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How to Produce Realistic Sales Projections

2016 has flown by and we are already in the fourth quarter! As we wrap up the year in just over a month, strategic planning for 2017 is happening in businesses across the world. As the person responsible for the bottom line, your job as a financial leader is quite simply to improve profits and cash flow. While that may sound easy, there are many nuances that are outside of your specific function (CEO, COO, CFO, Controller, VP, etc.) that you need to learn to lead your organization financially.

Working on 2017’s sales projections? Are you responsible for the bottom line? Download the free Goldilocks Sales Method whitepaper to learn how to build your sales pipeline and project sales accurately.

While there is still ample time left in the year, it’s never too early to start preparing for next year. If you’ve already started your projections for 2017, pull out your sales projections because there may be things you are missing. However, if you haven’t even thought about next year’s financial situation, here are some tips on how to produce realistic sales projections.

How to Produce Realistic Sales Projections

Producing realistic sales projections is difficult primarily because there are no guarantees. But you can avoid producing overly optimistic projections.

Why Most Sales Projections Fail

Most sales projections fail because of the financial leader’s inability to factor in potential risk and uncertainty. Just like in the children’s story Goldilocks, companies can easily miss the mark by producing projections that are either too pessimistic or too optimistic.

Start Doing Projections Now

Like I said, it’s never too early to prepare for what’s next. Are your sales projections realistic or optimistic? This would be the time to adjust any discrepancies in your financial projections. Don’t forget, 2017 is only a month and a half away!

Ask Questions

As you start working on your sales projections, it is imperative that you ask the following questions to your sales team, executive team, and financial team.

  • Where did the company meet the targets previously set for the company and where did the company fall short?
  • What did your team learn over the course of 2016?
  • What unfinished business will the company take into the new year?
  • What does success in 2017 look like?
  • What steps does the company need to take to increase the probability of success?

Starting Small: Unit Calculations

You can track future sales by calculating the expenses and comparing the number to unit sales. First, consider the expenses your business usually has: rent, loan payments, vehicle payments, utilities. Also include inventory and the equipment needed to produce the items. Tracking every expense for a future budget is crucial. Second, factor in the income sources. This can mean anything from time to units sold. Finally, compare the expenses to the sales. Do they change during the season? Use the year’s patterns to project next year’s performance.

Also take a look at your unit economics.  For every widget you sell, what is COGS and margin?  Is your margin sufficient to cover your fixed costs?  If not, then you should determine whether a pricing adjustment is in order, or if you just need to sell more of the item in order to cover fixed costs.

If you’re still not sure how to accurately project your sales, click here to access your free Goldilocks Sales Method tool. This tool allows you to avoid underestimating or over-projecting sales.

Watching Market Trends

You also need to factor in market trends. Preparing an external analysis will help you strategically plan your year and project accurately. Evaluate sales for companies in your industry, in your city, and your customer’s industry.

In Houston, the oil & gas industry has impacted the local (and even the national economy) over the past 18 months. Our 12-on-12 analysis has analyzed past 30 years of rig count and oil price data; using a guide like this allows our company to estimate how our and our clients’ business is going to fluctuate.

Be a Financial Leader

One of the common misconceptions about being a leader is that it’s all about delegating tasks.  While trusting your team and empowering them to make a difference is a crucial part of leadership, some tasks require your experience and expertise.

One of the most important ways you make a difference as a financial leader is by building bridges between departments in your company.  Since everything in a company is tied in some way to finance, it’s your responsibility to ensure that operations and sales have the information they need to be their best.

Don’t just ask your sales team for their sales forecast and plug it into your projections without another thought.  Instead, work with them to produce a realistic and attainable forecast that will guide the company over the next year.  The tighter your sales projections are, the better your financial projections will be.  As they say, it’s all about sales, the rest is just details.

How To Work With Sales

The idea of working with your sales team can sometimes be daunting. Financial people tend to be cautious and are more likely to understate projections. Salespeople can be very optimistic and will tend to overstate projections. If you ask your sales team to provide 2017’s sales projections, they may say that the company expects to grow 40% in revenue.

Sounds great, right?

Only if the facts bear it out.  Take a look at year over year sales reports. Over the past ten years, the company has only grown 20% year over year. Unless the company is releasing a new product line, etc., then you can make a calculated assumption that a 20% growth rate is more reasonable.

Educating your sales team on past sales trends and listening to them about what they’re hearing in the marketplace will allow you to produce more realistic sales projections than either of you might crank out on your own.

Manage Sales With a CRM

So you’ve worked with your sales team to come up with some killer sales projections.  You’re done, right?

If you’ve ever worked with salespeople, you know the answer to this question.  Giving a salesperson a goal but not holding them accountable for results is a recipe for failure.

What Gets Measured Gets Managed

In order to help them keep track of their goals and measure progress along the way, it’s a very good idea to invest in a Customer Relationship Management system (CRM).

One of the most attractive aspects of using a CRM to track customers and sales is the ability to compile information from many different communication channels (social media, website, telephone, radio, television, direct sales).  Even if your business is currently only communicating with customers in a few ways, it’s a good idea to have a centralized database with all your customer data so that your sales team can document customer preferences, communications, and goals.

Most CRMs will also function as a tracking system for progress towards sales goals.  Just the act of entering and tracking sales in a CRM can help keep your sales team focused on all customers and not just the ones that are causing the phone to ring right now.

Conclusion

Producing realistic sales projections should be a priority for your company, particularly at this time of year. If you need help creating an accurate sales pipeline, download the Goldilocks Sales Method. Let us how you think 2017 is going to look by leaving a comment below.

