Lessons Learned – Forecasting Improved Sales Revenue

The Harbus is delighted to introduce our latest columnist, HBS alumnus and Entrepreneur-in-Residence, Jim Sharpe, who will be sharing business lessons learned over the course of his career.

I’ve learned that predicting increases in Sales Revenue is much more elusive than achieving near term margin improvements, especially the further you are removed from the final “customer”.

For my sons who are in college and grad school, and are also professional jugglers, their revenue model is immediate and directly related to their efforts – they sign up for more performance “slots” at Boston’s Faneuil Hall and the tips in their collection hat increase; oh, if only my business model had been that easy!

At Extrusion Technology, we were very far down the supply chain as the OEM (Original Equipment Manufacturer) to our circuit board Contract Manufacturing customers (Flextronics, etc.) who sold their boards (with our aluminum on it) to large Telecom Equipment suppliers (Alcatel, etc.) who sold their product to the Telecom companies (Verizon, etc.) who used it to support voice and data systems from their phone and wireless customers! ÿAs a result, we barely had any ability to either “Push” or “Pull” sales.

All kinds of things got in the way of seeing the revenue stream increase – iterations of revisions as product was developed, extensive field testing and more revisions, slow ramp up as the “legacy” products were replaced, and finally a “natural” reduction in unit volumes as each new generation of product followed Moore’s Law of being faster and more efficient. ÿThe payoff, however, was long runs of 3-7 years of steady volume.

Much of the this sales “process” was beyond our control and our sales team and even our customers were challenged to predict the future. Developing a “pipeline” of prospects and projects turned out to have the most impact on future revenues. It turned out that future revenues were more directly related to insuring that the “pipeline” of new prospects, customer programs, developments, improvements and being responsive to customer requests/demands along the way. I struggled with this for many years since it was difficult to imagine the time it was taking to develop a revenue stream. ÿIt took the advice of a private equity investor in our company to develop the discipline of focusing on the pipeline “funnel” instead of daily order levels.

On the other hand, attacking material costs, wringing out concessions from vendors as volumes increased, pressing to improve manufacturing processes with each succeeding order and raising prices for lower volume/small orders all contributed to improved margins during these initial cycles and paid off as volume finally did ramp up. ÿWe found a lot of ways to continuously improve our manufacturing processes and to “wring out” more savings.

Earlier in my career working at larger companies the drive for “revenue growth” seemed to be much more acute. It took a number of years to learn the difficult lesson of over-forecasting, missing the revenue levels and having to scramble to deliver on the bottom line.

Keeping focused on the bottom line rather than the top line led to less disappointments, happier bankers and CFO (Debby) and larger quarterly bonuses for our employees. For me, revenue growth became much less important than focusing on margins and profitability – a different kind of juggling!

Jim Sharpe (MBA `76) is one of theÿHBS Entrepreneurs-in-Residence for the 2009-2010 academic year, who ran an aluminum manufacturing business for 21 years while working with his wife, Debby Stein Sharpe (MBA `81) after both left careers at GE and large companies and sold the business in late 2008. ÿJim can be reached at: jsharpe@hbs.edu, 310 Rock Center, 617-496-6285.