Forecasting Is Challenging

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Forecasting is one of the most challenging tasks an agency leader must tackle. I’m going to make it really easy for you to forecast revenue. We need to split this up into two things, existing business and new business.

Every month look at your existing clients, and mark them as green, yellow, or red.
If they are green, that means that they are happy. If they are yellow, it doesn’t mean that they’re unhappy, but it means that things are not going as smoothly as you would like them to be.
Red means that they are unhappy. 

Then, take your existing revenue from the current month, and project it out to next month. If the customer is green, project out 100% of their revenue. If they are yellow, project out 50% of their revenue. If they are red, project out 10% of their revenue. When you’re looking at revenue for next month, it’s going to be a lot lower than you’re booking for this month. 

Let’s imagine you’ve got 15 customers, and each is paying you $10,000 a month. You’ve got 3 who are yellow, and 1 who is red. Next month, for those 3 that are yellow, instead of $30,000 a month in revenue from those folks, you’re only going to be getting  $15,000, And for that 1 who is red, instead of $10,000, you’re going to get $1,000, You have just forecasted away $24,000 a month in revenue. What does that mean? That means you can devote $24,000 worth of effort into turning those yellows and reds into greens, which you probably shouldn’t do. You should invest maybe $12,000 of effort into improving those, but you also want to find a way to fill that $24,000 hole. You have to go out at $10,000 a month, and land 3 clients to fill in that hole. That can help you set your business goals for the next month, or the next quarter.

When we talk about forecasting new business, you’ve got to have a realistic way to think, “What’s the likelihood of this person closing?” Optimistically, if you just want to be simple about it, you take all of your existing opportunities and project out that 40% of them are going to close. That would be an awesome close rate. Let’s imagine we had 10 people in the pipeline at $10,000 a month. That’s $100,000 in revenue. You could project out that only 40 of that’s going to close, but that’s probably too optimistic. Of the 10 folks in your pipeline, there’s probably 1 who’s ready to buy now, and there are 2 who are probably ready to buy somewhere in the next 30 days. That’s 3 folks that are going to close in the next 30 days. That means that 7 out of those 10 are going to close sometime in the future, if they close at all.

When you’re managing your pipeline, be super pessimistic. If you’ve got 10 folks, and you’re only confident 1 is going to close now, that means you need to get 20 new people into your pipeline. You need to constantly smash down your expectations of new business. Try to manage your optimism, and think about it critically. 

There’s this old adage that, at any given time, only 3% of the potential customers in the market are in the buying zone. If you want to think about that from your perspective, let’s just call it 10%. Just imagine that only 10% of the new business you’re looking at is going to close. That’s going to be much closer than if you’re projecting out 80%. When you manage these two things, projecting out that you’re going to lose a bunch of existing revenue, and very little of your pipeline is going to close, that is going to ensure that you are aggressively trying to grow and stabilize your business. What happens, especially when your monthly revenue is okay, is you might get a little complacent. That’s why I want to shock you with this green, yellow, red paradigm, and I want to shock you by thinking only 1 out of 10 people are going to close.

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