The approach was simple, they focused on the sales budget for the next year. Or rather they concentrated on producing the most accurate sales forecast that they could.
I think their thinking went like this. Until they knew the sales, they didn't know two other, critical things. The first was what resources we needed, the second was what we could afford. So they agonised over the plan, analysing it in every way they could, looking at the current trends and their likely impact. Then they informed the heads of department how much they had to spend. You know what? This was a lot, lot less than the minimum the managers had been proposing, but somehow they all managed.
The point is to make a profit
The fundamental point that they taught me was that businesses are around to make a profit. If the costs can't be constrained to achieve this end, why bother? And of course with no profit the business wouldn't be around much longer anyway.
This is the right approach. The one exception is when you have heavy duty financial backing, and are in a market with huge growth potential. Google and Facebook were massively backed by venture capital funds and didn't get where they are today by watching the pennies. But they are very unusual.
I have two rules of thumb when preparing a sales forecast. These are "the trend is your friend" - in other words look at trends by business line and generally you can assume that they will continue.
The second is that new initiatives take two years to bear fruit - in other words from when you have started something new, it will be two years before it has a significant impact on sales.
These two rules help to prevent the great sin of sales forecasting. This is planning an over-optimistic hockey stick upturn, which somehow is always just around the corner.
With this approach you will tend to reduce costs in time. This makes such cuts easier and provides the business with a much better chance of survival. Conversely, when you are growing strongly you will plan the staffing necessary to support the business ahead of time, preventing likely hiccups down the road.
My final thought is this. Don't ever rest on your laurels. Make sure that you measure progress against your forecast, so that you can improve the accuracy next time around. Get this right, and everything else in your business will work much better.
By Chris Barling, is CEO of E-Commerce specialist, Sellerdeck. Originally published on BusinessZone