Figuring Out If We’re Having An OK Year

We’re hitting our numbers in terms of new sales, but we’re still off in overall revenue and profit forecast. We’re trying to figure out what’s working and what’s not working. Is it mix? If the mix is OK, maybe our forecast was off? What about the time it takes to ramp up and show results?

THOUGHTS OF THE DAY: Delivering according to plan can be complicated. Coming up with a plan that makes sense can be just as challenging. Look at the puzzle from multiple points of view. Take a critical look at the timing of income and expenses.

A plan is just that — a plan. Turning a plan into reality takes skill at forecasting, buy-in from everyone in the company, and a drop of luck. If plan and reality don’t match, sometimes the plan is off and no matter what effort everyone puts in, it’s unrealistic to expect that the company will hit plan. Other times, it’s off because people and circumstances didn’t match up to expectations. So, which is it? The plan or the execution?

To do some diagnostics, look at year-over-year changes in revenue, gross profit, overhead expenses and net income. Which sections of the P&L are up over last year, and which are down? We had one client that had a significant dip in revenue, which ordinarily would be troubling, except for  a large increase in gross profit dollars and percentage. They had deliberately dumped a group of less-than-profitable clients and as a result, had to do less work while they made more money. A home run! At the same time they knew they would need a year to build up sales to the previous level. No problem, because the increase in profits from a few new clients, plus higher overall profitability from existing clients, bought them the time they needed.

If parts of the plan are off, ask yourself: did everyone in the company know the plan and get behind it? Was there critical debate and a close look at topics of disagreement? Did problems get flushed out in the planning stage? Did people understand what had to happen to turn in the desired results? Were results tracked closely enough to allow for small corrections along the way?

To increase accuracy at predicting, build underlying models. Correlate the number of sales calls needed to deliver desired sales goals with current sales activity in order to assess the need for increasing the sales force — which will have both revenue and cost implications. Look at the demand a new customer puts on customer service and for how long, as well as expected attrition rates of new and old customers. Consider beefing up implementation support to reduce the attrition early on.

Highlight uncertainties and plan ahead for challenges. Hold people accountable for keeping their eye on results vs. forecast and recommending corrections if needed. Use external sources of information to forecast and analyze performance. Is your market expanding? What are competitors doing? How is the economy impacting your customers’ buying practices?

Consider whether it’s the overall forecast that’s off, or just the timing of income and/or expenses. One company we know made the mistake of issuing salary increases too early in the year, without considering that most of their sales growth happened in the 4th quarter. As a result, profits narrowed over the summer and caused unnecessary concern about cash flow just before things turned around in the fall. Shifting raises to the middle of Q4 allowed the company to match pay and revenue increases.

When things don’t go according to plan, reforecast. If things continue as is, how much of a loss will be likely? Should expense cuts be mandated? Will spending to boost revenue deliver enough profit to get out of the hole? Ask your experts to reforecast. What will happen to cash reserves? Take a careful look at a worst-case scenario, while brainstorming ways to turn things around.

LOOKING FOR A GOOD BOOK? Try “Business Forecasting: Practical Problems and Solutions” by Michael Gilliland, Len Tashman and Ugo Sglavo.