Rifle Stocks Australia
Rifle Stocks Australia
What Is The Link Between Sales Forecasting And Kpis? How To Find The Connection
I suggest the link is the relationship between working capital management and the reliability of the sales forecast.
Let me explain my logic.
The top levels of your performance indicators are your sales KPIs. They are the drivers of the revenue line in your accounts. More importantly the DuPont model formula shows that an increase in sales without an increase in your funds employed has a multiplier effect on your business return. That simple, irrefutable fact is the reason that good working capital management is so vital.
Revenues are the prime source of your working capital. If they shrink below your cost of goods and your expenses, you are consuming capital, and your solvency is at risk.
One of the principles of working capital management is that you should keep your stock levels and fixed costs in a reasonably stable relationship to your sales. Fail to do this and liabilities will inevitably rise as your cash flow turns negative.
Because costs are incurred before sales can be made, to keep the two in balance you have to predict sales and plan your present commitments to match the prediction. If you under- or over-estimate sales, you will have trouble either in supplying your customers, or in filling up the store with slow moving goods.
It is even worse in a service business because you cannot store time. Your people resources are a fixed cost in the short term. Economists call them “sticky” because it is hard to juggle them at short notice like a production schedule.
The inevitable result of either condition is a cash flow problem. The only question is “How long does it take for the wave to roll up from behind and swamp the boat?”
The simple fact is that inaccurate sales forecasts are a huge source of inefficiency in every business. All your efforts to fine-tune your business by performance measurement and management are futile if your sales forecasts are wildly inaccurate.
KPis and Leading Indicators.
Some of the most useful KPIs reside in the sales and marketing arena. These are the ones that act as leading indicators or predictors of a change in demand.
If your forecasts are based on your real KPI structure then they will give you advance warning of change and enable you to take early action to respond, either in your sales tactics, or in reallocating resources within the business. Either way, early response is a good competitive move.
An example:
If your business has a long sales cycle, a change in the value of the prospects in the early stages of the sales cycle will signal a change in the value of future cash flow well in advance. If you pick up the signals before competitors, you can take the lead.
A probability based forecasting model works particularly well as a leading indicator KPI.
The good news.
If you use the right techniques and the right forecasting models, you can dramatically improve the accuracy of your sales forecasts.
If you work on this you will improve business efficiency and overcome the mismatch of resources that is so destructive of everything you have worked for.
Why are so many businesses dependent on a deficient forecasting model?
I believe there are many reasons for reliance on inadequate forecasting techniques. Do any of these fit your business?
- Masses of data but little high quality information. It is hard to sort data if you do not know what is relevant. This is the reason customer and product segments are so important
- Sales data is too often $ numbers only. Quantity and activity numbers are hard to get from the accounting system. This make it difficult to answer the all-important “Who buys what?” question.
- Market segmentation is limited or out of date. This is the best reason to use your KPI model to find profitable market segments.
- Staff are not good at forecasting. There is no systematic approach or discipline. They rely on over-optimistic guesswork.
- Limited knowledge of statistical forecasting techniques. This is a problem with our education system. There are few courses on forecasting offered in business schools.
- We don’t believe it is possible. If it is not possible, why waste time trying?
- It’s too hard, too time consuming; we are too busy.
- Nobody in our business can do it so why should we try?
When your sales forecast absolutely has to be right. An example from my sales apprenticeship.
My first sales job was selling polyethylene to the plastics industry during the fastest sustained growth period in the second half of the 20th century. The industry was growing world-wide at a rate between 10 and 20% per annum and it continued for 20 years.
I worked for a major global manufacturer, that had built a new plant capable of supplying around 70% of national demand. A polyethylene plant is dependent on contracted supplies of ethylene gas from a refinery, and these contracts are set on an annual basis, well ahead of the start of the year. This business was totally dependent on the accuracy of the monthly sales forecast set 18 months ahead.
Global supply conditions fluctuated between gross oversupply and global shortages, and annual demand growth could be anywhere between 10% and 20% from year to year.
Let us examine the consequences of a bad sales forecast in this situation
If we underestimated demand, our customer would run short of stock and be unable to supply their demand for product. They could not obtain overseas supplies in the quantities needed, at less than 4-6 month’s notice.
People could lose their jobs and businesses fail due to failure to supply raw material.
Unhappy customers would depend on imports and the plant would lose vital market share.
If we overestimated demand the plant would have to pay the refinery to burn ethylene gas, or turn it into surplus product.
How did we get the forecast right?
For my customer group, 70% of tonnage went to just five major customers. A major part of my job was to negotiate an annual contract for supply that assured the customer of supply and required a close working relationship on forecast consumption month by month.
I had to prepare an 18-month forecast by customer and by product grade and update it monthly. This was my bottom up forecast. I also had to compare the total with expected growth rates, both globally and in Australia, and adjust the forecast for major new projects coming online (The top down forecast), and compare and reconcile the two forecasts.
Did we get it right.
90% of the time we were within 5% on a quarterly basis. It was good enough.
I felt highly motivated because I did not want the job of telling any customer that they could not run their factory because I got the forecast wrong.
