As soon as I hear one of my leaders in a sales review trying to blame the market for not meeting their budget numbers, the alarm bells begin ringing.
This is because at the point we agree on our annual forecasts, I never try to pressure management to put forward volumes and margins that are unachievable, and I always try to put myself in their shoes and consider what I think I’d be capable of delivering. Obviously, the biggest guide to these numbers is the last 12 months’ performance, especially the current run rate, overlaid with the additional sales and marketing investment we plan to make going forward.
Watch Out for Pump and Dump
Many leaders in other businesses I have come across over the years have obviously not had this forecasting discipline, and this getting-ahead-of-themselves phenomenon is sometimes because maybe they want to impress the external market, or they are being pressured and encouraged by advisers or bankers who actually have no idea what is realistically achievable. That usually ends badly and often fatally for the business, and there is a long list of companies that have gone this way over the last few years after some crazy early valuations. The often-used slang for this phenomenon is “pump and dump!”
For me, forecasts must be made very carefully and take many different factors into account if I am going to sign them off and put my reputation on the line, as they ultimately feed into our overall plan. These factors include:
- The strength of our product in the market
- How good our supply prices are
- Our local lead generation and marketing capabilities
- The current sales team’s performance
- Competitor activity
- Technology requirements
- How last year’s new customers will feed through into next year’s figures
- And much more
If this is all done correctly, even significant market changes, such as a country moving from growth to recession and a swing of a few percentage points of GDP, should have little effect on our business. If there are small changes that need adjustment, the levers our management team has at its disposal can be pulled to make sure we stay on track.
Tougher Times Bring Margin Elasticity
A good example of this type of midyear change is our response to the several recessions I’ve experienced over the years, during which our bad debt numbers always increase as business insolvencies rise, especially in the SME sector. This might mean a sudden additional cost to the business of 0.10, 0.20, or even up to 0.50 ppl across a whole country’s volume, which could add up to several million pounds over a year if it’s one of our larger countries. However, I do not accept this as an explanation for the underperformance of our net profit numbers, and I expect my team members to increase their margins to offset this shortfall. Experience has shown me that if everyone in the market feels the same pain, then margin elasticity occurs, and we can recover our numbers without losing market position. If we didn’t operate this way, our financial performance would decline, putting us under pressure with bankers and suppliers, as well as some unhappy shareholders.
Hence, for me, the answer to underperformance in a particular part of our operations over the years has normally been that the team there isn’t good enough, and we need to make some changes. The drops tend to come hand in hand with being under-recruited, and the specific leader has failed to understand that if they don’t operate on or close to the head count, then they have no chance of meeting their budget targets, however good their individual salespeople are.
Good leaders always have stronger management teams under them and consequently have reduced staff churn and better overall performance. They also spend a larger percentage of their working week on recruiting and people development, as well as on managing poor performers out of the business. So, don’t agree to budgets you don’t think are achievable, and don’t let your team blame the market for its poor performance.