30 Nov Forecasting For the Coming Year
As we enjoy the last days of autumn before a Chicago winter moves in upon us, I think of sitting by the fire over some cocoa and contemplating how the year has evolved. This is such a great time of year to take stock as a business owner of what has worked, what hasn’t and how I want to change in the new year soon to unfold before me. As a business owner who is focused on growth, I think forecasting and planning is one of the single most important things I do all year. Peter F. Drucker said it best, “Unless commitment is made, there are only promises and hopes, but no plans.” Plan and action are what drive a business forward and without them, we wake up without a plan for the day ahead of us. Stephen Covey discusses the “Big Rocks” in our lives-these are the wildly important things that need to happen NOW so that the plan can move forward, step-by-step, day-by-day. Are you sticking to your big rocks in your business? Here is how I approach planning and forecasting for my business this time of the year.
First of all, I schedule time on my calendar where I won’t be interrupted to focus in on planning. Not letting other issues come between me and my planning is step one in being actionable. My Big Rock is to grow my sales considerably. This article is focused on growing sales and planning for sales growth. I will write part two of Forecasting and Planning-which will focus on profitability and expenses as it relates to growth. That said, I am focused sales growth and to accomplish growth, I need to understand my current client positioning to the best of my ability.
One can start by reviewing the client list and profitability of each client. Which type of client has resonated with your organization by providing meaningful, juicy work where not only the client flourished but your business has risen to the challenge with vigor and new ideas? Chances are, these clients are also the ones where your company is experiencing high profitability because they value the work you are providing them and are willing to recognize the cost/gain analysis.
To compute a cost/gain analysis, you need to have solid accounting principles. Income must be divided between different revenue streams, along with the expenses required to serve these different revenue streams. This is referred to as having silos in your income and expenses. Does your company accounting system support the different income silos of your business? How clearly and quickly can you see profitability by client/client type/market type?
Once you have identified the juiciest types of clients for your business, it is time to think about how to reach more potential clients in this field. Do you know who the industry leaders are in this area? How can you connect with them? Are you hanging out where they are hanging out? How do you customize your products and processes so that it suites this audience the best? These are sales and marketing questions and if you answer them in detail, it will impact how you spend your sales and marketing dollars in the business. As sales and marketing costs change, does it impact your ability to deliver your products at the same price or will you need to change your pricing structure proportionately. I love using percentages to apply guidelines to the business. For example, instead of saying that your overall marketing expense increased by $10,000 because you joined a trade group that focuses in on your key potential client market, consider how much this additional $10,000 expense will increase the percentage of your marketing budget in comparison to current sales. Is your new expense a fixed cost or will it be proportionate to how many new clients you are able to develop because of it? Again, understanding the percentage of expense to income is a powerful way to help you make assumptions for planning purposes.
Applying the 80/20 rule to current business: Most business owners are familiar with the concept that 80% of revenue comes from 20% of the clients. If you apply this rule again, then you can assume that 20% of the top 20% of revenue-generating clients will be willing to partnering with your business in a way that will drive innovation and build long-term mutually beneficial relationships. It is important to understand that about 4% of clients are not only top innovators in their own industry space but are willing to partner with your business in a deeper, more powerful way.
Putting pen to paper is the last step to building a solid plan for revenue growth. Whether you use accounting software such as QuickBooks Online, and excel worksheet, or a blank sheet of paper and a pen, it is important to line up your different revenue streams on the left and the months of the new year on the top. You can then project the timing on how you are implementing your sales and marketing objectives and how this will result in new sales and when. Don’t forget to include current business that you assume to be secure for the coming year. You want your sales projection to include both current business that will continue, as well as new business that will be gained in efforts to reach the projected sales growth.
Stay tuned for the last article in this series discussing the ability to forecast and plan for changes in your cost of goods sold and operating expenses.
