In the previous article in this series I made the case for empowering your non-financial managers with the right budget tools. This was to drive collaboration, ownership and accountability, ultimately leading to a faster, more accurate budget that people were more likely to implement. This article digs a level deeper into the process and explores how you can bring these capabilities into sales budgeting and planning. Sales, after all, form the cornerstone of the overall budget.
There are many approaches to sales planning. The simplest is to take last year's total, add a percentage and present it to the CEO. Job done! (If only life were so simple!) Unfortunately, you need to underpin these numbers with data and analysis reflecting your expectations of market variables coming up in the next period. This introduces a couple of complex and challenging alternatives to consider.
Too many options and too much data
You could start by asking your sales team to forecast product by product, customer by customer, channel by channel. While this is theoretically possible, it becomes a daunting task in practical terms. Let's consider an example of an FMCG company with 1,000 customers that sells 5,000 products. Planning for this would entail managing five million individual data points. When multiplied by 12 months this amounts to 60 million items that need to be entered.
This would take months to do, distracting and frustrating your sales managers and, most importantly, side-tracking them from their core function of actively selling. Plus, the extreme granularity of this approach means you won’t be able to see the wood for the trees – it will be impossible to spot bigger trends and market shifts if you are looking at the data at this low level.
Tap into automation
Another approach would be to automate the above process to a degree. You could look at what was achieved last year at the same level of detail, then factor in past trends or simply add five or ten percent and consider the job done. This is approach problematic though because we live in a rapidly changing world where consumer preferences can be fickle. What is in vogue today can be off the shelves tomorrow. Trend analysis can only take empirical data and model historical data forwards, so it can’t cater to future trends. Then, exacerbating things, recent historical data is made up of a series of anomalies – not least the impact of the Covid-19 pandemic – making it even less likely to be helpful.
Finally, these numbers don’t consider what the sales teams at the coal face are experiencing, what they know about their customers and the market, and what they are seeing coming down the line. This will result in limited buy-in and accountability because your sales managers have not been involved in the process, and the numbers may force your sales teams to fish in an empty pond, while ignoring obvious sales opportunities just next door.
To rectify this we could ask the sales team to fine-tune the data, which at least creates a degree of involvement and interaction with the business at the front line. But is this practical or will you just be overwhelmed by data again?
It will come as no surprise that I advocate a more collaborative approach to sales planning, and one that seeks to reduce the risk of data fatigue and enable more responsive sales planning process.
Getting sales planning just right What is the middle ground – the Goldilocks “just right” – of sales planning with just enough input from your sales managers? The answer is a great example of how finance and operational teams can collaborate and play to their strengths. The “just right” of sales planning starts with the financial team, in consultation with the sales director, defining the most meaningful categories to plan against both for customer and product. This could be by product group, customer type, region, sales team, channel, or whatever categories make the most sense to your business. The 80/20 rule would apply, where you pay careful attention to the 20% of customers and products that contribute 80% of your revenue. As for the remaining customers and products, they can be grouped into the "other" category.
This approach allows you to focus your resources and efforts on the most significant revenue drivers while still maintaining a general overview of the customer and product base. A big advantage of this is that when consumer fickleness comes into play, a single product may nosedive, but another may surge to take its place.
Your sales teams now have a far more manageable number of inputs to contribute. And if the tool they are using is the right one, the process will be quick, easy and painless AND they will be contributing to the process, unlocking their on-the-ground insight and building ownership of the outcomes. As a business, you get insight into the shifts in customer buying patterns and can plan a sales budget based on what is most realistic.
From sales planning to modelling & scenario planning
At this point, you’ve completed your budget and sales planning. Your non-financial managers are involved, empowered and taking ownership of achieving their numbers. Now, seeing as today the only real constant is change, it’s time to consider “what if”.
As the finance team, it is your job to define the key assumptions that could fundamentally impact the budget, and what that impact looks like. This, along with the right toolset, gives you the ability to start modelling your detailed budget based on different scenarios. The next step is to share these scenarios with the sales managers. They can provide input based on their experience, confirm or question the assumptions, and in doing so, add value and buy into the process.
The result is a deeper understanding of the business plans, collaboratively created with everyone heading in the same direction, which in turn ensures a common understanding from which you can facilitate any adaptations that may be required as you meet and overcome disruptions going forward.
In the next and final article in this series, I will explore ways in which you can use collaboration to remove your budget from an annual cycle to help manage continuous change.
As published CFO South Africa - 15 August 2023