April 5th, 2006 | 
Inevitably, after each fiscal quarter, a couple (or few, or many, or most) of the companies I work with inform me that their sales results for the quarter were below expectations. By itself, of course, this is usually not a catastrophe (although it sometimes can be) and leads to some reflection about what went wrong. What drives me completely nuts, though, is when numbers are missed after the company had been forecasting higher numbers during the quarter. I go total berserk when those higher numbers were still being forecast late in the quarter – sometimes until the last day. It’s not only when numbers miss on the low side that makes me upset. Sometimes, even when numbers miss on the high side I find cause for concern.
To me, forecasting accuracy is the single most important measure of the quality of a sales team. And, thus, is a reflection of the CEO’s ability to manage the sales process and sales team.
Being able to accurately predict bookings and, more importantly, collections in a small business is absolutely critical to maximizing a company’s opportunities and growth. The more accurate the prediction of income, the better spending can be aligned and the more efficiently the capital gained from the sale of equity or absorption of debt can be utilized. Why sell more of the company or take on more debt than is needed?
Aside from the financial issues, there are very few things that can hurt morale in a company more than missing a couple of quarters back-to-back. It’s quickly seen as a sign of weakness in the product, company or market and makes employees question what they are doing and how many hours of their lives they are pouring into the enterprise. Doing what you say you’re going to do, and sometimes doing better, makes everyone feel like they’re dedicating their efforts to a worthy cause.
Companies have sales plans, of course, which are generally set up a year ahead of time. A year is a very long time for a small company and accurately establishing sales predictions that far ahead of time is virtually impossible to do correctly. Forecasting, on the other hand, while often done for longer periods, generally is studied for the current or next quarter. This shorter term look at sales should be far more accurate than the longer term sales plan.
Forecasting for small companies without much of a pipeline is difficult. In this case, if a deal drops out of the forecast, it’s not likely to be replaced by another deal that comes in ahead of schedule. When companies are small, closing those all-important first key deals should be the main focus of the sales force. After those initial deals are closed, however, the focus should change to increasing the size of the pipeline in order to create a stable and predictable revenue/bookings/cash stream.
There is no excuse for a company with an established sales team (direct or indirect) to miss the numbers it predicted just a couple of months earlier by any significant amount. This means high or low. If the numbers are high (not including bluebird deals that were never in the pipeline), then spending wasn’t optimized and growth through increased spending could happen sooner. If the miss is low, then the company potentially spent more than it should have and may run into cash problems earlier than planned.
There should be enough visibility into the deals in the pipeline and enough of an understanding of the sales cycle to be able to determine which deals are going to come in during a quarter and which deals aren’t. Certainly, as the company gets further into its quarter, the more accurate the forecast for that quarter should become. With this logic, one should assume that the forecast one week before the end of the quarter should be basically right on. It’s shocking to me how often that it’s not.
The CEO and VP Sales need to be held responsible for the accuracy of the forecast. In my experience, they are often either judged on their sales achievement with respect to their plan only or, even more often, with respect to some abstract level of sales that seems right for the maturity of the company in its particular market. This is not sufficient. Accuracy of forecast is an indication of how close the CEO and Sales VP monitor the pulse of the business. It demonstrates how well the two understand the customer, the sales cycle and the market. Without a detailed understanding of these, there is little chance that the company will be successful. Therefore, it needs to be one of the key and, at certain stages of the company, the primary key factor in judging the success of company management.
The way to make this work, of course, is through compensation plans, making sure the company is tracking the right metrics and always asking good questions. I’ll talk about some of this stuff in the future in a post about compensation plans and unintended consequences.
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