Imagine an orchestra without a conductor — without guidance, there’s no unity or harmony, just like a business without revenue forecasting.
Revenue forecasting provides an in-depth look at how much money you’re earning and how much you’re losing, empowering effective decision-making. Hit your financial goals like an instrument striking the right note with professional service automation tools that manage resources, automate processes and provide real-time project visibility.
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Ready to predict your financial forecast like a meteorologist mastering predicting the weather? We’re here to help! In this article, we’ll fill you in on everything revenue forecasting.
Here’s what we’ll cover:
- What Is Revenue Forecasting?
- How Does Revenue Forecasting Work?
- Revenue Forecasting Steps
- Benefits
- Next Steps
What Is Revenue Forecasting?
Revenue forecasting predicts how much money your business will make within a specific timeframe, like every month or year.
Forecasting profits is challenging, like guessing a number someone else is thinking. Fortunately, revenue forecasting simplifies the process by analyzing how well your business has performed in the past and how it’s currently performing. This info makes getting detailed estimates and data-driven decisions more manageable.
How Does Revenue Forecasting Work?
Forecasting relies on data. After you have the data you need, it’s time to strategize. But how does revenue forecasting work exactly?
Revenue forecasting typically involves three principles: analysis, management and strategy. Ready to predict and estimate your revenue? Follow the process below.
1. Analysis
Kickstart your analysis by gathering data, like financial records and relevant performance metrics. Historical data is the key to revenue forecasting. As ironic as it sounds to move your business forward, you start by referencing the past.
During your analysis process, ask the following questions:
- Where is your money going?
- Where are the most profits coming from?
- Where could profits be heading?
- What supply and demand patterns do you notice?
- How reliable is your current inventory process?
- Is your recordkeeping as efficient as possible?
- What factors are driving your revenue growth?
- How accurate and reliable are your data sources?
- Are there any potential external influences that might impact your profits?
- Is your data backed up for future reference?
Remember, analyzing revenue forecasting is an ongoing process that requires regular review and adjustment. By routinely analyzing your revenue forecasting with these questions, you can refine your forecasting method, improve decision-making and drive revenue growth.
2. Management
The second step in revenue forecasting is management. Forecasting leads back to your business’s day-to-day structures, like revenue streams.
During this step, evaluate where your profits may go and where your revenue is currently. Knowing where your money is coming from and should be going simplifies strategizing.
Collaborate with sales and marketing teams to align revenue targets and identify potential revenue drivers and strategies. Continuously monitor and update your forecast using real-time data, making adjustments as necessary to reflect any changes in market conditions or internal circumstances. Conduct regular reviews assessing forecasts’ accuracy and look for improvement areas.
3. Strategy
In the final step, use forecasting to model out various scenarios to find the best strategy for growing your company. Understanding how these scenarios affect your company and the goals you’re working towards helps navigate future business needs.
Understanding the basic steps of revenue forecasting is only the starting point. Revenue forecasting is ever-changing, so adapting to different revenue forecasting methods is pivotal. Let’s check out the various methods!
Judgment Forecasting
One of the most frequently used revenue forecasting methods is judgment forecasting. If your business is newer and lacks relevant information for creating data points, judgment forecasting is exactly what you need.
Judgment forecasting is where you look at feedback from potential customers, experts in the industry and experienced sales team members to determine required data points.
Uses for judgment forecasting:
- Customer surveys
- SalesForce surveys
- Delphi method
- Executive input
Customer Surveys
A customer survey in the context of revenue forecasting involves asking customers about how much they commonly spend on items. This method is ideal for eliminating internal bias from forecasts.
Surveys also provide a bigger picture of what products have a stronger reaction and ensure better numbers.
Sales Force Surveys
Sales force surveys determine how the business is doing with various products. Most salespeople have insider knowledge about the specific products they sell, and as the saying goes, knowledge is power.
Sales surveys are critical if you’re handling multiple product lines and must forecast each product.
Delphi Method
This method of judgment forecasting is when you give experts in your industry questionnaires without members collaborating on their responses. The Delphi Method provides a cohesive conclusion eliminating the persuasive effects of the majority.
Executive Input
Forecasting with executive input helps drive business decisions like when to hire, when to skip hiring and when to take on new projects.
Executives have expertise and valuable perspectives on market trends, competitive analysis and overall business performance. This method is beneficial for businesses going through significant transitions like a merger.
Quantitative Forecasting
Quantitative forecasting is less about judgment and more reliant on mathematics, so have your calculator nearby. This type of forecasting utilizes numbers to prove a point and requires an objective point of view about the business overall.
Methods that quantitatively forecasting favors are:
- Naïve Forecast
- Seasonal Forecast
- Revenue Run Rate
- Historical Growth Rate
- Linear Regression
Workday’s revenue forecasting dashboard. Source
Naïve Forecast
The naïve forecasting method assumes that you’re performing the same as you have by only using past data to create estimates.
