How Do You Plan Spending - To Backlog Or Sales Forecast?

A company had several large orders last year but ended the year with a low backlog

. Forecasts from Sales are rosy, but acceptance of proposals and initiation of work is hard to predict because the company's products are just a piece of much larger projects with highly variable timelines. How do you plan spending in this environment - conservatively to backlog or more aggressively to the sales forecast?

Advice from a group of CEOs:

It is important to understand the magnitude of difference between spending under the two scenarios. For example, if a conservative spending plan means cutting product lines or business units in comparison with the more aggressive plan, then detailed analysis and what if scenarios are considerably more complex.

Other important considerations are the company's cash-flow and debt situations. If you are cash-flow positive with little debt, then there is more flexibility to the decision. Another consideration is the Board's attitude on debt. If the Board is negative on the use of debt this restricts options.

Be wary of the healthiness of a credit line that you don't use, even if you have good relations with your bank and a strong credit history. Companies have seen unused credit lines get cut and accounts cleared when they have started using the lines after a long dormant period. If you don't use the credit line, your bank does not have a feel for your reliability in drawing from the line and paying it back. It is better to use the line from time to time and to establish a history of paying the line back down. Exercising the line may give you more flexibility than you see at present.

Look at your approach to forecasting and spending. For example, if your current approach is bottom-up with monthly revisions, how far out are you forecasting? How effective have outgoing forecasts for several quarters been in the past, and what confidence intervals can you put around your forecasts for next quarter, the quarter after, and the quarter after that? If you are reasonably confident in your ability to forecast one quarter out, plan spending around this. If you are able to adjust spending relatively quickly this gives you more leeway.

Establish leading indicators that will improve forecasting of future business. What is your win/loss record on proposals, and a conservative estimate of what this ratio means for revenue? Compliment this with trend charts to improve your feel for the flow of business. Other examples include sales calls to new customers versus new key customers won, and similar sales metrics. These metrics can help you to govern expectations based on sales forecasts and improve predictions of future revenue. Consider hiring an experienced market specialist with a good knowledge of your industry to improve your feel for industry trends.

If your sales team is not performing, look at changes to sales management. This may wake the team up and prompt them to go the extra mile for contacts and contracts.

by: Sandy McMahon

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