

Third, if customers receive their orders late, customer satisfaction will drop.

Get forecasting right

World-class companies can’t afford to make big forecasting errors. They create a culture of measurement in which sales and marketing managers work in synch to achieve their goals. I recently spoke to the VP of sales of a software company, and he showed me how his 300-person sales team follows a documented sales process that gives the CEO a monthly forecast that’s 98 percent accurate. The VP of sales shared more reasons for pushing up forecasting accuracy.

He said that higher forecasting accuracy allows him to catch market changes earlier. You can respond faster with special promotions when the market slows down, or you can step up sales quickly if the market goes up. His comment: “Speed drives ROI.”

While many organizations are stuck tracking forecasting with spreadsheets, world-class companies use purposefully built, sales-forecasting software, such as Salesforce.com, that’s integrated with their CRM solution. These solutions both capture the data and provide exceptional analytics to drive better insight and accurate action.

As the economy moves into the recovery phase, now is the time to invest in better sales-forecasting tools that will eliminate expensive errors and give your company the flexibility to respond quickly to market changes. Run your company based on science, not on hunches, so you can cut costs and maximize productivity.

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Dick Orlando


Well done post Gerhard! Accountability for accurate forecasting is the sole repsonsibility of the Sales Leader in any organization. CRM is an essential tool for forecasting, however, the Sales Leader must take ownership for practicing consistency in format, review period, data required (only ask reps for info YOU will read), actively feedback to reps, instill a collaboration culture among reps/first level managers and praise the accurate forecasters publicly. Even with 75% of our software business coming from new accounts, we achieve >90% accuracy monthly. Forecasting accuracy is a reflection of the Sales Leader, not the reps.


OptioneerJM

My top Blog post was exactly on this subject and gets to the heart of the matter "Forecast, Project or Dart Board" ... which reinforces much of what you say and why forecasting is so important. There is definitely resistance to forecasting which I believe is accountability and projecting conveys a weakness in confidence of a sales team. Lack of accountability means you may as well just have a dart board to pick a number.
OptioneerJM
http://optioneerjm.blogspot.com/2010/08/forecast-project-or-dart-board.html

Mark Sellers

Another cost Gerhard is one borne over time and therefore might have even higher consequences. A culture of 'we'll never get our forecasting right' has created work arounds to compensate for the deficiency. These have become acceptable business practices that prevent true continuous improvement and progress. Finally, the root cause of forecasting woes isn't a lack of fancy CRM algorithms - it's salespeople not putting opportunities where they really belong on the funnel.

Richard Lane

Gerhard, interesting post. Having spent years struggling with sales forecasts and cajoling sales people into updating CRM, I went on a journey to find a better solution. I found Dealmaker from The TAS Group. The first system I have seen that integrates into your CRM, removes the subjectivity from the forecast process (by embedding sales best practice and process) and, perhaps most importantly, delivers value back to the salesperson because the information they enter gives back important information to them. Helping them to be more successful.

I am a little surprised you didn't take your article further into sales performance automation rather than stopping with Salesforce.com.

Finally I should add a disclaimer that, because of the value I saw from Dealmaker, Engleby Associates is now a Certified Partner for The TAS Group.

Thanks,
Richard

Scott Marker

“World-class companies use purposefully built, sales-forecasting software, such as Salesforce.com, that’s integrated with their CRM solution”

Yet, another reason to use a CRM but most companies / sales forces don’t have the disciple to use one everyday to help improve customer service and "Yes", close more sales.

However,... 98% accuracy, I might question that executive, sounds a little too high, even using CRM’s.

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