Sales Forecasting Its About How Not What

Mar 22, 2009

When your sales staff provides your top-line outlook, are you being fed arbitrary targets? Or, are those numbers filled with support showing how those revenues will be achieved.

Let's plow in with an example.  The table below is a simple sales forecast for a small $1 million electrical supply distributor.  The sales manager provides the owner a three-month forecast each and every month.  Notice the projected sales are driven by number of customers, the number of lines per each sales order, the average price per line item on the sales order, and the number of times each customer places an order each month.

 
If your forecast does not resemble this level of detail, seriously consider adding such drivers to arrive at the forecast.  For each driver, there's an underlying strategy to hit the forecast (marketing, proper inventory management, customer service, strategic pricing, and so on).  Sales do not just happen.  Accordingly, manage and plan the drivers, not the sales dollars.

The forecast is completed.  Now what?  Here's the fun part.  Compare the plan to actual results.  Assume the following:

Actual sales: $96,294
Forecast: $104,132
Variance: $7,838 unfavorable

What does this mean?  We were off nearly $8,000.  So what?  Why?  What caused the drop?  Consider the table below for the answers.

 
 The table above is a variance analysis showing the causes for not hitting our sales forecast.  Customers, lineage, and customer frequency experienced drops while the average price went up per line.

While the sales forecast with proper drivers can serve as part of your strategic plan on the top line, the variance analysis comparing actual result to the forecast shows us if we need to revise our strategies, and if so, take steps to resolve undesirable trends.

In short, here's a quick summary for perfecting your sales forecasting:

-1- Pick a time period such as week or month.
-2- Select the appropriate sales drivers that you can manage (but keep it simple).
-3- Forecast the drivers and complete the forecast.
-4- Compare actual results with the forecast and determine causes for variances.
-5- Revise strategies to obtain your desired future results
-6- Repeat steps -1- through -5-

As a side note, I want to thank my friend and fellow partner Keith Simmons in New York for helping me think through the causal analysis.  Keith is a great CFO and his cost accounting abilities are through the roof.

If you need help in this process or need a quick sounding board, drop me a line at mgandy@b2bcfo.com.

 

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