Use a Forecasting System to Stay on Track

The best business leaders are those who are constantly looking into the future to determine what must be done in the present. With that in mind, kitchen/bath firm owners should be tracking three key indicators of their business: (1) leads, (2) sales orders and (3) income (the value of substantially completed projects under accrual accounting).

Given the state of the current economy, you could also make a strong case for tracking the number of days from point of lead to point of close. This metric would most likely have increased substantially since the financial system’s meltdown last fall. But for simplicity purposes, I will only address the first three business indicators and how they can be used in tandem to generate an effective Forecasting System for your operation.

Historical Percentages

Forecasts are based on historical percentages. To create a useful Lead Forecast, a company must have had a Lead System in place.

In my view, a Lead System is essential for kitchen and bath firms, whether large or small, since all significant sales and marketing information emanates from the accuracy and completeness of these records.

In developing a Lead Forecast, you must dig into your Lead Records for as many years as possible. Ten years of data would be ideal. The objective is to determine what percentage of leads has been generated in each month of the year. For example, over 10 years perhaps January on average produced 9.6% of all of the leads in a year, February produced 10.2%, and so forth.

The next step is to calculate the Sales Orders/Lead Ratio. By Sales Orders, I mean the value of signed contracts in any given month. For example, the top chart above shows just the last three years of records of a hypothetical company.

Dividing the Total Sales Orders over three years ($4,350,000) by the Total Leads registered over the same three years (904) tells us that the company will generate $4,812 of Sales Orders on average from each Lead. So if our Sales Order Goal for the coming year is $1,710,000, we will need 356 Leads ($1,710,000/$4,812) to support that goal.

To create a Lead Forecast, the final step is to apply the historical monthly percentages to the 356 Lead Goal for the coming year and then post the Monthly Actual Results as shown in the center chart above.

Managing By Percentages

You follow the exact same methodology to create monthly percentages for Sales Orders and Income. Once these three Business Indicator Forecasts have been completed, you can literally manage your operation by the percentages.

At the end of every month, you will be able to project year-end totals for each indicator by taking the Cumulative Actual Total and dividing by what the Average Cumulative Percentage is.

For example, as shown in the bottom chart at left, let’s consider what remedial action would be needed if a company is faced with these results after four months.

The leads are there in quantity. Clearly, the salespeople are not converting enough of them into closes. Immediate additional sales training should be considered if the company is to achieve its Income Goal of $1.5M, now only projecting out at $1.233M or 82% of goal. If this gap isn’t closed quickly, additional overhead will need to be cut to avoid a possible year-end loss.

Another benefit of a Forecasting System is to create a viable Monthly Sales Contest among your sales/designers. By applying the same Company Sales Order Percentages per month to each sales/designer’s Annual Sales Goal, rookies can compete with veterans for recognition (and cash awards, if desired) at Monthly Sales Meetings based upon % of Goal achieved, rather than on sales volume alone.

Peer pressure has proven to be a positive motivator of increased production in this industry. But owners need management tools such as the Forecasting System to take advantage of this dynamic.