Recently, I received a sales forecast from a client who was seeking a bank loan, and wanted me to review the projections before submitting it to a lender. It predicted staggering growth for a company with questionable financial capability in a market where growth is hard to attain.
I had to chuckle as I could see why it can be said that CEOs are considered optimistic, and CFOs( m y former incarnation), are more a “conservative” tilt in their thinking.
This company made a mistake that we see often – it failed to understand the difference between a pipe dream and a realistic forecast backed by empirical evidence and sound logic.
REALITY: There is adequate and peer-reviewed documentation that supports your numbers.
FANTASY: You lack supporting documentation that is sufficient or lacks independent review to support your numbers.
It is imperative that business owners and their executive teams learn to make this distinction. Sales forecasts are linchpin reporting relied on by third parties such as bankers, investors, and senior management. People rely on these documents as they consider important business decisions, including:
- whether to purchase your company;
- whether to invest in your company;
- whether to do business with your company.
Sales forecasts also influence internal decision-making and nearly every aspect of a company’s short- and long-term planning, including personnel decisions.
Let’s take a look at what constitutes a realistic backlog and pipeline, and what factors you should consider to help you assess them more accurately. A backlog consists of contracts you have won but not yet completed. For government contractors, a backlog consists of two components:
- Funded backlog, i.e., cases in which the government client has issued a funding document that says you are guaranteed to be paid X amount for work performed under the contract.
- Unfunded backlog, i.e., work that has been authorized but not yet funded. The unfunded backlog amount is equal to the Total Contract Value minus the Funded Value.
A pipeline is the potential business you can bring in over a given time period. It is Opportunity Sales Dollars that are factored with probability percentages to calculate reasonable and supportable Potential Sales Dollars. Government contractors should base their pipelines on submitted proposals.
To distinguish reality from fantasy, support your backlog and pipeline with the following documentation and data:
- Financial capability of the company: Your ability to fund growth through adequate financing.
- Company history/win rates: Background on previous projects you have completed and the percentage of proposals you have historically won.
- Company management: A summary of your senior management team to show credibility.
- Contracts in hand and your most recent backlog reports, reviewed by an independent third party.
- Pipeline: A list of proposals submitted with potential values conservatively assessed.
- Disclosures: Relevant information that could affect contracts and potential contracts. For example, could any of the contracts you are using to support the backlog be cancelled or terminated? Be upfront with this information.
As we all know, you don’t do business in a vacuum. In government contracting, your company is affected by factors that are out of your control, such as political decisions around the government’s procurement of products and services and the competitive landscape. To help you assess the stability of your backlog and the potential of your pipeline, ask yourself the following:
- Who are your government clients? Are their agencies being cut back or do they have spending growth in the federal budget?
- How could the political environment affect your sales forecast? Are federal budget priorities congruent with your backlog/pipeline forecasts?
- Who are your competitors? Are you a small fish in a big pond? Do you have an existing business relationship with the potential customer? The government likes to work with companies it has used before. Be realistic. If you are up against larger organizations with a track record of winning similar jobs, your business may be less likely to win the contract.
It is okay to be optimistic, but not at the expense of realism. A more accurate and honest sales forecast, built on a backlog and pipeline that can be supported with documentation and logic, isn’t just important for third parties – it matters for you, the business owner.
With accurate figures, you will make better decisions for your business and be more likely to hit your targets. For example, if you conclude that you are unlikely to land a percentage of your proposals, you know exactly how much work needs to be done to close that gap.
CEOs and CFOs can agree—it is better to be realistic than to hold on to false hope and risk falling short of your sales goals. Drive your business with backlogs and pipelines that are based on reality, not fantasy.