What Is Revenue Forecasting?
Projecting and forecasting your revenues are one of the most essential parts of budgeting. The foundation of your budget is the proper assessment of your core revenue stream. The sale of assets or profits from investments are irregular revenues that can be considered separately.
How To Forecast Revenue
1. Decide if you are going to use judgement forecasting, quantitative forecasting or a combination of both.
Judgement forecasting as the name suggests is the process of using intuition and experience to forecast the year’s income and expenses. On the other hand, quantitative forecasting is a more scientific approach and involves using previous years revenue data from your own business or other similar businesses in the industry as a basis for tracking trends and making predictions. A combination of these two methods will help you achieve a more accurate prediction of the upcoming fiscal year.
2. Use the previous years’ revenue statement
Start by making the base of your prediction from the previous years’ revenue statement. Consider changes that may have occurred since then in terms of personnel, products, pricing, competition and any other factors that could be of consequence to your future revenue.
3. Calculate the anticipated revenue.
This can be done by taking the average selling price (ASP) for future periods and multiplying it by the number of expected units sold. It is important to separate individual income sources to get a clearer picture of the variables affecting each revenue stream. For example online vs. retail sales or different product lines.
4. Review and update the forecast on a regular basis
This needs to be done to reflect the ground realities of the business. Input changes at least once a quarter if not once a month.
How do you calculate projected revenue?
The amount of money that a company is expected and estimated to generate during a specific period is called the projected revenue. The accounting period being considered could refer to monthly, quarterly or annual periods. These projections in revenue are made using a combination of research and internal knowledge.
1. Review Historical Data
In order to calculate projected revenue, begin by reviewing your performance over the last three years. Use your records to not only look at annual figures but to also compare the year-to-year data according to quarters to spot any specific revenue trends like slow periods to properly project cash flow. The last eighteen months of revenue should be looked at carefully as it will reflect any consistent upward or downward trends.
2. Investigate Marketplace Trends
Pay attention to the chatter in your industry. Are they predicting any trends that might affect your sales? Scan websites, social media and print media of trade or professional associations to get information that might affect your revenue. Take into account technological developments, legislation, price increases and increased competition. Also remember to check out online issues of trade magazines, white papers, research studies and academic essays.
3. Project Your Sales
A variety of parameters need to be taken into account while projecting sales with your sales team. The categories that you need to include while estimating your revenues are customers, distribution channels, products, territories and sales reps. Contact large customers to discuss their plans regarding your products for the coming year, for consumers, use online or phone surveys to understand their planned consumption of your product or service during the coming year.
Focus group discussions can also be helpful. While making your sales and revenue projections, divide them into three categories, optimistic, realistic and pessimistic possibilities.
4. Estimate Receivables Turnover
Along with projecting your sales revenues, it is also important to estimate when it will arrive to help with your cash flow planning. Sales don’t necessarily result in immediate cash, so project your revenues based on your credit terms and customer’s payment histories. Calculate bad debts that you have incurred in the past three years and discounts that had to be offered on receivables to speed up cash recovery.
Why is revenue forecasting important?
Forecasting your revenue is not just about planning your budget. There are many benefits to this business practice. Some of them are:
1. More Investors
Knowing how to forecast revenue, can attract investors whether you are an entrepreneur or an established business. Investors favour revenue forecasts that are well-researched, detailed and backed by facts, predictions and market trends. They need to be convinced that your business is a lucrative and smart investment.
2. Helps To Budget Business Expenses
Making an annual revenue forecast with reliable tools and methods can help with the way you budget your business expenses right from the beginning. It can help you compare your progress and ensure that you don’t veer away from the plan. Revenue forecasting can help you most importantly accomplish your desired goals.
3. Justify Hiring Decisions
With revenue forecasting, you will be able to hire new people and expand teams if you can justify how an expanded team will increase revenue. It will let you know if you can afford new hiring and how much you can pay them.
4. Execute Strategic Planning
One of the important benefits of revenue forecasting is that it enables you to make strategic plans as well as informs you as to how soon you can implement them. Knowing the optimal time to invest will assist you in gaining optimum benefits.
5. Improve Scheduling
You will be surprised to note that knowing how to forecast revenue can also help you manage your production scheduling. It can help to prevent bottlenecks that lead to a loss in sales. The forecasts also help you identify your busiest days and those that are likely to result in downtime. This information will help you cut your losses and efficiently plan your production tasks especially during sluggish periods.
6. Know Your Customers Better
Revenue forecasting allows for valuable customer insights, the analysis of customer patterns and sales data can help with the prediction of customer behaviour and future sales. Better knowledge of the customer can aid in preparing the team for product improvement, pricing and marketing.
7. Manage Cash Flow And Credit
Effective cash flow management is one of the most important reasons for forecasting revenue. It allows you to efficiently plan the timely delivery of your payments, project when you will receive them. It is the best way to avoid generating late fees as well as missing out on payments to vendors and suppliers. With revenue forecasting, it becomes easier to obtain and negotiate credit for unexpected expenses or starting a new venture.
Understanding how to forecast revenues is an important part of future business planning. You need to be aware of approximate business revenue, expected cash flow and expected growth. It does not give you an exact figure but definitely helps you get as accurate as is possible.
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