Sales Forecasting

Sales Mindset

Sales people want to sell. With pressure from Stakeholders to show revenue growth, and to demonstrate the value of the Sales team they will work to create forecasts for new accounts they hope to win and speculate how much business that will entail. Given their unbridled enthusiasm Sales teams will almost always be highly optimistic in their estimates on prospects for future growth and new business wins which makes unchecked sales forecasting problematic. And you want your Sales team to be pumped up and enthusiastic for sure.

A Sales Forecast Gone Badly Wrong

The revenue plan was made up of a combination of existing business , newly won business , and business that hadn't yet been won but were in some stage of the Sales cycle. With intense pressure from the Board and CEO to grow the business the Sales forecast became the revenue plan for the year, upon which all budgets, expenses, capacity and investment plans were made. This was even though a significant portion of that forecast included business that hadn't even been won yet. To underscore the problem any attempts to scrutinize the revenue plan were squashed.

We were to trust the Sales team to pull it off. But given Sales' enthusiastic nature the revenue forecast was highly optimistic in all respects. Projections from existing customers came from the customer's Sales teams, who were also bullish. And most importantly the inclusion of business not yet won in the base revenue forecast meant that we were basically counting on winning all of that business with complete certainty.

Sales dismissed the pessimism with the promise that they were going to win all of that new business. In the meantime they fell short of revenue plans, and cash flow and profit projections. New business wins didn't materialize. If we did win any new business it would not be sufficient to recover the lost revenue and lost profitability. We now had to take severe restructuring action to adjust the infrastructure and size of the organization to restore some semblance of profitability and viability.

Conclusion

Any new business included in business plans should undergo deep scrutiny, with some level of judgement applied to de-risk the numbers. All key functions in an organization should be a part of reviewing and agreeing on forecasts, with full transparency as to how these forecasts were created. Sales, Finance, Supply Chain, Manufacturing, Operations, Human Resources, I/T, and more will all have input that, if taken into consideration, will result in better forecasts and increased ability to “Under commit and over deliver”. If you accept the fact that sales forecasting will never be perfect than the next step is to figure out how to create a Supply Chain that acknowledges that reality.