I once talked to a well-respected and widely published magazine columnist about the seemingly random accuracy of his predictions. He was sometimes right. Often wrong. Never uncertain. Never concerned. As a columnist, he did not feel the need to be right, only interesting. But it’s not that easy for an entrepreneur. We are actually held accountable for our forecasts. We have to hit our numbers or have a darn good reason why.
Optimism versus realism. Selling versus truth-telling. Getting funded versus hitting your numbers. There are few activities tougher or more important than revenue forecasting.
It’s easy to feel like a rubber band being pulled in a hundred different directions. The different people who are part of the process bring their own personalities, experiences and ambitions to the table. By nature, sales people are optimistic. Their glass is always half full. The finance team will almost always be a little more cautious. While their glass may not be half empty, it is rarely overflowing.Checks and Balances
The key is using the expertise and different natures of your team to establish a systems of checks and balances. There are two aspects of the process where this has been particularly valuable–pricing and the timing of sales coming in. The sales team tends to be confident and deal oriented (they want to close). As a result they will tend to overestimate the percentage of deals that they will close and how soon they will close them. They will also tend to cut price sooner and more often than they need to. One way that I have addressed this, is by creating shared responsibility between finance and sales for pricing and forecasting. Sales could not do any deals that finance didn’t agree to. At the same time, finance shared in the incentives to hit the revenue targets.
The other source of input into the process are the operating groups such as manufacturing, production and marketing. They can help you figure out when products will hit the market, how manufacturing volumes will ramp, and when marketing and sales materials will be in the field.
I can’t say that the system of checks and balances works without friction or fustration. The sales guys will complain that finance is slowing them down, holding them back and denying them resources by downgrading their forecasts. The finance team will probably complain that the sales guys are short-cutting the process at ever turn.
The CEO’s Role
To make the process work, the CEO or GM must be an active participant. You need to make sure that everyone plays by the rules and treats their team mates with respect. Don’t let any one opt out of the process or trash their partners. Most importantly, you need to let people know that you value the accuracy of the forecast even if the accurate forecast is disappointing. With an accurate forecast you have the chance to create an action plan for accelerating sales. Good forecasts are as important to your business as a good gas gauge or a good speed speedometer are to your car.