Everybody is Winging it!

Top 5 faults in forecasting

  • Tops Down Sales Forecasting. This is when, to achieve an artificially imposed revenue number on the business annual sales targets are introduced into the forecast, without any real substance behind how they will be achieved. A noose around the sales guy’s neck. To be an incentive targets must be realistic. It’s like offering £3,000,000 for the first person to high jump 3m, its 55cm higher than the current record, set in 1993 by a chemically enhanced Cuban, so not possible and not an incentive.
  • Magic Margins. Setting margin targets which can only be achieved by increasing prices to unsustainable levels. When setting selling prices in a forecast, ensure they represent a competitive selling price not a crack pipe to delude your audience. Again, Sales beware. You may have guessed that I have run sales in a number of organisations and have been on the receiving end of such fanciful targets.
  • Keep it real. Forecasts are a view of the future and as such inherently full of potential inaccuracies, you don’t know what you don’t know. Make sure your forecast is representative of historical performance and tune the outcomes to take account of the things you do know with a reasonable degree of certainty. If Amazon said they were going to increase warehouse staff during the festive period at no incremental cost as Jeremy Clarkson, David Tennant, Scarlett Johansson and the other talent contracted to Amazon Prime Video productions were going to pull free shifts picking and packing as part of their contracts. Amusing though that might be, its unlikely to true. Make sure you associate the fully loaded costs to everything you include in your forecast.
  • Deferred Revenue. Software licences, maintenance contracts and many other services come with an upfront payment for a time period, typically one year. Such revenue is meant to be recognised pro rata over the period it covers. Just remember you’ve had the cash and no more is coming so don’t be surprised if you spend it all up front and still have the liability of providing the service that there may be a hole in your cash flow.
  • Just how much is your stock worth? Over stating the value of your stock to shore up your balance sheet isn’t a new form of creative accountancy; Ted Baker seem to have been doing it for years to accumulate a total of £25,000,000 over valuation. That’s a lot of shirts and shoes. Remember that inventory has a shelf life after which it starts to become worth less than you paid for it. That’s what sales are for, to move slow moving stock, don’t just let it accumulate and report it at full value. It will come back to bite you, even the dimmest board will catch on sooner or later. If not them the auditors will. We’ve all done it every now and then, it only works if it’s a short-term fix/fudge.

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Mark Harrison

Cheif Commercial Officer