What causes forecast under-performance?

Revenue and growth forecasts are vital for determining what you can afford to do and showing investors what you need in order to get to where you want to be. Forecasts also help you avoid the cash flow shortages that can hinder your business performance.

Forecasting allows you to determine what your estimated sales will be for a given period. The forecast is generated from an analysis of previous data about your sales, the sale of similar products by your competitors, and market response to your offerings.

However, many business owners can easily get it wrong when trying to build a sales forecast. Being overly ambitious is a common mistake. Another mistake we regularly see is a failure to regularly update forecasts to reflect market shifts and what your competitors are doing in areas such as product development.

Also crucial to accurate forecasting is having a predictable sales and marketing process in place for finding, converting and growing sales from customers. Having a systemic process will provide useful data in how your sales teams are converting opportunities into cash. It can be all too easy to offer excessive discounts to achieve sales targets, which may compound cash flow shortages.

What are the key indicators?

Having a dashboard of financial indicators can help you monitor the warning signs when turnover is under-performing forecast and prevent any long-term damage to your business. Typical warning signs include:

• A divergence of actual versus budget sales figures,
• Reducing gross margin and increasing customer attrition rates.
• Reduced order levels from regular customers, deferred (but not lost) sales or a reduced market share.

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"When overtrading, it is vital that your key functions work collaboratively."

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When faced with overtrading, it is vital that your key functions work collaboratively together. The Managing Director needs to take control of the emerging situation by reviewing sales performance with the sales team and reassessing the achievability of original forecasts.

Managing Director/CEO

The Managing Director/CEO should speak to key customers to ascertain reasons for reduced order levels. Sounding out key employees on their opinion of sales under-performance and any suggestions to restore sales levels could help to improve the situation.

Financial Director

The Financial Director needs to take responsibility for identifying internal and external solutions to protect cash flow by working closely with the MD to undertake root cause analysis for the under-performance.

Time would be wisely spent preparing a re-calibrated forecast with realistic and achievable numbers supported by full buy-in from the sales team. Establishing closer interaction and communication with the sales team can also improve the situation.

Sales and Operations

The Sales and Operations teams need to support the MD and FD by reconsidering what sales numbers are realistically achievable with the resources available. Part of this process will include contacting all regular clients to gauge future order levels and  assisting in the preparation of bottom-up re-forecasting.

One priority for the sales and operations teams will be to ensure that there are no manufacturing or production bottlenecks which might hamper sales by preventing finished products being ready at the right time. And of equal importance is ensuring the sales proposition remains relevant and competitive in the market. If the proposition is less competitive, it may require adjusting or the marketing communications may need attention.

Key points

It is vital to conduct root cause analysis to understand the probable causes for under-performance and formulate a turnaround strategy. Always challenge all forecast assumptions based on historic experience of client order levels and sales performance. Time would be well spent to consider strategies for developing new markets, customers, or your proposition. Review your product pricing structure and compare against your competition and assess whether you are charging enough or too little.

I hope this article has provided some useful tips on what may trigger cash flow problems caused by turnover under-performing forecast and how your teams should work together to mitigate any long-term damage.

We work with growing UK SMEs and small-cap PLCs that have funding needs in excess of £2m and regularly approaching £100m. Our clients’ needs will typically be for sophisticated finance products such as cash flow based lending or private equity investments. Our value lies in helping clients access funding that relies on confidence in future trading and cash flows. For a confidential, independent, no obligation discussion on the funding options available click the 'Let's chat' button.