Resource | Business Growth Pathways

Sales planning and forecasting - Top-down, bottom-up

Sales is the lifeblood of any business

In business growth, sales predictability is everything; it is the future of your business. It acts as a measure of how the market will respond to your go-to-market efforts. It represents your ability to forecast this, with a high degree of confidence, is critical to achieving sustainable, repeatable and profitable business growth…and no one likes surprises when it comes to sales. Robust sales planning and forecasting accommodates corporate revenue expectations and helps you to manage operational and financial plans of action going forward, adding value throughout your organisation.

Sales and revenue are in direct correlation when building a successful and profitable business. Sales is the ability to transform your business into a profitable organisation capable of fulfilling a gap or previously unmet need in the marketplace. If operational excellence represents the arteries of your business, sales is the heartbeat that feeds your business.

The information derived from your sales forecast needs to be infiltrated across all areas of your business to secure and protect the bottom line, at a bare minimum. The various operational departments and functions within your company cannot accurately plan cycles and develop budgets for capacity or hiring, or even product inventory. Committing to regular, quality sales forecasting can help avoid such expensive mistakes.

It is essential to use the right data and using your company’s key drivers to understand the metrics that truly measure growth. You should also look for performance indicators that will give you insights to problems and successes early on, so you can adjust planning and forecasts as needed.

Sales planning

MOST businesses will default to a ‘top-down’ approach when planning, taking into account just two factors — the historical performance of the company over the past 12 months, and the growth ambitions of haughty senior leadership teams, aligned to the three or five-year plans.

The top-down approach to your sales planning will start by addressing the total size of the marketplace. It will then gauge a percentage of how much that marketplace can capture and convert into a sale — i.e. if the marketplace represents £100 million of spend, a business could estimate that they could acquire 10% of that marketplace, giving them a sales forecast equivalent to £10 million.

Now a top-down approach isn’t a wholly incorrect stance to take. It addresses the potential for acquisition in your AMR strategy, and opens the following questions:

What does growth look like from a revenue AND profitability perspective over the last three years?
What are the trends?
Which products and services are performing well? Which aren’t?
What are the broader aspirational goals and growth ambitions for your company?

It could also take into account external factors such as:

Industry and market trends
Milestone events during the next financial year, i.e. General elections, Brexit etc.
The movements of your competitors — what they are doing, who are dominating the marketplace, and what you can learn from them

The key to delivering a valid and accurate sales plan/forecast is to adopt a top-down/bottom-up method, allowing both ways of thinking to meet in the middle.

Now, this could lead to a minor gap in the middle ground, or even some tension between what the aspirations are from a top-down approach, aligned to a realistic deliverable view from a bottom-up approach. Yet, this provides an opportunity at the beginning of your financial year to discuss this gap, being proactive about your planning, rather than trying, like most businesses, to frantically close the gap three, or even six months into the year when you’re already on the back foot with your sales.

By applying this dual-methodology to your sales planning, you can also see how your AMR strategy is fundamental in your ability to forecast accurately.

The bottom-up application is where the science of sales gets aligned to your AMR. You can start to build a reliable forecast of what will happen in that ‘middle ground’ between top-down and bottom-up forecasting — whether further analysis will be required or whether you will have to manage expectations to arrive at aligned thinking from both perspectives of sales forecasting.

Through bottom-up thinking, you start by projecting the amounts of units of a product or service your company will sell, then multiply that amount by the average cost per unit. From this, you can then also build in the locations (if applicable), number of sales reps where appropriate, number of online interactions, and other granular metrics. The idea behind a bottom-up sales forecast is to build up from the smallest components of the forecast.

It is imperative to implement both schools of thought when forecasting sales for the next financial year, and beyond your 3- or even 5-year planning. Apply a top-down approach, to begin with; then by calculating your figures from a bottom-up method, you can see how reasonable and accessible your first estimate is. If they don’t match exactly, you can then tweak the numbers to produce the same figures.

The science behind the numbers

As so many functional parts of your business rely on your forecast, it is vital that is it accurate, cooperative and actionable. Your data collation and analysis need to be on point, not based on ‘gut feeling’, but aligned to the customers’ sales journey, and presented in a way that makes the forecast actionable; across the board — or the whole process of forecasting will be moot.

