Critical Numbers

How to avoid making the mistakes today that will make your life miserable next year

I hate to say it, but there's a good chance that right now you're creating a majority of the problems you'll be dealing with next year. How? By putting together an annual sales forecast based on gut feelings and wishful thinking.

By the time you discover your mistake, it will be too late. You'll be facing layoffs or scrambling to find the new hires you need. You'll be fielding customer complaints about poor quality or missed deadlines, or desperately looking for sales. You'll be dealing with bickering and finger-pointing between departments. Your bank will be calling. You'll be worrying about cash flow.

Bad forecasts wreak havoc in a company. Fortunately, there are some rules you can follow to increase the likelihood of getting a good sales forecast--that is, a forecast you can count on, one that people will rally around and do whatever is necessary to achieve.

Rule 1: Quantify your expectations. Salespeople need to know the annual growth rate that the boss (or the senior management) is looking for. I'm referring to the increase in sales you expect not just in the coming year but year after year after year. Frankly, I think everybody in the company ought to know that number, but no one needs it more than the people responsible for figuring out where the sales are going to come from.

In our case, the number is 15%--for two reasons. First, it's a rate of growth we can finance internally, using our own cash flow. We don't need to increase our debt or bring in outside investors to achieve it. Second, we can grow 15% a year without overwhelming our people or putting jobs at greater risk than we're comfortable with. At 15%, we can develop people fast enough to take advantage of opportunities, and we can develop opportunities fast enough to take care of people.

Does that mean we expect every salesperson to bring in 15% more sales each year? Of course not. Some salespeople's numbers will go up by more than 15%, some less, and some of the growth will come from starting or acquiring new businesses.

But we do expect our salespeople to pull their weight in helping the company hit the goal. And they're responsible for giving us an honest assessment of what they can do.

Rule 2: Ask the right questions and insist on real answers. Most CEOs are skeptical of the forecasts they get from their salespeople, and I can understand why. Nine times out of 10, there's no substantial evidence to support the numbers. By evidence, I mean hard facts about things that will directly affect your customers and their future purchasing decisions.

I'm not talking about trends. I don't believe in trends. I don't want to hear that sales will rise or fall "because that's the trend." Nor do I want to hear forecasts based on growth or stagnation in the economy as a whole.

If a salesperson tells me a product's sales will go from $1 million this year to $2 million next year, I want to know why. Are we doing more promotions? Are we cutting prices? Are competitors increasing theirs? I also want to make sure we've considered what might go wrong. Have we checked our customers' inventory levels? Do we know how they're making buying decisions? Are new competitors entering the market?

Your salespeople can get the answers to such questions only by doing their homework. By researching your particular market segment. By talking to your customers, and your customers' customers, and your customers' customers' customers. By working the informal networks and keeping an ear close to the ground.

Of course, you'll never completely eliminate the uncertainty in forecasts, but you can reduce it to a manageable level.

Rule 3: Use your salespeople to link your workforce to the marketplace. The key ingredient of any forecast is passion, which comes from a sense of ownership, a feeling of personal responsibility for the results. Without passion, you can't have accurate forecasts, except by luck. Why not? Because salespeople won't work hard enough to come up with the right targets or dig deep enough to make sure you hit them. The rest of the company won't understand where the numbers in the plan came from, what they mean, and why they're important. Instead of unity, you'll get dysfunction.

So how do you kindle that passion? For openers, you have to make sure your salespeople understand that jobs depend on the forecast. I don't want our salespeople to do forecasts for my benefit. I want them to be thinking about the impact their numbers will have on the lives of their fellow employees. I want them to know that people will be raising families based on the sales that our salespeople say they can deliver.

Then again, I also want the rest of the company to understand how the forecast came together. I want our inside employees to appreciate the competitive issues we're dealing with. Who better to teach them than our salespeople? In effect, they serve as our eyes and ears in the marketplace. They can tell human resources what the competition is paying. They can help engineering figure out what products we should be developing.

The forecast is an opportunity for our salespeople to bring what they've learned back to the rest of us. If we were small enough, I'd shut the company down for a day and have the salespeople make their presentations directly to the entire organization. We do the next best thing and bring 60 people together for a two-day forecasting meeting every October, after which the salespeople go back and give their forecasts to their respective divisions.

Rule 4: Leave the ownership of the forecast where it belongs. There's one more thing you have to do with the forecast: accept it. Yes, you have a right and a responsibility to insist that the numbers be substantiated. You need to make sure that the salespeople have done their homework, that they have reviewed all the evidence and formed a reasonable opinion based on it. But then you have to accept their opinion--even if it's different from yours.

Look, I understand how hard that can be, especially if you're the owner of a small, privately held company carrying a load of debt secured by your personal guarantee. To tell the truth, even if you're not in that situation, accepting a forecast you disagree with is extremely difficult.

But you have to do it. Why? Because if you don't, you let your salespeople off the hook. You take away their ownership of the forecast. It's not theirs anymore; it's yours--and so is the responsibility for hitting it.

Oh, sure, your salespeople will go out and do their jobs, but something will be missing. The little extra drive that pushes them to get the final sale at the end of the quarter. The keenness of instinct that lets them smell trouble and head it off just in time. The pride, the desire to win that makes them dig down deep and pull off the big play when you need it.

What you lose is passion--which is, ironically, the one thing you must have to achieve a reliable forecast. With it, you can hit almost any reasonable target you set. Without it, your forecast is just an empty prediction that neither you nor anyone else can count on, and that is almost certain to create problems for you down the road.

Jack Stack is the president and CEO of Springfield Remanufacturing Corp., in Springfield, Mo., and the author of The Great Game of Business (Doubleday/Currency, 1992). Both the book and this column were coauthored by Bo Burlingham.