Driving your business from the sales forecast

Their approach was to start with producing the most accurate sales forecast that they could. Everything else followed from this.

They believed that until they knew the sales, they didn't know what resources they needed, and what they could afford. They agonised over the sales plan, cutting it this way and that, looking at the current trends and how that would pan out. Total realism ruled the day.

Once they had the sales plan, they informed each department what their budget was, and those that didn't comply had a short trip to the job centre.

You know what? The budgets were a lot, lot less than the minimum the managers had been proposing beforehand, but somehow they managed.

Profit is the point

The fundamental point I learnt was that businesses must make a profit. If the costs can't be contained to make it work, why be in business? Staying profitable at all times is the starter for ten.

This is the correct approach in all but one case. That's when you have strong financial backing in a market with massive growth potential. Google and Facebook didn't get where they are today by insisting on an immediate profit, but they are the exceptions.

Getting the sales forecast right

My two rules of thumb for sales forecasting are "the trend is your friend" and "the two year stitch".

My experience is generally that sales trends by individual business line or product will usually continue for the next year. It's important to break the business into parts as an apparent overall sales line may disguise conflicting trends within the individual parts that make up the total.

The two year stitch is about new initiatives. I've found that these generally take around two years to bear fruit. Don't fall for the trap of assuming your new initiative will save the day. It's unlikely to make much difference in the next year, but maybe in two years time it will start to count. Obviously this is a very broad rule of thumb, but it's a safe starting point.

The payoff

I've found that these two rules help to stop me from planning an over-optimistic hockey stick upturn in sales, which somehow is always just around the next corner, but never actually arrives. They also help on when to predict strong sales growth that needs matching infrastructure developments.

When it's been necessary, this approach has helped me to reduce costs in time. Making cuts early is much easier and greatly improves the chances of survival. On a more optimistic note, when you are experiencing strong growth you can plan the necessary support for the business in good time, enabling the growth to continue.

Is this rocket science? No, not really. But sometimes focusing on straight forward issues has a bigger payoff than the more sophisticated stuff.

Chris Barling, is CEO of E-Commerce software supplier, Sellerdeck. Originally published on Business Matters.

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