- The better you understand what has happened in the past, the better your ability to forecast the future: If you can analyse past performance and understand that your average sales cycle is five weeks, that your conversion rate is one in every seven leads, that each sales person creates 25 leads a month and that the average deal size is £15,000, that data will help you formulate a potential sales plan as you increase your sales team over the next six months. This is just one example but understanding key metrics such as debtor days, overtime levels, inventory movements and order cycles and applying them correctly can significantly improve the accuracy of your forecasts.
- Make sure you understand the trends over time for each metric: If you have 12 months of historical data, don’t just look at the total for those 12 months. Is there any seasonal activity to take account of Or maybe your sales have actually been increasing by 15 per cent for the first seven months but an average of 35 per cent over the past five months. Understand that trend, what has been driving the recent growth and whether it can be relied upon to use as a basis for your forecasts.
- Involve senior managers early and regularly: Get their buy-in or you’ll always have a forecast that others will label as “useless” because you didn?t consult them. Just like a budget, there needs to be accountability and responsibility.
- Prioritise your focus: Don’t create complicated models to forecast your overhead spend if it only varies by five per cent each month or if it makes up a small proportion of your total costs. Focus on the real drivers of the business the pipeline of deals, sales delivery and margin or productivity measures.
- Take a disciplined approach: Embed the forecasting process in you organisation. Hold forecast meetings on a regular basis.
- Make it easy to produce: Some of the best forecasting processes focus solely on the real drivers of the business (this might be the number of visitors to your website, the number of phone calls made by your sales team, or average order value through your web store) and nothing else. Whichever it is, make sure the data is easily accessible, can be produced on a regular basis and is reliably accurate.
Chris Chapman is managing director of www.mybusinessFD.com, which offers high-calibre finance directors to ambitious smaller and growing companies on a part time, flexible and affordable basis. Tel: 0207 717 5254 or [email protected].