GOALS ARE NOT FORECASTS!
“It’s a new month, and a redemption month! To hit our forecast, everybody should sell at least 2 more cars than they did last month!”
How about this one:
“We just hired 2 new sales people and they are both rockstars, ya know, great ‘car guys’. They should bring 15 more cars apiece this month! Our forecast just went up 30 cars!”
This one seems much more solid:
“In order to get an idea of our sales next month, let’s take a poll of the sales team and have each individual guess how many cars they will sell. Then we add these up and try to beat the total forecasted.”
“How many cars did we sell last December? Let’s sell 10% more this December.”
…these are all examples of goals.
A monthly sales goal can be used as a great motivational tool for the sales team, but upper management should never use such an anecdotal and archaic method to properly plan for their next month.
When establishing a realistic plan for the future, these “what does your gut tell you” sessions at the beginning of the month need to end. Immediately.
These goals are nothing more than unsubstantiated numbers plucked out of thin air. So why do we do this each month?
It is a feel good method. We pump ourselves full of piss and vinegar and lies at the beginning of the month only to be let down by month’s end.
When was the last time every single sales person met their monthly goal?
Such an absurd process often results in negativity from not achieving the goal, and/or tension between management and sales personnel, and/or animosity among the sales team.
Goals are NOT forecasts. Stop using this terminology incorrectly. A sales forecast is only as good as its accuracy. In other words, can you trust the prediction?
Forecasting methods can be as simple or as complicated as you want, but there is not a single correct method. Each dealership is unique and each one should be treated as such. One forecasting technique is not always appropriate for all stores.
The essential factor to consider is the accuracy of the forecast. As with forecasting processes, there are various methods to calculate how right, or rather, how wrong a forecast was. MAPE (Mean Absolute Percent Error) is the most ubiquitous form of measuring forecast accuracy. The following is a briefing on the basics of what your forecast should entail.
A dealership forecast should consist of 3 very basic elements:
- A seasonal index
- Current trends
- Historical accuracy check
A basic seasonal index
A basic seasonal can be established by looking at past data. Historical sales numbers will give insight into how seasonality affects sales. At Driven Data Consulting, we use a Centered Moving Average (CMA) in order to establish a seasonal index.
Current tends is a running total of monthly sales. Once the seasonality is normalized by month, a Weighted Moving Average (WMA) of the actual sales numbers is established, and this becomes the basis for the forecast. Of the variations of WMA technique, choose the one which yields the most accurate results.
Historical accuracy check or MAPE (Mean Absolute Percentage Error)
MAPE is a common form of accuracy measurement. First we find the error, or the difference between the actual and forecasted sales for each month divided by the actual. Use the absolute value of each error, then sum all periods for which there is a forecast.
Lastly, divide by the total number of periods and multiply your answer by 100 so you end up with a percent error. There are different industry standards for MAPE, but generally speaking, MAPE < 30% is considered appropriate.
In a growing industry where there exists intense performance pressure, let’s not place undue strain on ourselves by setting unrealistic or totally speculative goals. Let’s begin looking into the past in order to accurately plan for the future.
Establishing a monthly forecasting process at your dealership based on data is an excellent way to plan ahead and focus your efforts. Start with a basic forecast, measure your accuracy, then improve it over time.
Does your dealership throw unsubstantiated numbers out and call it forecasting?
How are you (your dealership) currently forecasting for Sales and/or Service?
We have an open discussion in the dealer forums – please comment over there!