The Annual Liar's Poker Tournament (or, How to Forecast Sales in 2011)
As we come into December, it is time for the annual Liar's Poker tournament -- also known as the Sales Forecast. Every year companies go through the exercise of projecting their revenue for the next year. I have seen this process take many forms -- some scientific, some anecdotal, and some no more sophisticated than a witch-doctor smoking herbs and reading animal entrails.
I'm not disparaging the need for the information. Owners, bankers, plant managers, and staffing all need to have a reasonable idea of how to plan for the year, and that starts with the forecast. Every industry and business has its own unique parameters, but having done this with almost 150 companies from all sorts of businesses, I've come up with this general process designed to root out unfounded optimism and other witchcraft.
Step 1: Decide what you know, what you can guess, and what you don't know.
For me, this typically starts with setting a size threshold for the accounts for which I want an account-by-account analysis, and those accounts that are too small for that type of rigor. I recently did this with a $50 million supply company and we set the threshold at accounts greater than $2,500/month. All accounts at that level and above we would ask our questions account-by-account. For accounts with revenue below that, the estimates would be made for the whole. This step establishes what you know and what you can guess. That leaves the new customer acquisition goals.
Step 2: Do the account planning on your above-threshold accounts and determine the following:
- Last year's revenue
- This year's rolling forward revenue from past orders and patterns
- What are the penetration sales, (additional product sales, locations, service extensions)?
- What are the contraction or turnover risks?
Step 3: Ask the same questions from Step 2 for the collective accounts that are below threshold. For example, at the supply company, 28 percent of its accounts were below the threshold. We looked at when each one became an account this year, and then made some adjustments so that we could predict what a full year's revenue would look like. We also looked at the historical trends on penetration, contraction and turnover. From that analysis, we were able to forecast what 2011 would likely look like for 28 percent of company's revenue.
Step 4: Analyze and add your "near-to-close" pipeline. This is where the process moves from science to voodoo. We are starting to predict events that have not yet happened. However, near-to-close, (usually accounts that are in the final stages of the sales process and have close dates between now and March 1), should have a higher predictability. Take your accounts that are at the proposal step in your sales process and meet the March 1 close requirement, total them and then cut that amount in half to take out ramp time, fall offs, delayed contracts and unwarranted optimism.
Step 5: New Sales. I recommend breaking this into regular and large sales categories. As you create these new customer acquisition targets for the next year, here are a few guidelines:
- No blanket goals. If you have more than one sales person, then you will need to set your goals by sales person. No two sales people's territories, current book of business or other circumstances are the same. Set the goals individually.
- Name names. For large accounts, I believe you should put the names of the target accounts you want to land in the next year into your plan. You won't land all of them, but you will land more if you put them into the plan.
- Plan to win. I have seen quite a number of companies who put crazy goals into their sales plans every year. They have no history of that level of growth, no rationale for how they would serve that number of new accounts. Somebody -- usually the CEO -- just wants that number.
Flickr photo courtesy of tiffa130/CC 2.0