During my time as a business coach, I’ve made it a point to talk about the importance of sales. Not just the act of meeting with a prospect and finding ways to align their interest with your products or services — although that is a huge part of the job — but also developing the processes that make up the business sides of sales. Without these core competencies, you can’t create those measurable and predictable results that are so key to consistently generating profits.
The more accurately you can measure your sales performance, the easier it becomes to both forecast future results and verify your current trajectory. To do this, you not only need a method for reliably generating that data, you also need a dashboard of some kind to help you make sense of it.
Tracking this data gives you greater visibility into your current sales, and it forms the starting point for a predictive model for knowing where your future cash is going to come from. It’s a powerful tool for creating accurate financial projections. This system doesn’t need to be fancy — it can even be created manually, writing out those data points on a paper ledger — although I highly suggest at least putting it into something like Excel to keep it manageable on a day-to-day basis.
The important thing to keep in mind when you are building your projections is that they need to be based in reality, not on hopes and dreams. Excel is a beautiful thing, but it can also be a temptress. It’s all too easy to tweak some formula by a small amount, only to see results that are wildly optimistic. That’s missing the point. To make informed decisions, you need the accurate data and grounded assumptions, even when they tell you a story that’s painful to hear.
Getting accurate results means stress testing every piece of the model. You never want to use your best-case sales scenario for testing. Favor scenarios that are conservatively optimistic at best. Not only does this help keep your expectations grounded, it also means you can be in for a pleasant surprise if you overdeliver on those expectations. It’s all gravy at that point.
These projections also need to focus on cash flow. As you’re building these financial and performance models, you will have all manner of things to consider — from income statements to balance sheets — but for a company focused on profitability, cash flow is everything. Cash is the lifeblood of the business, and when you run out of cash, it’s game over.
As you update your model, use actual performance data to replace those early estimates. When you create the model, it’s normal to fudge the details with your best guesses. Replacing that information with the real data allows you to see how close your projections were to reality. This allows you to refine your model as needed, and to better predict your future results.
These predictive models aren’t just about anticipating profits. They also allow you to see trouble on the horizon much earlier than you would be able to otherwise. This provides you with more time to react to changes in the market or with the business, giving you the room to pivot or adjust as needed to avoid disaster.