Only the weatherman can screw up their forecasts on a daily basis and stay employed.
For almost three decades I’ve been building sales forecasts. In that time I’ve learned it’s one thing to develop a sales forecast for me as a target, a whole other thing to develop them for bankers, investors and board members.
If you’ve got investors, a Board of Directors, or a bank loan (are banks even lending to SBEs anymore? If you have a bank loan please let us know how you got it!) you have developed a sales forecast as a part of your annual budget and you likely know the pain of being called on the carpet for being dead wrong.
First off, I know doing them well is critical to my business because only by accurately forecasting sales–including revenue per month–can I develop a cash flow forecast. And without a cash flow forecast it’s impossible to plan and make well founded business decisions. Like, when can I afford to upgrade computers for the staff? Or, when can I get a paycheck?
My first Board Meeting with my first investors occurred 7 years after I started my first company. My previous projections were always too aggressive, so I’d adjust them down each month. No harm no foul, right? Because my company was growing it didn’t matter that much because 1. It was my company and 2. I made business decisions based on CASH in the bank not on “futures”.
With a vested 3rd party involved in my business, all of a sudden it became critically important to forecast accurately. And I was awful at it. Why? I once had a Pastor tell me I was the worst kind of optimist… an idealistic optimist! I felt if we did the right things, offer the right product and services, to the right target market, we were “destined” to hit my growth numbers… In 1993–my first year with a Board & Investors–I endured the ultimate smack down… I forecast growth of 250% and we only [sic] grew 200%. It was painful because the Board tied bonuses to the forecast target!
But that was 20 years ago… right?
Here’s what I learned: Build three forecasts. Show one.
Forecast #1: This is my most optimistic number…
- I take the amount from whatever recurring revenue, booked orders, and solid accounts I have.
- I evaluate the growth or drop in sales from the previous year and carefully evaluate the reasons for the change and estimate which customers I might win back, or by how much I can grow existing accounts.
- Go through each of the prospects I have in my sales pipeline forecast and project revenue from accounts I believe we’ll add based on everything I know about each of them.
- Review last year’s customers and evaluate which accounts were added from last year’s marketing efforts and forecast a similar number of new accounts in this current year.
- Add them all up… A Very Big Number With Big Growth Rates. That’s Forecast #1 – Pie In The Sky! Everything goes right. The fields are ripe for the harvest!
Forecast #2: Take Forecast #1 and discount it by 1/3rd and float it around to your closest, knowledgeable confidants–but not to your vested 3rd parties.
Forecast #3: Take a look at last year’s performance. If you grew year-over-year: what was your growth percentage? Was it an acceptable growth rate to your Board/Investors? If so, no matter how much you think you can grow… Develop a forecast with a slightly bigger growth rate… and not a penny more (If you grew 30% in 2012… as long as conditions are favorable to repeat, show a 40% growth rate). Now support this forecast with educated predictions on revenue generated from each account.
I have learned it is better to regularly beat a published Forecast #3, than to achieve a healthy growth rate and still fall short of Forecast #1. Remember, the world is an unpredictable place, and as an SBE we have no way of controlling macro conditions and their outcome.
Running an SBE alone is like running blindfolded in dark: the long strides are exhilarating, until you hit a tree. Partner up! Don’t go it alone!