Published on Friday, February 22, 2019
Since you’ve come here to find out how to forecast revenue and growth, we’re sure you know the value and importance of the practice. In the world of business, having a clear understanding of your past and current finances, and knowing where you are going financially, is imperative to making the best decisions and plans for your organization. In fact, there are many benefits that come with revenue forecasting.
Despite this, some still turn their heads to the idea, and avoid doing it, since creating accurate forecasts can be difficult and time-consuming, especially if you’re using old and outdated methods. Of course, the practice can indeed be tricky, but your business will struggle to keep up and remain competitive without it, and planning for the future will be much more difficult too.
With that said, we know that starting is the most difficult part, but we’re here to help. Read on to learn how to forecast revenue and growth, to ensure that you take your business from strength to strength.
A Quick Overview Of Forecasting
Before we get into how to forecast revenue and growth, we’ll give you a quick reminder about some important things you need to know.
Forecasting, in business, essentially means making educated and well-informed predictions about the future performance of your organization, based on past and present data. These predictions are used to plan for a variety of aspects, such as future sales, trends, and inventory.
Revenue forecasting specifically is an estimate of how much money will come into your business in the upcoming financial year.
Who Is It For?
Most importantly, calculations of your revenue and growth are for you and your organization. As we’ve mentioned before, these calculations will allow you to be skillful in the way that you navigate your future, like planning your budget and marketing strategy.
Armed with the insight from your revenue and growth calculations, you’ll know what you can afford to do. And, chiefly, the insights will give you an idea of what you need to do to get exactly where you want to be.
More than that though, these forecasts will also be used by banks to determine whether you’re able to get a business loan from them. Furthermore, forecasts are also key factors that investors take into account when deciding whether your business is worth putting their money into. So, in a sense, your forecasts are for banks and investors too. This is why it is important to have well-constructed and accurate forecasts.
Why Is It Important?
Apart from helping you to bring money into your business – either through investors or through a traditional bank – knowing how to forecast revenue and growth is important for a few other reasons too.
We’ve spoken about how forecasting helps you plan, but deeper into planning comes decision making, and forecasting helps with that too. Forecasting is important because it helps you to ensure that your decisions are good ones since they will always be data-driven.
By looking at your forecasts, you can decide when to hire new employees, when to run new campaigns, and much more. These are important decisions for your organization and thus it is imperative to ensure they are the right decisions.
How To Forecast Revenue And Growth
Now that you have some background information and context, let’s get on to what you came here for: how to forecast revenue and growth. It is important to note that forecasting will differ a bit depending on whether your business is well-established or if you are a start-up company. Here, we will focus more on how to forecast revenue and growth for start-ups and new businesses that have never done it before.
Forecasting Revenue and Growth: A Guide
For newer companies who have never done this before and have little historical data, here’s how to forecast revenue and growth.
Decide On A Timeframe
Before you start making any forecasts, you need to decide on a timeline. In other words, think about how far in the future you want your forecast to be.
Consider Your Expenses
Thinking about your expenses is an important part of forecasting. This should be done by thinking of costs in two main categories:
- Fixed costs – These include expenses that remain the same every month. For example, rent, salaries, utilities, insurance, technology, and any other costs that you pay every month to ensure your business stays running smoothly.
- Variable costs – These change on a month to month basis, depending on the sales you make or tasks you finish. For example, these include production costs for goods you sell and direct labor expenses such as customer service.
Think About Your Income
Predicting sales can be tough. It is useful to use data about customers, your location, the conditions of the market, the industry, and seasonal changes in sales to make predictions. It shouldn’t be guesswork. For new businesses, with little historical data, you can also base your forecasts on research about demand in your industry, and find other industry information from the U.S Bureau of Labour Statistics.
Forecast Your Revenue
Here you need to make several estimations. For example, you must figure out who your customers are and how many customers are near your business, then estimate how many of them will make purchases, and finally what is the average amount you will receive for each sale. Based on this, and the income and expenses information you collected before, you can make a calculation.
Multiply the total number of customers by the total annual purchases (quantity) and the sales price. This will give you your projected sales. Forecasting revenue is then calculated by adding in any future assumptions of growth or churn (loss of customers).
It can be useful to make two forecasts here, one where you’re being very optimistic with your estimations, and the other where you’re being more conservative with your estimations. This can help you to see the bigger picture and aim higher, while still being realistic at the same time.
Measure Your Projections Against Key Ratios
No matter how excited your forecasted revenue and growth gets you, you still have to be realistic. As such, it can be useful to keep some key ratios in mind. These include gross margin, operating profit margin, employees.
For example, just because you have no employees now, doesn’t mean you’ll have no employees in 5 years. Over the years (we hope) your client base will grow, and that usually means that you’ll need more employees. You need to work this factor into the assumptions that you make.
Similarly, as your revenues increase over the years, your operating profit margin should improve. You need to consider this too, and also ensure that you don’t expect it to happen too early as will result in you being unprepared.
Tips For Established Organizations
For established organizations, you have revenue statements and historical data to lean on. Remember to think about pricing and competition too. Separate income sources, for example, online versus offline sales or third-party channels, to get a clear picture and do forecasts monthly to better keep track of revenue streams.
Forecasting revenue and growth doesn’t have to be a task that you dread. Once you know how to forecast revenue and growth, things should become much easier. And, if you’re still lost, you can always reach out to experts who can help you along the way. Contact revVana for more information.
No matter how you do it, ensure that it gets done – because forecasting your revenue and growth can help you in several ways, and help your business reach the success you’re aiming for.