Intelligence is the ability to adapt to change
~ Stephen Hawking
At OptiFuse, January is reserved for creating an operating budget for the upcoming year.
Generally, I will first meet with our sales staff to try and determine what our projected revenues will be. Together, we will review the past sales history of each and every customer.
We then will try and assess whether this customer has sales that are trending up, trending down, or remaining constant. We will then take a look at potential projects and new business opportunities at the customer. Finally we will assign a projected sales number to that particular customer in the box beside the account name.
One by one, we go through the entire account list.
After which time, we will total the projected revenues contributed by each customer.
To this total, we will then add a "new business" sales number. This is some random number that we seemingly select out of thin air. This pie-in-the-sky number is a way to try and account for those new sales opportunities that are completely unforeseen in January but will somehow materialize before the year-end.
Total those two numbers together and voila... there you have it... our projected revenue for the upcoming year!
At that point the "fuzzy math" gets a little better.
With incredible accuracy, the rest of the numbers follow a very logical and predictable path.
We know within a couple of percentage points, what our production and freight costs will be. Applying this percentage to the sales number, we can very accurately predict what our annual gross profit will be.
Using historical data, we know within a couple of percentage points, what our occupancy, compensation, operations, sales, and interest expenses will be.
Subtracting the expenses from the gross profit, we can then predict our net profit.
We then use time-tested benchmarks to determine our optimal inventory days, A/R days and A/P days. This helps us to manage our cash-flows.
This budgeting process is textbook management and accounting... I’m certain that the late management legend and business guru, Peter Drucker, would most likely approve...
...but somehow, theory rarely conforms to reality... it just never seems to work in real life...
The fundamental flaw is that we have no real idea what our true revenues will be from one year to another. The expense side is generally predictable. This is because expenses are based on our own actions.
Conversely, revenues are unpredictable because they are solely dependent upon the actions of other people (customers).
Sure... we can try and make calculations based on previous sales years... we can look at back-log and try to use that as a gauge for future revenues... we can plug in an educated estimate as to what we reasonably can expect for unknown sales opportunities...
...but in the end... it’s all just a hopeful guess trying to predict what the buying habits of our customers and potential customers might be over the next 12 months.
A Tale of Three Years
Over the course of the last three years at OptiFuse, we have been significantly wrong with our revenue projections... which needless to say... caused us a multitude of management problems along the way.
In 2010, in the middle of what has been characterized as the worst economic conditions in our lifetime, our sales revenues were up over 30% from what should have been expected in early January.
We rationalized this great growth in sales as validation that our message was starting to resonate with our customers and the marketplace in general. Our products were being readily accepted as a low-cost / high-quality alternative to the incumbent market leaders.
Due to the surging sales, expenses and inventory levels were significantly increased to keep up with demand growth.
We were finally on our way to hyper-growth and the riches that would certainly soon follow...
In 2010, the company had turned a corner and in the year that followed, it was our intention to keep the upward sales trend moving along the same direction.
In January of 2011, our team concluded that we could reasonably expect sales to continue to grow... at worst case... grow at 10-15%.
Well, so much for the great crystal ball... Sales in 2011 were down almost 15% from the year before (not 15% down from the budget number... 15% down from the previous year!).
There was no reasonable explanation for the drop in sales. The global economy seemed to be recovering, the stock market was up, and overall, the general consensus was that the worst of the recession was behind us.
Still in the end, our customers (based on demand from their customers) weren’t buying as much of our product.
Our product quality had not changed... our pricing had not changed... and our customer service levels had not changed...
We were at a loss as to what predictors we had missed... what did change?... what did we do wrong?...
Due to the losses in sales, we needed to react sharply and quickly reduced inventory and expenses. Fortunately we reacted fast enough to the changing conditions so an economic catastrophe was averted.
After a disastrous 2011, we needed to buckle down and get back to basics.
We decided that we needed to get ourselves out of the office and spend more time in front of customers.
We needed to update our sales literature, invest in sample kits, and revamp our website.
The problem was that we were still smarting from lower than expected sales the year before so there was very little extra cash to invest in these worthwhile projects needed to once again grow the company.
And to top it all off... these investments were still wild gambles... there were no guarantees that they would actually pay dividends any time soon...
After a great amount of soul-searching and some debt restructuring, the decision was made to move forward on these projects despite the inherent risks...
A national sales manager was hired, a new full-line catalog was created, and a completely revamped website was launched in 2012.
It appears that the gamble seemed to have paid off...
Year-on-year sales were up over 40% in 2012.
Now specifically... why were sales up?... well unfortunately, I truly cannot answer that question...
I’d like to believe that it was hard-work and doing all the right things right... but in the end... I’m not really certain of anything anymore...
The "foreseeable future" is an oxymoron.
We know our customers, our products, and our market better than almost anyone in our industry... but even with all of that knowledge, I do not believe that we can truly accurately predict what 2013 (and beyond) will hold for me and OptiFuse.
The lesson here today is that no one can accurately predict the future... regardless of how much data, experience, skills, and knowledge one has. Markets are still unreliable and move faster than ever (in both directions).
My best advice is to try and continuously move with the changing environment... constantly re-examining our positions and our strategies... and adapting to the changes quickly.
The foreseeable future is but a few minutes from now...
Thank you very much for your support of OptiFuse as we find ways to quickly adapt to our customer’s needs.
Wait... my phone is ringing... my foreseeable future could be changing...
Email - firstname.lastname@example.org
Website - www.optifuse.com
Blog - www.optifuse.blogspot.com
Twitter - @OptiFuse