To make your sales plan as dependable as possible, it needs to provide you ‘what if’ modelling capabilities for your sales reps, which encourages them to take a more holistic view of their deals and account plans. Secondly, dashboards that employ different levels of insight to stakeholders within the organisation.

What needs to be included in your sales forecast, and how granular should it be, so that you can accurately budget and plan for the future?

Revenue streams

Look at how many revenue streams you have in your offering — product groups, chargeable services, subscriptions etc. Try and align these sales with your accounting so that you can see the difference between the two further down the line; this is real business planning and management that makes regular reviews and revision easier.

Granular data: row-by-row

Units sales = price x units. Take the cost per unit, predict the number of sales, and you can have an excellent forecasting method that allows for variation in not only the number of sales but also your cost per unit. This can be applicable for not just tangible products, but also billable hours if, for example, you are a lawyer, accountant, consultant, or even work in the trade industry.
Recurring charges: Applicable to subscription services, this takes into account your AMR; how many new sign-ups you may Acquire, the turnover of existing contracts (retention), and the attrition rate (if any) or cancellations of subscriptions.
Revenue only: This solely looks at the money by revenue stream, without taking into account price per unit/units sold. Great for an overall forecast, but it might not give you the level of information required for a detailed analysis and projection for your sales plan.

It is reasonable to forecast and plan your sales for the next 12-months at a bare minimum, from a perspective of being in ‘The Groove’ stage of business growth at the very least. From this, you can plot unit sales month-by-month for the first year and then generate a graph to provide you with a visual trend in expected revenue within that 12-month period. (see fig 1.1)

Sales Planning and forecasting aligned to AMR

Take, for example, a business with a previous revenue line from last year of £1,000,000. The following three questions should be asked to assess where your focus should be:

What is the natural attrition rate in your business?
How much of that revenue is locked in as annuity/recurring revenue?
What’s the potential for growth in the existing customer base?

No matter how good you are at the retention of customers, there is always some natural attrition that is the best practice to factor in. A low attrition rate demonstrates that you are good at the retention part of you AMR; a high attrition rate tells you immediately that you need to work on this area.

If the above example company with a revenue of £1,000,000 has an attrition rate of 10%, you can immediately see that you can only expect £900,000 this year, based on that rate.

Next, if you factor in any recurring/annuity revenue — in this instance, let’s say £500,000 locked in.

Time to factor in the maximisation coming from your existing customer base. Perhaps you acquired some new customers during the previous trading year who are now delivering a full 12-month annuity from the beginning of the year to the tune of £300,000 in revenue.

Adding the maximised £300,00 to the £500,000 locked annuity revenue gives us a figure of £800,0000 in forecasted revenue for the upcoming year. With this £800,000 in forecasted revenue from maximisation and retention, you can see that any new or ‘acquired’ businesses need to deliver £200,000 just to remain stagnant, without any growth, and meet the £1,000,000 revenue delivered last year.

If you are aiming to meet a 10% growth rate this year, at a bare minimum, on top of last year’s achievements, you will need to bring in £300,000 through acquisition, just to close that £200,000 gap AND deliver the 10% growth. The table below should summarise the numbers:

From the numbers above, there are questions to be asked:

Can the 10% year-on-year attrition rate be reduced to retain some extra revenue?
Is there an opportunity to maximise your existing customer base further to extract more revenue and increase the profit potential from them? — this can be broken down into a customer-by-customer analysis and forecast for the £300,000
Is £300,000 of new business feasible and realistic? What current pipeline are you carrying into the new financial year and when is this likely to convert?

Through this process, you can create a clear picture of where you can find AMR opportunities and realign your sales plan to fit.

take action; achieve more

Sales should be at the heart of every business-performance culture, make it a priority, so that everyone understands their role
How well do you plan and forecast critical sales revenue in your business and how effective are you at measuring and modelling the customer sales journey right from acquiring new customers, to developing and maximising the relationship to optimising retention and the ongoing commercial value to your business?
Are your sales teams equipped with the tools to do the job and a clear understanding of what excellence looks, feels and acts like? If not, it's your responsibility to invest in your people so they have everything they need

Sales planning and forecasting - top-down, bottom-up

Sales planning and forecasting - Top-down, bottom-up