REPORT: WORDS HEARD AND OUR TAKE Title: Forecasting for Sales & Finance Who: Bruce Lazenby, FreeBalance's President & CEO Don Gibbons, FreeBalance's Chief Financial Officer When & Where: OCRI's Dollars & $ense, November 4th, 2004 Words Heard: Selling cycles for FreeBalance range from the unusually quick at 6 months to the not-so-unusual at 24 months. With deal sizes for its global, government-only clientele starting at about $1M, fixed costs of 90% and revenues that are earned over a period of months following a sale, FreeBalance is particularly vulnerable to sales shortfalls: it can not afford surprises. That said, it took the arrival of new management in 2000 for the company to recognize the risks it was taking by not having a stronger connection between its sales and revenue (cash-flow) forecasts. The challenge, then, was not only how to improve the quality of the FreeBalance sales forecast, but also how to better tie those numbers into the cash-flow forecast so that it, too, became of higher quality and the company had fewer surprises to deal with. To begin, ownership and responsibility for the sales forecast was assigned to the VP of Sales, the cash-flow forecast to the CFO. Each individual was to manage his own process and improve it - quickly. To improve the accuracy of his sales forecasts, the VP of Sales standardized the factors used to state any given sale's 'state of advancement' and reduced the number of acceptable probabilities to 6: 100%, 90%, 75%, 50%, 25% & 10%. A state of advancement of 10%, for example, meant that a prospect has been identified and an action plan devised; 100% meant that the contract has been signed and the PO cut. To improve the accuracy of his cash-flow forecasts, the CFO took the sales forecast and recognized only those sales with a state of advancement of 75% or higher ("items above the line"). Each potential deal was then scrutinized to determine precisely when, how much and how often the customer was obligated to pay. To further improve the forecast and to ensure Sales understood the real-world financial ramifications of any given clause in a contract, FreeBalance's executive team had the CFO insert his team into the 'contract drafting' stage of the sales process. Bruce and Don reported that the changes made to the sales and cash-flow forecasting models have been successful, but also that some months are more successful than others and that improvement is an ongoing process. But both also reported that by creating a real link between the company's sales and cash-flow forecasts, FreeBalance has dramatically reduced its exposure to unpredicted events, allowing for more effective operation of the business and its growth. Acorn Partners Two cents worth: By standardizing the factors underlying its 6 acceptable 'state of advancements', FreeBalance freed itself from the vagaries of its salespersons' judgment calls ("Salespeople have happy eyes…") and improved the reliability of its sales forecasts. This made the VP of Sales more accurately and immediately aware of any sales funnel shrinkage and allowed him to take appropriate actions to regenerate that funnel before it collapsed on itself. By basing the cash-flow forecast on the payment details of only the "above the line" items on the sales forecast, FreeBalance gave itself a grounded, real-world view of its forthcoming cash inflows. This made the VP of Finance more accurately aware of any impending shrinkage in cash inflows and allowed him to take appropriate actions to help protect the entire company from the chaos and potential collapse caused by cash-flow crunches. Tying your revenue forecast more closely to your sales forecast is ultimately about better predicting your cash-flow. Closing deals and watching annual sales figures grow is fun (and important). But making sure your company has enough actual cash to continue making sales (and meeting payroll and making rent, etc.) is critical. FreeBalance's approach to managing its cash-flow is a good one and can most certainly be scaled-down to work in any company where the VP Sales and the VP Finance is the same person, aka the President or CEO. 708-350 Sparks Street, Ottawa, ON K1R 7S8, t: (613) 563 4588, f: (613) 563 4689, ourtake@acornpartners.com, www.acornpartners.com If you wish to unsubscribe, reply to this email with "unsubscribe" in the subject.