This type of revenue forecast means this technique won’t work for revenue forecasting, trends, patterns or other influences.
For example: If you made $200k last quarter, the Naïve Forecast assumes you’ll also earn $200k in the next quarter.
Seasonal Forecast
Seasonal forecasting (also known as seasonal indexing) uses historical seasonal data to predict what similar seasonal data you’ll recreate.
The gist is that you’ll use related seasonal data to determine each corresponding season’s forecast.
Seasonal forecasting looks like this:
Season 1 + Season 1 + Season 2 ÷ 3 = average performance in every single Season 1.
Revenue Run Rate
The Revenue run rate predicts your EOY (end of year). Collect performance data you’re hoping to project, like the number of projects closed, then multiply that number by the number of periods in a year.
Customize your revenue run rate to be time specific to your needs, like quarterly or monthly.
Historical Growth Rate
When looking at a revenue forecast using historical growth data, you’re looking back at the past to see how you’ve grown.
You’d want to use a historical growth rate when forecasting multiple years at one time, but it isn’t very accurate for yearly forecasts.
Linear Regression
When you know what product or idea creates revenue, a linear regression revenue forecast is what you’ll need. Linear regression means that you will track that one thing, whether it’s your sales marketing, direct mail marketing or email marketing.
Use linear regression to get the average amount you make per marketing action until you figure out the ideal number of emails or sales to earn the highest.
Revenue Forecasting Steps for Beginners
When starting with forecasting, it’s important to have a plan with steps to follow to stay on track with your revenue estimates.
Some typical first steps are:
- Establishing timelines
- Forecasting expenses
- Determining what drives or hinders growth
- Predicting sales
- Combining sales and expenses to reach your project sales
While you can’t use a crystal ball to see your financial future, you still have some control over your business’s revenue destiny. Check out the steps below; you’ll forecast like a pro in no time!
Establish Timelines
How often do you want to forecast? You can run a forecast on any schedule. It just has to fit your business.
When considering timelines, consider how long your projects last, when campaigns end and how long your average sales cycle lasts. The numbers you envision here will help you get your overall forecasting timeline.
Forecast Expenses
Plan your expenses forecast and gather the data you plan to use. Expanded forecasting is as simple as looking for fixed costs such as rent, utilities, phone bills, accounting, insurance, technology and software.
After this, gather your variable costs, which fluctuate over time based on the economy, sales volume, or demand.
Find Out What Drives or Hinders Growth
Knowing what drives and hinders your market, whatever niche and need you’re filling, can help ensure you do nothing to hinder yourself. Is your business seasonal? If so, is the off-season poor for you? What season is stronger?
Move into the next step with these answers in mind.
Predict Sales
Once you have an idea of growth, predicting your sales is a breeze. Depending on the type of business and the answers you gave in the above area, your sales prediction will consider everything that affects your business’s income.
When predicting sales, consider the following:
- Sales cycle
- The current pipeline
- Lead generation
- The conversation rate at which you’re earning leads and obtaining clients
- The average revenue for each client type
Combine Sales and Expenses
For the final act of forecasting, put your sales vs. your expenses to see a forecast of your yearly business. The simple formula for projecting sales is: Number of customers x average sale value x number of units = projected sales.
Primary Benefits
Revenue forecasting takes your data from the past or projected data from the future and creates various visualizations, so you can see how your business grows over time.
That’s just the cherry on top of other benefits of revenue forecasting. Other benefits include:
- Maximized Marketing Efforts: Gaining insight into your business through forecasting shows what revenue channels are the most profitable and ensures you’re putting enough money into the appropriate stream for the highest gain.
- Enhanced Hiring & Investing: Get a big-picture view of your company, seeing your slowest and busiest times and ensuring you hire the correct amount of people for those times.
- Proactive Decision-Making: View how your business will do, whether it will do better or worse, according to the model. You can then use that predictive analysis to make proactive decisions about your business.
- Increased Cash Flow: Determine what’s draining more money than it brings in and how to budget across your company, putting the money-makers first.
- Added Automation: Professional service automation tools collect data and promptly point out relevant trends. Automating tools don’t just save time; they save money and prevent burnout.
- Improved Visibility: From start-up to enterprise, every business relies on making a profit. Revenue forecasting provides insight helping you navigate through highs and lows with reliable estimates.
Next Steps
Revenue forecasting is a bona fide way to look at the past and use that history to shape your future (like Back to the Future but with revenue projections specifically).
Now that you know the basic steps of revenue forecasting, you can spot your opportunities and weaknesses, then plan accordingly.
Ready to start, but unlike Marty McFly, Doc isn’t telling you what happens next? No problem! If you want to see a positive impact from revenue forecasting but are unsure which product is the best fit, check out our free comparison report and see how products stack up against your needs (without worrying about drastically altering the future).
Have you used revenue forecasting already? What’s your favorite way to forecast? Let us know in the comments!