Produce Realistic Sales Projections

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Produce Realistic Sales Projections

 

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Why do most sales projections fail?

One common perception is if most sales projections fail, why do it? As you probably know, sales forecasts are used to predict a certain amount of revenue over a given period of time. Whether this is based on a gut feeling or on historical data, the worst thing you can do is over-promise and/or under-deliver.

Remember: “What gets measured gets managed.”

Why Do Most Sales Projections Fail?

Projecting revenue is essential. Two weeks ago in our blog, How does a CFO add value?, I mentioned the three legged stool analogy. If your sales fall short of projections, you’re going to run into some issues with respect to cash flow, inventory, or a lack of resources. Whether you are releasing a new product or are continuing to project growth in your sales, it’s imperative that your sales projections are accurate.

Sales Manager vs. CFO

Sales managers and CFOs normally have different perspectives, mainly because their roles contrast greatly. The sales manager is often more concerned about his or her team and maintaining customer relationships. They’re also generally fairly optimistic (sometimes overly so) in their projections.

The CFO looks at the bigger picture. They move 3-5 months faster than sales people or accountants, because they’re forward-thinking and continuously making plans on how to improve the company as a whole. This often leads to conflicting predictions with the sales force.

For example, Bill (the CEO of ABC Company) asks Steve (the CFO of ABC Company) what he projects sales to be in the next quarter. Based on previous performance, Steve predicts about $3.8 million, because last quarter they generated $3.7 million. That’s about 2% higher than the actual revenue generated, which is reasonable considering their historical record.

But then Steve the CFO asks Ben, the Sales Manager, what he thinks. Ben’s top salesperson, Lillian, performed over 40% better this quarter compared to the previous quarter, and he expects her to positively influence the sales team with her success over the next quarter. Ben optimistically projects $4 million, which is almost 8% higher than last quarter’s revenue, and 6% more than Steve’s projection.

When you increase revenue by just 2%, the bottom line also increases by a substantial amount. When comparing the bottom lines of a 2% increase in revenue versus an 8% increase in revenue, which would you think is more realistic? And which number would you accept as a CFO?

Let’s look at a more recent example.

Case Study: The Apple Watch Dilemma

Let’s refer to the Apple Watch situation last year… Apple optimistically projected to sell 41 million watches. Shortly after releasing the product, analysts altered that projection down to 31 million. Pretty soon, Apple decided to be a little more realistic in their projection. Thus, they reduced it yet another 10 million. Why do you think that is?

1. Their “gut” feeling was poisonous.

It’s natural for a company to be excited about the release of a new product.  They were absolutely ecstatic that this product was finally going to launch. This positivity created a bias for future projections because they were the only ones formulating this prediction, not an outside group of differing opinions.

2. The idea that a new product equals new data.

“We don’t need to check our historical figures because this product never existed in our company before, right?” Wrong. True, this is a new product. However, there are other ways of comparing and predicting your sales.

For example, if I was the CFO of Apple, and Apple Watch decided to launch a new app, I would look at similar, previous apps that cost the same for marketing, production, and other direct costs associated with the app. It’s common sense – how much can you usually afford to produce?

projections fail

Apple quickly saw that their projections were wrong and just as quickly adapted. But companies that are worth $10-100 million can’t necessarily afford to be 20 million units off of their projections. A projection that wrong could have easily put a company without the resources of Apple into the grave.

How to Prevent Your Sales Projections from Failing

projections failNate Silver, author of  The Signal and The Noise (pg. 19-20), generally spoke to the failure of projections…

“The most calamitous failures of prediction usually have a lot in common. We focus on those signals that tell a story about the world as we would like it to be, not how it really is. [Then] we ignore the risks that are hardest to measure, even when they pose the greatest threats to our well-being. [Thus] we make approximations and assumptions about the world that are much cruder than we realize. We abhor uncertainty, even when it is an irreducible part of the problem we are trying to solve. If we want to get at the heart of the financial crisis, [then] we should begin by identifying the greatest predictive failure of all, a prediction that committed all these mistakes.”

Although Silver is analyzing financial crises, the same analysis applies when we look at sales projections of a mid-size business. The most important factors you have to calculate are risk and uncertainty. If you neglect to consider risk and uncertainty, you are most likely over-shooting your projections.

Risk & Uncertainty

People often overlook risk and uncertainty when projecting revenue. However, life happens every single day, leaving you with failed projections.

Most projections fail due to inability to calculate these two factors: risk and uncertainty. So where do you start in assessing risk and uncertainty?

For risk:

  1. Identify any risks that could occur (events, etc.)
  2. Calculate the probability of each risky event occurring
  3. Create alternatives and figure the cost/benefit analysis of each response
  4. Choose a response that would best allow you to reach your sales projections
  5.  Reassess after your company responds
  6. Continue to monitor those risky events

For uncertainty, identify those events or situations that you are not sure of. Acknowledging your ignorance is key in this situation. It allows you to put focus on places where you are not sure. Uncertainty is not the same thing as inaction as many business or financial leaders like to define it. That’s an important distinction that you must continue to remind yourself of when analyzing what risks and uncertainties your company is facing.

By completing a SWOT analysis, you’ll be better equipped to understand where risk and uncertainty is found within your company.

Conclusion

If the problem is either over-shooting or under-delivering sales in their projections, then the answer is relatively simple but is often overlooked. The Goldilocks Sales Method will help you project revenue that is not only more accurate, but will help you utilize your projections.

projections fail

Strategic CFO Lab Member Extra

Access your Sales Genie Execution Plan in SCFO Lab. The step-by-step plan to build your sales pipeline and project sales that will improve profitability and cash flow.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

projections fail

See Also:

Projecting Revenue

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