Financial Projections Are Crucial to Goal Setting
Projections can help CEOs chart a course from zero sales at the start of the year to the sales objective desired by year’s end
Years ago, I sat down with a new client, and we chatted for hours. The topic: Whether I could help him determine if he would have sufficient inflow of cash to double his company sales from $4 to $8 million in the coming year.
It turned out he had a good command of his product line and product margins. On that basis, I told him we could work together to produce a set of monthly projections designed to determine if he would experience a cash shortfall.
Together, we determined there would be a shortfall. As a result, he approached his bank to increase his credit line. His company ended up doubling its sales. I helped him again the next year. Sales doubled again. I then constructed a model to help his people perform projections, and they took over in year three.
The point of the story is that the client would not have doubled his sales in two consecutive years had he not benefited from financial projections that told him he’d experience a cash shortfall, and would need to extend his credit line.
Therein lies the benefit of projections. If CEOs follow them, the projections force them to focus on the numbers. The ritual of establishing projections helps set a starting point and an end point, or goal. The projections lay out a course for the company to go from zero sales on day one to the desired year-end sales goal.
Projections are also helpful as a scoreboard with which to compare actual results. As you move through the year, you always want to compare how well your company is doing with what you projected it would do. This gives you an opportunity to adjust your actions to achieve your desired results.
Finally, projections enable CEOs to flesh out action plans for marketing and sales teams. Unless you have a methodology or program that says, “This is what we’re going to do to achieve these sales numbers,” it’s not going to happen.
Marketing and salespeople benefit from action plans that flow from the projections. What’s more, those action plans can be broken down by month, week or day to give key employees a blueprint for action. By monitoring those plans, a CEO can determine whether or not employees are getting results.
Next time around, I’ll lay out best practices in developing realistic projections, to help keep companies focused on the numbers.