Presentation Magazine

Sales Forecasting is a myth!


forecasting

Who in their right mind ever thought up sales forecasting?

Can’t you just see the manufacturing staff of every company sitting around waiting each month anxious to read the sales forecast to determine what to build? Talk about a way to go out of business!

Manufacturing (this takes into account hardware, software, consulting services and anything else that is sold) does not build to forecasts!

That’s right, manufacturing does not build to forecasts, companies build to statistical history. This is true for anything sold. If you sell ice cream, you buy month’s supply of ice cream based on what you sold over the last 3, 6 or 12 months. If you increased your sales by 20 quarts of chocolate every month for the past 12 months, guess how many additional quarts you are going to order…20! If you placed an ad and the sales increased 20% every single time it ran, guess what? You would increase your next order by 20%. This is not rocket science; production is based on history not forecasts.

The ‘build bases history’ is the same regardless of what is produced; cars, washers and dryers, baseball caps, PC’s airplanes, locomotives, widgets…you name it. Someone in management has a statistical chart that shows growth (or decline) and builds accordingly.

So from where does this magical sales forecasting idea come? The roots are based in the history of sales managers being the good guys and in their need to avoid tough questions. How many sales managers say the same thing every month – “It’s not me asking for this forecast, it’s the factory, the owner, the VP of manufacturing.” You name anyone that is not them, anyone ‘above’, and that’s who needs it. Rubbish!

CEO’s need to know one thing and one thing only about sales: Do you have enough in the pipeline to meet your quota? Sales Managers need to concentrate on one thing and one thing only – the pipeline. Either your staff has a good pipeline or they don’t.

CEO’s know, statistically, that Sales is going to produce £X of sales per month based on the following: within the sales force the top 20% sell at 200 -300% of quota, the next 60% sell at 90 -120% of quota and the bottom 20% at less than 90% of quota (20/60/20). Guess where everyone spends their time? That’s right, getting the top 20% to sell more. What a waste of time! Those people are doing their jobs and other than making sure that there is nothing holding them back, like the sales prevention teams which every company employs, they should be left alone.

The bottom 20% should be given a specific action plan and then let go if the results are not quickly forthcoming. The sales manager needs to be focused on the middle. Following is an example of how this attention can produce results.

Given a total sales staff of 10 each with a quota of 100 with a 20/60/20 split on performance consider Table A. The most important three numbers are: Sales Staff, total sales (£1,150) and the sales £ per staff, in this case £115.

Table A

Projected
% of Sales
# Sales Staff Quota Actual
Top 20% 200% 2 £200 £400
Middle 60% 100% 6 £600 £600
Bottom 20% 75% 2 £200 £150
£1,000 £1,150
Total Sales Staff 10
Annual Sales Target £1,000
Quota per sales £100
Quota £ per staff £115

Now consider Table B, reflecting a sales manager who is spending time where needed. Result? The top 20% are left alone, the middle 60% have raised their quota achievement from 100% to 150%, and the bottom 20% are let go.

Notice that sales goes up, head count goes down and sales per person moves up from £115 to £163, and the cost of sales goes down.

Table B

% of Sales # Sales Staff Quota Actual
Top 20% 200% 2 £200 £400
Middle 60% 150% 6 £600 £900
Bottom 20% 75% 0 £200 £0
£1,300
Total Sales Staff 8
Annual Sales Taget £1,000
Quota per sales £100
Quota £ per staff £162

What does this have to do with forecasting you ask? Everything! If you improve the close ratio in the middle of the pack, your rewards will be immense.

What have we gotten in the open? Sales Forecasting is not about forecasting, sales forecasting is about monitoring activity. Let’s start calling Sales Forecasting what it is: Sales Activity Monitoring (SAM).
Understand this: no one at corporate gives any credence to sales forecasts – other than holding your feet to the fire when your forecast is off. And your feet are held to the fire every month! If you still believe forecasting is needed so that corporate offices can produce the correct products mix,. stop reading and keep doing what you always do – because you are going to keep getting what you have always gotten: considerably less than desired and possible.

So how does SAM improve Sales? Simply. Regardless of what one sells, no one can predict when an order will come in. The secret to SAM and raising closing ratios is tracking real opportunities. If you sell cars, you can’t tell when someone steps on your lot if he will buy. Selling life insurance – who knows. Selling refrigerators – right. Multi million dollar complex systems? Same thing. No matter what you sell, you actually do not know until the order is placed what is a 100% certain sale.

SAM Basics

Let’s use the selling of cars to illustrate SAM’s significance. To stay in business, let’s say my car dealership needs to sell 10 cars per day. Based on past history, I know that the closing ratio of people looking to buy is 5 to 1 (5:1 or 20%). For every five people who step on the lot, one will buy. Now I have the basics. To sell 10 cars a day, with a close ratio of 5:1, I need 50 people on my lot every day. I don’t care how, I don’t care who and I don’t care when, because I know if I get 50 people to step on my lot per day I will sell 10 cars. And how, you ask, do I know? Statistical average.

Beginning to see the picture?

Now here’s the rub with forecasting! Still assuming we need 10 deals; let’s say I only have twenty people visiting my lot, see a problem already. Do the math. With a closing ratio of 5:1 we get four sales…Remember, we need to have 10 per day. What sales managers do with the above scenario is fudge the close ratio, making the close ratio whatever number is needed to make ‘their numbers. In this case, the close ration goes to 2:1 or 50% and lo and behold, we forecast 10 sales. The only problem is that the close ratio in reality is still 5:1, we sell five cars and our forecast is off again.
There are two problems here: a) There is no way in the short tem to increase the close ratio from 5:1 TO 2:1 and b) There is not enough activity to make the actual close ratio work.

I propose that sales manager be sales managers – not coaches, not closers, not presenters – simply Sales ‘Activity’ Managers (SAMs). Forget sales forecasting and start evaluating activity! Activity is the only thing with which a sales manager ever need be concerned. A sales manager should make sure that all steps for every opportunity (and the steps are different for every company, but they are same within a company) are completed or in process.

Only then can one evaluate an activity and determine whether the opportunity is real. Tracking real opportunities are is SAM is all about.

Step back for one second to get the relationship picture between sales activity and sales. Though not the same, they are joined at the hip. Ever see someone get a home run by not getting to the plate? No ‘at bats’ means ‘no hits’. Just as no one gets a home run every time, no one closes every opportunity. But, if you get to bat enough times, and you perform all the basics correctly, you will get hits. Likewise, if provided enough real opportunities and perform all the steps correctly, you will get sales.

 

Published On: 12th Dec 2005

Read more about -
Sales,Sales Management

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