The sales forecast and quota are related to the critical business concept of budgeting. Budgeting applies quantitative controls to navigate the inherent risks and uncertainties of operating a business. Companies are concerned with measuring and predicting their business’s future economic performance and planning accordingly. The business tools of sales forecasts, quotas and budgets are guideposts enabling companies to profitably manage economic uncertainties and vicissitudes and best plan for asset optimization. Reviewing the history of forecasting, quotas and budgeting, allows us to contextualize these concepts and thereby gain greater appreciation for their role in today’s business world.
Captain Robert FitzRoy (1805-1865) of the English Royal Navy invented the word “forecast” in the 19th century to more accurately predict the weather for safeguarding mariners. Fitzroy was captain of the HMS Beagle and chose co-patriot Charles Darwin (1809-1882) to accompany him as a naturalist in his 5-year journey and circumnavigation of the globe from 1831 to 1836. This trip led to Darwin’s theory of evolution and watershed contribution to science. FitzRoy also served as Governor-General of New Zealand and Vice Admiral.
FitzRoy founded The Meteorological Office, now known as The Met, in 1854 as a branch of the Board of Trade with a staff of 3. Today The Met, with a staff of 1,500, is one of the most important worldwide bodies responsible for climate, ecological and weather forecasting. The Met is based in Exeter on FitzRoy Road, and has offices in Aberdeen, Gibraltar and the Falkland Islands. Fitzroy utilized the nascent electronic telegraphy to warn sailors of perilous weather conditions and patterns and published the first weather forecasts in “The Times” newspaper August 1, 1861 under the section “Wind and Weather Report.” Alarming weather conditions were telegraphed to coastal outposts which used visual signals consisting of drums and cones hoisted on masts to warn sailors, assisted by lanterns at night. Francis Galton (1822-1911), Charles Darwin’s cousin, collaborated with FitzRoy and using his data, created the first “weather map” that provided a visual guide of prevailing weather conditions and forecasts.
Benjamin Franklin (1706-1790) of colonial Philadelphia in the 18th century, made many key scientific meteorological observations to spur commerce and trade prior to FitzRoy and Galton. Franklin provided seasonal weather forecasts based on folk wisdom in his publication “Poor Richard’s Almanack” for farmers and mariners. Franklin coined the term “Gulph stream” now known as “Gulf Stream” to describe the hot-water, fast-moving “river” that runs along the Atlantic Ocean. Franklin as Deputy Post Master General of the American colonies was seeking a faster route for trans-Atlantic shipment. Franklin consulted with his cousin, Timothy Foldger (1732-1814), a Nantucket whaler and sea captain, before scientifically charting the clockwork current of the stream starting at the Gulf of Mexico and flowing through North America and across the Atlantic Ocean. Their collaborative “Franklin-Folder Chart” visually illustrating this “Gulph Stream” was published in 1768.
The word “budget” derives from the Latin word for “purse” and has been associated with money, merchandise and commerce since the Greek god of commerce Hermes and Roman equivalent Mercury. Budgets are concerned with managing the metaphorical purse strings and best plan for resource allocation, in the context of risk and uncertainty. The modern “budget” traces its origins to 18th century England and the government’s attempt to balance receipts with expenses. Sir Robert Walpole (1676-1745), the first English Prime Minister and Chancellor of the Exchequer in 1733, created the first “budget.” Walpole submitted his budget to Parliament by providing projected revenues against expenses to obtain approval for taxes and spending.
Frank Donaldson Brown (1885-1965) as Chief Financial Officer of General Motors (GM) made major contributions to complex corporate budgeting, planning and sales forecasting, working with Alfred P. Sloan (1875-1966), Chief Executive Officer of Detroit-based GM. Brown in the 1920s broke down assets with fixed capital (plant, equipment, etc.) and working capital (cash, inventory, etc.) in his budget analysis. He used running sales reports issued every 10-days to help optimize sales planning, inventory management and production planning. Donaldson’s dynamic budgeting allowed for a feedback loop to help inform asset planning and optimization.
James O. McKinsey (1889-1937), who founded the eponymous consulting agency and taught at the University of Chicago, made pioneering contributions to budgeting and planning. McKinsey wrote the book “Business Budgeting” in 1922, establishing his expertise using budgets to better control business uncertainties and allow for more efficient financial planning. According to McKinsey, sales forecasting is a critical lynchpin to overall corporate budgets and planning:
"Goods are purchased or produced in order to be sold…It is obvious, therefore, that wise administration will take into consideration sales expectancies in planning purchases or production…The failure to limit purchases and production to correspond with sales possibilities has caused many firms heavy losses... But the quantity of production is determined by the volume of sales; so in the end the sales campaign determines the plant and equipment program."
Marvin Bower (1903-2003), considered the modern “founder” of McKinsey and leader for 17 years as managing director from 1950 to 1967, is credited with seminal contributions to budgeting. Bower recommended “scenario planning” in budgeting utilizing multiple contingencies for a myriad of possibilities versus a rigid, fixed plan.
The concept of a “sales quota” traces to John Henry Patterson (1844-1922) and Dayton- Ohio based National Cash Register at the turn of the 20th century. Patterson employed a scientific means to plan sales growth with assigned sales quotas based on universal criteria such as population size, advertising dollars, exclusive protected territory, etc. The word “quota” derives from the Latin “quotus” meaning “of what number” and relating to “”quot” or “how many.” The sales quota today relates to the quantifiable portion a salesperson contributes to the sales of the company from a sales territory.
Budgeting, setting sales quotas and determining sales forecasts benefited from the revolution in personal computing. The creation of Lotus 1-2-3 in 1983 (purchased by IBM in 1995 for $3.5 billion) and Microsoft Excel spreadsheets in 1987 with pivot tables provided readily accessible financial models that could be changed instantly. Today artificial intelligence and regression analysis aid in even more data based and sophisticated prediction forecasts. However, the intuitive, educated guestimates based on the metaphorical “dead reckoning” of mental landmarks is a principle commonly used navigating business uncertainties. Educated guesstimates based on historical experience, human insight, and relationships remain a key determinant, along with data based scientific refinement, underpinning successful numerical formulation of quotas, forecasts and budgets.
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