Categories
Finance Plan & Forecast

Poor forecast accuracy

Over the last few weeks three separate clients have expressed their frustration with inaccurate forecasts delivered by certain members of the salesforce. Nothing new here. It happens all the time. However, what struck me about these three independent cases was the nature of the issues: The salesforce consistently forecast higher than actuals. This is not typical. Most sales people try to forecast lower to build up some buffer in case of bad news.

BOOKING INVENTORY

What happened here? Very simple: sales tried to utilize the forecast to ‘reserve” inventory of their extremely well-selling products. Their rational was that a higher sales forecast would inevitably lead to a higher availability of finished products ready for sale. In the past several sales people had encountered product shortages which affected their compensation negatively.

The sales forecast as an inventory 'reservation' mechanism

THE THREAT

This kind of poor forecast accuracy could lead to a precarious situation. In case of an unexpected economic downturn, the company could end up sitting on a ton of finished goods inventory. And not only that: average inventory could trend upward reducing liquidity as a result. As we all know, inventory is central to effective working capital management.

THE REMEDY

The controllers of these companies were very frustrated with the situation. Despite senior management discussing the resulting issues with the sales force, accuracy barely improved. But one controller had developed an interesting idea that he is about to implement: start compensating the sales teams based on Working Capital measures.

WORKING CAPITAL & FORECAST ACCURACY

The basic idea of this evolves around punishing sales for consistently producing these unacceptable variances. And the implementation of this does not necessarily have to be that hard. We can measure forecast accuracy. A series of negative variances (Actuals < Forecast) leads to a reduction in the sales bonus. The critical thing here will be to avoid punishing people for random variances. I could see using a rolling average to only punish consistent ‘offenders’.

This is an interesting idea. The actual compensation impact would obviously have to be worked out carefully. But the basic idea is quite interesting!