Here’s one for the ages. How many times have you projected income and profits only to fall short, and make excuses to those depending upon you to perform?
We know the answer of course.
Lots of people do or will depend upon your leadership in driving growth, stability, and profitability. There will always be times when salespersons or associates provide you with projections for future sales that reflect their inherent optimism.
Who do you send these projections to and why?
Whether you in turn report to a CEO, a board or just your bank, you must reconcile such projections against the commitment of resources that will drain short term cash in expectation of revenues. Hiring call center employees, building raw materials or finished goods inventory, making that decision to expand space, all are made as a result of pressures from the past or expectation of growth in the future. So, you bake some amount of these projections into your own budget and forecast and make decisions based upon the result.
The rule of the 50’s
Some of us who’ve had extensive experience in senior management have lived by a rule of the 50’s. Fifty percent of the salesperson’s forecast rolls into cutting 50% of the sales VP forecast, making 25% of the initial salesperson forecast the operating budget.
The smaller the company, the more unreliable to data
In a smaller company, the tendency to believe the numbers originally projected is higher because there are fewer levels of management and therefore more danger of overstatement. And some are so good at forecasting that this entire issue seems to be of no value. I had that discussion recently with several CEOs. I left the room wondering if they truly acted upon forecasts without change.
What if future revenues seem guaranteed?
Even if you believe future revenues to be a solid guarantee, it is prudent to discount the numbers by some percentage so that planning for expenses is more conservative. Everyone feels great when surprises are positive. We don’t celebrate just making our plan, we expect it. Instead, we celebrate overachievement and all it represents. Bankers, the board, shareholders, employees all love to see success. Think of the public company announcements of earnings, you see them instantly compared to analyst’s projections. The market punishes anything but a positive surprise most of the time, a reflection that this insight is a part of the culture of the public markets.
Recurring revenues help but churn can be a spoiler
Many current businesses have predictable or recurring revenues each month by contract or historic performance. Obviously, forecasts of this kind of revenues are more accurate and believable. But churn can spoil the best of these absolutes, especially when product quality, aging systems or poor service drive customers away. Churn should be conservatively forecast—reducing recurring revenues at least slightly more than you believe realizable at the start of the budgeting year.
The most important question
Why pressure yourself, endanger the business and lose credibility by risking missed forecasts? We are rarely rewarded for the accuracy of our forecasts, and always are dunned when there is a shortfall. Think like Apple, a company that historically has always exceeded its forecasts to the delight of all stakeholders and respect of investors. We can’t all be Apple, but we can learn at least this lesson from that company.