My next job was Sales Director of an auto component manufacturing business, with similar forecasting problems. Over 7 years we had a proud record; we never stopped a customer’s production line. The disciplines of my apprenticeship had served me well.
Sales Forecasting issues and solutions.
Discontinuities in trends. These are sudden and unpredictable changes in demand, like earthquakes. Even when we know they are going to happen, we don’t know when. All you can do is to look out for signs of overheating or cooling and try to be more conservative when you doubt the boom time hype. Many discontinuities are predictable, with causes such as major changes in legislation. A good current example is the Obama health care bill currently in the US Congress. Things will change; the big question is “How?”
Discontinuities are no excuse for failure to forecast.
Forecasts are not accurate. All forecasts are wrong; the only question is “By how much?”
The solution: Measure your forecast error and make adjustments to your settings; just like sighting in a rifle.
Project (or contracting) businesses are notoriously difficult to forecast, whether they are in construction or professional services.
The solution: Use a probability based forecasting model. This uses three ideas.
- Keep track of every prospect in your sales pipeline from the first time an opportunity is identified.
- The probability of turning a prospect into a banked check increases as each milestone in the sale process is achieved.
- The Expected Value of the prospect is the value of the sale x the probability attached to the last completed milestone.
This type of model has proved remarkably reliable for me and my clients for many years.
Products and services based businesses find it difficult to pick out a trend they can rely on.
The solution: All trends in business are the sum of three underlying trends; namely;
- The long-term trend.
- The business cycle.
- Seasonal demand patterns.
If you have good data for 5 years or more, and a statistical model, you can quickly obtain the long-term trend and a seasonal index for your market or for individual segments.
The statistical principles and techniques are well established, and you can get the same results just following the instructions with a good Excel Model.
Top down versus bottom up forecasts. Too many businesses rely on the bosses forecast to set sales targets, then wonder why targets are not achieved by a dispirited sales force.
The solution: Top-down rarely produces the right result on its own; bottom-up alone is no better. Combine the two techniques and focus on reconciling the difference between the two and you are likely to get a reliable result.
Sales people can produce a good honest forecast if they are shown how and given the right tools (models) to do it.
Some suggestions for action.
Improving your sales forecasting process and accuracy will always improve your return on funds employed. Forecast accuracy is always a key performance indicator, because it pulls every lever in the business..
To make it happen for you, I suggest three or four steps:
- Review your market segmentation using a KPI strategy model, so you are trying to forecast the right parts of the business.
- Use a Probability Forecasting Model to manage sales effort. Treat every prospect as a project in its own right for best results.
- Develop your own Sales KPI model to ensure that you have identified your real KPIs.
- Use a Trend Analysis model to dissect trends for individual segments (if that fits your business better..
I suggest you avoid fancy forecasting programs until you understand the theory behind them. The three models I have suggested will solve 70%+ of sales forecasting problems with minimal investment. The big programs are for big companies with complex structures, so they have to deal with complexity. They also get it wrong, despite employing expensive analysts.
Remember that forecasting is informed judgment so no one can take the judgment out of the equation. Use models to test your judgment and they will work for you. Use models to remove the need to make a decision and you risk failure. “Keep it as simple as you can”, is still sound advice for most of us.
I am absolutely confident that if you use the ideas in this article and follow them through you will be able to sleep more soundly at night, secure in the knowledge that you have taken the guesswork out of your forecast.
Australian Nerf Arsenal
|
|
Krylon K04293000 Camouflage With Fusion For Plastic Paint Technology Aerosol Spray Paint, 11-Ounce, Camouflage Olive $4.16 Krylon k04293000; 16 oz (12 oz) [PRICE is per CAN]… |
|
|
Nerf N-Strike Spectre Rev-5 Dart Blaster $30.00 Versatility is the key to success in any N-Strike mission. With its 5-dart rotating barrel, the Spectre Rev-5 is quick and powerful. The folding stock and barrel extension make it perfect for the most sensitive stealth missions…. |
|
|
Magpul Prs Precision Gen 2 Stock – Black $196.70 Magpul Prs Precision Gen 2 Stock The Magpul Prs Is A Drop-In Precision-Adjustable Butt Stock Designed To Offer The Fine-Tuned Customized Feel Of A Precision Target Stock With The Durability Necessary To Withstand The Operational Environment…. |
|
|
Crosman 2100 B air rifle $55.00 One of the most versatile airguns on the market, the Crosman 2100B multi-pump pneumatic shoots either steel BBs or .177 lead pellets. With 200 BB rounds in the gun’s reservoir (17 BBs in the magazine), you’ll be shooting for hours without having to reload. Just pump and shoot! If you prefer to shoot pellets, the 2100B can do that, too (loaded one at a time). As both a repeater and a single-shot, t… |
|
|
Gamo Varmint Hunter Air Rifle $179.00 Includes the Gamo Varmint Hunter rifle, 4x32mm scope, rings, scope stop, laser sight, torch light, pressure cables and 50 rounds of PBA ammo!Send pellets screaming out the muzzle at 1,000 fps with Gamo’s super-powerful Varmint Hunter (1,200 fps with PBA ammo!). This breakbarrel rifle has a spring-piston powerplant and comes with a 4x32mm scope (there are no open sights), rings and scope stop. To h… |
