Sales & Marketings Unique Challenge The Sales and Marketing function faces a unique compliance obstacle. More than any other function it relies on guesswork for its most critical financial instruments. Sales forecasts generate guesses about what a given market demand should be. Sales plans generate guesses about how the company should capture that demand. Opportunity assessments generate guesses about a company or products addressable market. Critically, many other business functions depend on sales and marketings guesses:

“ Finance projects cost and profit levels and capital needs based on a given sales forecast, and usually publishes its expectations to Wall Street.

“ For a manufacturer, operations plans what to produce, and thus what raw materials to procure based on a given sales plan or forecast. Service organizations allocate human capital and adjust fulfillment plans. A real-world example demonstrates the potential impact of getting it wrong: a major airline over-forecast nearly 60,000 seats crossing the Atlantic four summers ago, and had to swallow enormous costs from the capacity it built to accommodate these phantom flyers. It had already paid access fees to airports, allocated planes, entered longer term fuel contracts, etc. When summer came, planes with as few as 15 passengers would make the crossing. The ticket charges couldnt even pay for the direct costs of making the flight!

Unfortunately, sales projections are often based on the plan of what executives want to sell, not on an analytic assessment of the actual market demand at the time of the forecast. The Next most common method is to premise the forecast on some loose version of historical analysis: this is what we sold last year; this year, well beat it by 2%. Will Sarbanes-Oxley digest such back-of-the-envelope or simplistic analyses? Do you want to take the risk to find out? Taking a chance is probably not a good idea. In practical terms, compliance will require transparent, accurate and effective processes for generating forecasts.

In fact, any financial report that will eventually be used or relied upon by the CFO or any other part of the business should be drafted with awareness that someday, along with hundreds of thousands of other documents, it may end up as part of a response to a subpoena. Ordinarily, future statements are not actionable, (weve all seen the disclaimer at the bottom of nearly every press release) but that is not the point. Its not that the reports and forecasts of sales & marketing contain prognostication; its about whether those reports and forecasts were developed through sound analytic and business practices “ i.e. under an umbrella of internal control. While the prognostications themselves may be beyond legal recourse, the processes behind them probably are not. (Continued in Part 5)

Disclaimer

The information and opinions expressed on this paper are not intended to be a comprehensive description, nor to provide legal advice, and should not be treated as a substitute for specific advice concerning individual situations. While the author and Upper Quadrant has made every attempt to ensure that the information contained in this document is accurate, neither the author nor Upper Quadrant is responsible for any errors or omissions, or for the results obtained from the use of this information.