The Right Way to Create a Sales Forecast in Direct Selling
This week’s featured article is from Daniel Murphy, Co-Founder and Managing Principal of Strategic Choice Partners. Dan has over 30 years of experience holding senior finance and operating roles at TJX, Pepsico, Panera Bread, Princess House and Immunotec. For the last 15 years Dan has served as both a CEO, CFO and COO for two party plans and network marketing company respectively. Currently Dan is a consultant specializing in the direct selling industry. Dan also served as the Treasurer of the Direct Selling Educational Foundation and previously served as the Treasurer for the US Direct Selling Association.
Guest Post by Dan Murphy
The Right Way to Create a Sales Forecast in Direct Selling
Every year, usually after convention season is over and most direct selling companies kick into their high-selling season, another important task begins (or at least it should): the formulation of the sales forecast for the balance of the year, and the plan for the entire following year.
This is a good time to appraise how well your initiatives and tactics are working in the current year. Are we ahead or behind our plan? What worked and what didn’t work? Honest and clear answers to these questions will set the stage for the planning of the next year.
So many companies fall victim to repeating a different twist of the same ol’ plan year after year. This is not how a sales plan should be developed. Instead, a zero-based method should be applied with the key performance indicators driving the metrics that, at the end of the day, drive revenue. A zero-based approach means you start with nothing, and build your budget and plans from the ground up (rather than just take last year’s plan or budget and tweak it here and there).
A forecast and budget that is created without the overall strategic plan in mind is out of sync from the very beginning. What strategic initiatives will be important for the coming year? New products? New territories? New technology and social media initiatives? Each of these has a definite cost that must generate a return on the investment.
At most companies I have worked with, the process for the development of the sales forecast is typically led by the finance department due to the nature of the exercise. However, if finance drives the process in a silo, the plan won’t be worth the paper it is printed on!
An effective sales and budgeting forecast must be a cross-functional exercise. The marketing department needs to put together an overall marketing plan that will govern the cadence for the coming year, usually driven by a travel incentive trip and a convention with specific monthly programs interlaced along with them. Importantly, the percentage of revenue spent on a convention and travel incentive trip should be no more than 4%, and I like it even more at 3%. Monthly programs which typically include discounting of product or some reward should be no more than 25% of the mix of sales with the balance sold at full price. These programs should be designed to not only sell product but increase activity and sponsoring.
Once senior management agrees with the strategies, initiatives, programs and the necessary investment and resources to make this happen, the plan must then be turned over to the sales department. It is critical that they understand and embrace the plan. Too many times I’ve seen a good plan fall flat on its face because it just gets thrown over to the sales team, with the expectation to “just go promote it.” Your sales team must be part of the decision-making process, and then they must also have the opportunity to fully process the plan with the various paradigms they represent in the field.
Any good plan includes specific KPIs. The most common for direct selling, regardless of the specific initiative, typically include sponsoring rate, the attrition rate, average order size, activity rate and the orders per active consultant. Retention is also a key driver we so often overlook. There will also be certain KPIs that are specific to an individual tactic. Be sure to account for these, too, so you can judge the effectiveness not only of the plan holistically, but also the individual efforts. This information will prove to be very beneficial for future plans.
It is up to the sales team to commit to the sponsoring numbers, the activity numbers, and the sales order numbers. The plan must be broken into regions if that is how the company is organized so that each particular individual is fully accountable for their actions and outcomes. Incentives for the sales team should be structured around the achievement of these goals. I’m always so baffled at how common it is for a direct selling company to create an incentive criterion that doesn’t directly impact the company’s sales goals. Don’t let that happen at your company!
Of course, direct selling is a volatile business: as soon as a new year begins, a process for reporting and performance analysis must begin. In my experience, this is best accomplished by a post-period de-brief, consisting of a cross functional group from sales, marketing, finance and operations. The group collectively reviews the actuals versus forecast, and discuss what went well and what the challenges surfaced. This is the venue to brainstorm any mid-course corrections, and where the forecast becomes a living, breathing tool.
Once the sales plan has been finalized, then the calculation for inventory management needs to be aligned so that over-stocks or back orders are avoided. This supply chain process deserves an entire article all to itself, so I won’t cover those details in this article. I will say that your supply chain and logistics team will appreciate nothing more than an accurate sales forecast, so take it very seriously.
The biggest mistake I have seen in regard to sales forecasting is that the ownership of the plan belongs to finance or senior management alone and not with the entire organization. I believe the real ownership belongs with the sales team. Without this critical step of creating ownership within the sales team, the plan remains the responsibility of management and others, and sales will simply do the best they can to be of support. Sales as a supporting role never works; they need to make the plan come alive and make the necessary mid-course corrections needed to make the plan a reality.
With the combined efforts of the entire organization led by sales, there is a solid road map based on specific activity that will make a sales plan a reality.