Not long ago, I was reminded just how important forecast reports can be for a business. I spoke with a business owner who was frustrated because her company growth plans were sputtering.
In a burst of enthusiasm, she and her team had gone off site at the end of last year for their first-ever strategic planning session.
In that session they set a goal: to nearly double sales this year. They clearly articulated the goal, specifying an exact dollar figure to hit by a specific date.
The only problem is, three months into the following year, sales are not on track to double. In fact, sales are slightly behind last year's year-to-date comparison.
Much More Than Talking About Growth
The reason soon was glaringly obvious: the team hadn't thought through how to double sales. Along with that were some other issues:
- There wasn't a team in place. Her team hadn't started recruiting sales executives to make more sales. They didn't even have a clear idea of the capacity of their current sales force, so they never pinpointed how many new people they would need nor what those people would cost to hire.
- The company had no plan for how to generate more leads. Their small marketing department was stretched to the limit. They'd maxed out on the low-hanging-fruit techniques they'd been using such as content marketing and social media. To grow, they'd need more sophisticated marketing, including marketing automation and a true CRM system. And for the first time, they'd likely have to do some advertising, as word of mouth wouldn't be enough to feed aggressive growth.
- They didn't have the technology infrastructure to scale. Many order entry and product processes in the company are still largely manual. Were they to double sales, it could bring the company to its figurative knees.
- They didn't have the money to scale. The company was in that catch-22 situation of needing to grow sales, but not having the money to invest in hiring and scaling. The executive team wasn't sure how much money they needed for growth because they hadn't done a detailed expense analysis. They hadn't taken any steps to find a financing source, either.
How Forecast Reports Can Help
This business couldn't figure out how to change course mid-stream, because they hadn't set up supporting objectives or milestones. Simply put, they didn't have enough information to know what to do differently. All they knew was, they were falling short.
I think a detailed sales and expense forecast could have helped this team.
The vogue in some circles today is to eschew business planning. But that “no planning" sentiment can rob you and your team of one important thing: the value of thinking through how you're going to achieve goals in business.
Goals may fail to materialize not because they were impossible. When there's little underneath the goal—no analysis, no objectives or interim steps, no carefully thought assumptions, no testing of "what if" scenarios, no metrics to measure progress—it can be hard to turn goals into reality.
One of the most important parts to a plan is the numbers, which can be determined through forecast reports. Forecast reports are a numerical projection for your company for a future period, based on analyzing past data and creating “what if" scenarios for growth.
An important factor that makes forecast reports useful is whether it is detailed enough. A general forecast may not be worth the napkin it's doodled on. Here are three attributes to detailed forecast reports, and how they help. Good detailed forecast reports are:
1. ...generated in a spreadsheet or a forecasting tool.
Forecast reports consist of numbers—in detail. To generate a proper and useful forecast, you can create it in a spreadsheet such as the template provided by SCORE, or in a planning tool such as LivePlan that enables you to enter in numbers. The tool should perform calculations and automatically change associated numbers if your assumptions and “what if" scenarios change.
For example, a good forecast can allow you to assume a certain number of sales per week or month, and calculate the total revenue based on the price per sale. But what if you increase prices? Your spreadsheet or tool should be able to automatically adjust the total revenue numbers simply by changing the price in one field or cell.
Accounting software may not be the best tool to use for creating detailed forecast reports. In my experience, most accounting software apps are better for actual numbers, not estimating future numbers or allowing changeable “what if" scenarios.
2. ...breaks down forecasted sales by month and preferably week.
Consider breaking down your annual sales projections by month—or preferably by week—in your forecast reports. You don't want to rely on a lump sum number for the quarter or the year.
Breaking it down into smaller time increments can help you identify the exact objectives and interim milestones you have to meet. For example, some companies may assume they can make an equal number of sales each week. But in a lot of businesses, such as B2B businesses where clients are off near the holidays, you may have zero sales from mid-December to mid-January. By breaking it down by week, you may be able to better spot the impact of seasonality, and realize that your forecast needs to be lower for those weeks.
Also, seeing how many sales you need to make each week can bring into stark contrast whether you've got enough sales executives and other staff. Say one sales representative has struggled in the past to close just 200 sales per week and you've only ever delivered 200 orders to customers, and now your forecast calls for 600 per week. You would immediately spot the need to increase capacity thanks to your forecast reports.
With lump sum numbers, too much is obfuscated. It's much harder to “see" exactly what you have to do and plan for it sufficiently.
3. ...breaks down forecasted expenses by individual categories.
Good forecast reports can also forecast expenses. Growth often requires investing in advance of or in tandem with sales. You may have to hire staff, expand facilities, upgrade equipment or deploy new technology.
If you break down your expenses by line item (in expense categories similar to what you use in your accounting system), you may be more likely to think of everything needed to achieve your goals. With your expense categories in front of you, you can do a detailed line by line analysis to project the amount of increased expenses to support your sales forecast.
Don't shortcut this step with a “back of the envelope" estimate. Consider everything—not just salaries, but also the impact of benefits and payroll taxes, as well as:
- additional office space or other facilities for expansion
- additional equipment, computers, phones, software, etc.
- costs of raw materials and inventory carrying costs
- any special initiatives such as process improvements or new technology deployments
- costs of working capital
The more detailed your analysis, the more accurately you can identify the needed resources to meet your goals, as well as any hit to your cash flow and any additional capital you may need.
Your actual results probably won't match your forecast reports. But that's not the point. The act of creating a detailed forecast—and how it forces you to think and plan in detail—is the point.
Read more articles on critical numbers.