Stress tests are common for financials, why not for one of your business’ most important tools.
Most companies know how critically important accurate sales forecasts are.
Harvard Business Review said, “In virtually every decision they make, executives today consider some kind of forecast. Sound predictions of demands and trends are no longer luxury items, but a necessity.”
Ventana Research’s 2013 State of Sales Forecasting Research Report found that more than half — 55 percent — of respondents revealed that they lack confidence in the accuracy of their sales forecasts. Fully two-thirds of respondent’s report being dissatisfied with their current forecasting process.
Not having accurate sales forecasts can negatively impact projected profit and cashflow, causing significant strain on the health of the company. Inaccurate forecasts can also negatively affect a company’s valuation and multiple at time of sale.
To stress test the accuracy of a sales forecast, a company needs to look not just at sales funnel data, and utilize internal experts but also industry and market factors. Stress testing a forecast using industry and market factors allows companies to see the underpinnings and foundational elements of a forecast, creating much greater accuracy and drastically reducing surprises. Make your company a healthier one by stress testing your forecast; here are 8 ways how:
1. Ensure Sales Cycles are Considered
Forecasting alignment with sales cycles is key. If your company only uses a 12-month forecast but the typical sales cycle is measured in years, then there is significant room for error in your forecast as it will not show highs and lows in your client’s demand over the course of a typical sales cycle; leaving your company with an inaccurate view of the sales trajectory as the visibility is too limited.
2. Product Lifecycle Impacts Sales Forecasts
Where a company wishes to forecast by product, it must consider the stage of the product’s life cycle in the market for which it is making the forecast. The availability of data and the possibility of establishing relationships between the factors depend directly on the maturity of a product, and hence the life-cycle stage is a prime determinant of forecasts.
3. Understand Market Growth Trends
Rising tide raises all boats has never been so true when is comes to sales forecasts. If a company is on trend and has core competencies at the heart of a growing sector, the chances of increased revenue is high. Conversely a company that is primarily focused on generating revenue from a declining or stagnant industry may receive unexpected pressure on forecasted sales.
4. Is the Market Big Enough
Market size and projected capture rate versus the competition can say a lot about whether a market can support the forecast of the company. For example, if a company has unknowingly focused on a market that is smaller than anticipated then it runs the risk of missing forecast as projected capture rate and/or volume likely exceeds realistic levels.
5. Consider Clients’ Satisfaction
How does the market view a company’s offering? If satisfaction and brand perception is decreasing this will probably translate into top line pressure. Conversely, if the market is viewing the company’s offering more favourably, this strengthens the ability to plan around increasing forecasts and may even be translated into a vertical or horizontal move into markets with the same or similar needs sets; adding growth opportunities.
6. Ensure Low Hanging Fruit is Being Captured
First a company must understand its core competencies relative to key needs of the client and competitive offerings. This will point a company to focus on maximizing sales from current clients making an accurate forecast much easier to achieve. It is better the devil you know……
7. Is Distribution in Alignment with Forecast
How is a company going to market, how does that contrast with other industry leaders? What are the advantages and disadvantages from a top line perspective? Making the right choice for distribution can have a significant impact on predictability of sales and time to money. For example, if decision makers are known and there is an existing relationship then going direct may be the best course of action for predictable outcomes, conversely if it will take time to develop consideration and selection by decisions makers, an in-direct channel through distributors may be the best option. Either way, channel decisions will impact forecast.
8. Know What the Competition is Up To
Knowing the competition is key. What are their offerings, what are the terms, what market dynamics are at play, are all pieces of market analysis that will tell a lot about the health of the company’s forecast. For example, if the industry 800-pound industry guerrilla has recently launched, or plans to launch, a new product or has made changes to terms, how is it being received by industry stakeholders, what are the sales results and potential impacts on forecast.
Stress testing forecasts using industry and market data is an essential business function to improve predictability; if your company is not doing it, internally or through advisors, then it needs to figure out the best way to make that happen, as without it, your profit, cash flow, valuation and even the future of the company is at risk.
Steve Williams is a Principal at the Incentica Advisory Group in Calgary. Steve has done over 100 strategic plans for some of the biggest and best companies in Canada.