You Can’t Build Profits Without Forecasting Your Sales

You Can’t Build Profits Without Forecasting Your Sales

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It was the beginning of another year. The December holidays felt like they were months ago. Already work was becoming overwhelming.

Charlotte held the hard-earned post of regional operations manager in one of South Africa’s biggest tile retailers, she had been with the company for eleven years. For some time she had felt she needed a change.

She also had a creative side that never found expression in the day-to-day humdrum of operations. For three years before she started her own business, Charlotte had been keeping herself busy over the weekends.

Every week she would collect the broken tiles that were discarded as a result of careless material handling – dropped boxes, forklift damage incurred during the long journeys from manufacturers all over the globe. She only collected the decorative tiles with colours and patterns to suit the tastes of eclectic South African consumers.

The tile pieces were taken home to the garage where Charlotte’s other life took over. On the walls and floor were tile mosaic patterns expressing emotions and images that would appeal to the homeowner.

Her journey into the world of mosaics began on a trip to Chartres, France in 2004. There she visited La Maison Picassiette, a home covered completely in mosaic made of broken ceramic tile. The care, dedication and beauty evident in the work inspired her so deeply that she decided to make mosaics.

 

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Inspiration and passion are key attributes needed when starting a business which she certainly had in large doses.

In 2006 she left her previous employer on good terms and started her own business. She produced mosaic kits including the mosaic pattern, tile pieces, tools and materials needed for home mosaic enthusiasts to create their own pieces of art.

In 2010, her business was generating an annual turnover of R13 million with exciting growth prospects.

Managing costs

Few retail suppliers are pure cash businesses; terms of payment often sit on both sides of your business model. Retailers demand payment terms and you want their business.

On the supply side, Charlotte sourced the broken tile pieces from her previous employer. Her orders were made up of broken tiles collected in nylon bags or end of range whole tiles which she broke up into the fragments.

The relationship was invaluable. Charlotte could order as and when she liked and the pricing was reasonable. The biggest distribution centre of the retailer which supplied stores across the country was a convenient 12km from where she lived.

The early years saw her learning the lessons that cannot be avoided. At first she marketed her product too broadly. Not everyone likes the idea of buying a mosaic kit.

During the first two years, Charlotte worked hard to understand the consumer market.

Turning your business to face your customers and not your ideas is a very humbling and difficult task to achieve.

She found a market and matched the products she developed to retailers that she could market to.

In 2008, the impacts of the global credit crunch began to bear down on the global economy. The South African economy responded soon afterwards. In order to sustain her growth, Charlotte had to innovate. This meant two actions.

First, she had to get the price of her materials down. At the same time, she had to broaden the range of products she had under specific price points and increase the range of designs to appeal to established customers. Her first trip to China was being planned.

After two weeks in Guangdong, China, Charlotte arrived back in South Africa with her first order placed. She found a range and variety of tiles that fitted exactly what she needed and at prices that were almost 30% cheaper than her current line of supply. It was a dream trip.

When I met her in 2011, her annual turnover was a solid R18,7 million.Charlotte complained that while her turnover had grown and things were looking good (she was about to list her products with a national garden product retailer), turnover was not translating into the profit margins she once enjoyed. She was in a terrible cash crunch.

Sales forecasting

I ran the diagnostics on her business. We included the numbers, a site visit and business systems evaluation. What I discovered sent a chill down her spine.

Charlotte’s materials inventory, work-in-progress and especially finished stock ratios were a mess. After additional analysis, we discovered that the problem lay with the Chinese inventory. The levels were too high and cash was tied up in what increasingly looked like unsaleable stock.

Before importing from China, Charlotte procured locally. At most she would have a three or four day delivery cycle. Her ability to order ‘just-in-time’ was on offer all-the-time. While this was great for the first few years of her business, the demands and pressures that led to her having to import required a different approach.

China required an increase in the size of the average order and she also had to endure long lead delivery times, as the tiles were transported by ship.

Despite her experience, the stock she ordered often arrived when the season for its demand had passed. Mosaics have a fashion and novelty factor and so we quickly went to work on developing a system to create an inventory order foresight capability. It’s called a sales forecast.

Charlotte had to prepare a forecast on sales over the next year. The forecast needed to specify sales into product units. For the first time, she could get a sense of what the future plan of the business would look like. Supporting the forecasted sales was a promotional plan, something she had never aligned against a forecast.

With our ability to read the market signs and present them in product units, we developed an inventory ordering capability that took into account the manufacturing and delivery processes from the Chinese suppliers.

Included in the February orders were samples for the development of products for the following summer season. This allowed Charlotte to move to a point with her retailers where she could pre-sell the season’s products before placing orders from the Chinese manufacturers.

Forewarned is forearmed

The power of doing a well thought out sales forecast in your business provides you with advantages that you would never have thought of. In Charlotte’s case ‘forewarned is forearmed’.

Today Charlotte’s business generates a consistent R27 million with an average stock turn of around 1,4, dramatically down from the terrifying 3,2 that we first discovered. Goods are almost completely sold before they are even ordered. A nice place to be. And profitable too.

Become a Sales Process Master

Sensing the future

Forecasting isn’t about mind-reading. It’s looking to the future, and then using the numbers to make intelligent decisions today.

Stock sense

What does your inventory look like, and is it hurting your business?

Toolbox

Build your forecasting tool

Create 12 columns marked with the months of the year.

Row 1

Identify all the activities this year that will impact sales e.g. school holidays, strike season, elections, the seasons etc.

Row 2           

Forecast the business from your current clients.

  • Organise your profitable clients. It’s likely that the top 20% of your clients make up 80% of your sales. If you are dealing with consumers, segment them and identify which segments make up your 80% of sales.
  • Forecast their performance this year: Take a view on growth given the poor economy — say 10% and take your 20% customer segment and grow their revenues over the period by 10%.

Row 3

Forecast sales from new clients against your product/service range.

  • Take all your products or services and do the same — segment them into the top 20% that brings in 80% of your sales. List them over the 12 month period.
  • dentify what promotional activity you want to implement this year and locate these activities over the 12 month period.
  • Take a view on what new sales you will generate against your top 20% products/services in response to your promotions.

Row 4

Aggregate your sales forecast for this year by adding the expected sales from current customers to the hope for sales of the new customers responding to your promotions over the year together.

You now have a forecast

It will never be right. Every month register what sales you brought in and compare to what you thought you would bring in. Did you over- or underachieve?

Ask and interrogate why and in so doing you develop the intuition of foresight through a most useful tool called the forecast. Do it now and it will serve you beyond your dreams.

Pavlo Phitidis
Pavlo Phitidis is the CEO of Aurik Business Incubator, an organisation that works with entrepreneurs to build their businesses into valuable assets. Pavlo is a regular commentator on entrepreneurship on 702 Talk Radio and 567 Cape Talk Radio. He can be contacted at www.aurik.co.za