The Secret to Generating Reliable Revenue Forecasts
Annual revenue forecasting is a part of every business’s process. Company leaders perform the exercise as a way of predicting next year’s revenue, but most of the time, it’s just straight out guessing and hoping.
Here’s how it typically goes. When presidents or CEOs think about forecasting, they tend to start with what the company did the previous year and add some percentage. Sometimes, they pick what they need to generate in order to put themselves in a healthier state. Other times, they’re so optimistic that they pick a number they feel the company should make. We have a fantastic product line. There should be no reason that clients won’t buy from us.
The head of sales typically forecasts by predicting what this year’s clients will do next year, and making a guess at what new business will come in. Or they might look at what each salesperson did this year and increase it by some percentage.
These approaches often lead to a lot of anxiety, judgment, and disappointment during the year, especially when you get to mid-year and things aren’t panning out the way you expected. There’s frustration with the people who aren’t hitting their numbers, but also with yourselves when you realize that maybe the estimate you put together wasn’t all that good.
When the Guesses Miss the Mark
In most cases, leadership views the forecast as gospel. There’s no way our guess is wrong, they think. The sales team, meanwhile, feels discouraged that they’re not hitting their goal. The rest of the company may be feeling judgmental towards sales. They will definitely feel disappointed in general as they realize that the company never seems to make it, that it always guesses too high.
If the forecasts are not achieved, leaders first consider what internal issues might have kept the company from reaching it: the sales and marketing process was faulty, the sales training wasn’t sufficient, or we didn’t have the right talent or structure on the sales team. Then they might consider what outside influences contributed, such as market conditions or a competitor’s offerings. Bad forecasts are never considered wrong at first. Only after everything else is exhausted will leaders consider the forecast wrong.
If forecasts are achieved, the reality is it’s usually due to outside influences or changes, not what the company did to make it happen. There are times when the company will have done a few things to influence sales, or it could be a mixture of both internal action and outside factors. Regardless of the reason, though, everyone wants to take credit for the success and pat themselves on the back.
Forecasting to Hit Your Revenue Goals
As long as few internal issues exist, like glaringly bad processes or people, forecasting and hitting your revenue goals hinges on (1) trying to maintain your inertia growth, and (2) planning and implementing initiatives that actually drive growth or lead to inorganic growth.
Assuming nothing has changed in the marketplace, the economy, or with your sales team and product lines, there’s a certain amount of growth that’s going to come just because you exist and are out there in the market. That’s your inertia growth. Sometimes it’s a lot, but most of the time it’s around 2-4%. Typically, you can add a small percentage to the prior year’s revenue to estimate inertia growth.
Driven growth only comes from purposely doing things differently to add new revenue. Examples include adding new products or services, adding new sales personnel or capabilities, penetrating new markets, increasing prices, initiating a new marketing campaign, and adding new marketing personnel or capabilities.
Inorganic growth comes through acquisitions. The company has to be in a very strong cash position to do this, and it has to have the resource bandwidth to assimilate the new company. Obviously, this is a special kind of beast to take on.
Moving Beyond Inertia Growth
When you come up with a typical revenue forecast, some portion of it is going to be achieved through driven and inorganic growth. And these two kinds of growth require doing things differently. First, you have to establish new, very quantifiable goals that will contribute to increased sales. This might involve goals around new product units sold, additional staffing, additional market share, new markets penetrated, or the number of marketing and sales qualified leads.
To achieve those goals, you then have to launch initiatives. Initiatives are one-time, coordinated efforts to create something new or significantly upgrade something that exists. They’re not ongoing; they must be completed within a defined period, and they require resources for completion. For each goal, you have to determine what initiatives you’re going to launch to make it a reality.
These goals and initiatives are hard to come up with, but leaders are the only ones who can make it happen. It starts with a blank sheet of paper and requires a viable strategy. Initiatives always cost time and money that you don’t always have. But figuring it out is solely the responsibility of company leadership. You can’t delegate this job.
And what if you can’t come up with viable goals and initiatives? The answer is simple: You cannot increase the revenue forecast past inertia growth. Settle for it and accept it. It is unhealthy for the whole company to be expected to increase revenue when leadership is unable to come up with viable goals and initiatives for driven. It’s unfair to your sales organization to do so.
In this situation, you may also have to accept the fact that there’s little upside to the company’s future. If you don’t have any levers to pull that will allow you to grow beyond inertia, you need to face that reality and get comfortable where you are.
The good news is, you have the opportunity and a way to generate reliable forecasts. It’s all within the leadership team’s control. It just takes creativity, a strategy, resources and time.
Did I just say that’s a good thing? Well, at least I didn’t say it was quick and easy.