Published on Tuesday, December 15, 2020
When it comes to making financial projections, it can be difficult to distinguish between sales forecasting, billing forecasting, and revenue forecasting. Whatever industry you are in, making accurate financial forecasts is essential when it comes to budgeting and planning for growth.
While the three are related, they each have different practical uses for businesses. If you want to improve reporting and forecasting abilities, understanding the distinctions between sales forecasting vs billing forecasting vs revenue forecasting is crucial.
Read on to discover the meaning of each, the key differences between them, and how you can use them to build your SaaS business.
What Is Sales Forecasting?
Sales forecasting is the process of estimating the deals that a business will close in a given period of time. This process views sales in their entirety and considers the full value of closing business deals.
A sales forecast is calculated in a variety of different ways. Past internal sales data, external market analyses, review of hot sales leads, and economic trends can all contribute to making an accurate sales forecast. In addition to historical and external data, pipeline from CRM applications are one of the primary inputs to sales forecasting. Businesses use this information to further their growth and neet new deal and customer acquisition
So Why Is Sales Forecasting Useful?
Sales forecasts are crucial to successful planning and budgeting, no matter the business. Sales forecasts and sales results are also the primary metrics for customer-facing, front office sales teams.
Being able to project long-term sales performance lets the company set realistic goals, including setting targets and quotas for their sales teams. This allows businesses to make better internal and external business decisions that are backed up by real data.
What Is Billing Forecasting?
Billing forecasting, also known as invoice forecasting, concerns the projection of future invoices. This is based on the frequency at which the company invoices its clients.
The billing forecast will split the value and timespan of the entire contract or subscription into how frequently the client is invoiced. If a business invoices its clients annually, this forecast will show the estimated cash coming into the business per year.
Why Is Billing Forecasting Useful?
It is no secret that cash flow is essential to any business. This is where billing forecasting is extremely beneficial.
By considering the cadence at which the company invoices clients, invoicing forecasting predicts incoming cashflow. In other words, these forecasts provide an estimation of when the company will receive the actual capital they need to effectively run their business.
Viewing income per invoice gives companies a more accurate view of the actual capital they will have available to them during a particular time period.
This data allows them to make more informed decisions regarding resource allocation and shorter-term goals.
What Is Revenue Forecasting?
Revenue forecasting goes a step further than sales forecasting. It considers how a company recognizes its revenue and splits the value of the sale based on this.
Many SaaS businesses offer monthly subscriptions for their services and so recognize their revenue monthly. This means that their income or Profit & Loss (P&L) statements will show their monthly earnings.
However, many of these businesses offer an annual subscription to the same monthly services. When a client pays upfront for 12 months of service, the company receives 12 months of revenue at once. This leads to ‘deferred revenue,’ which cannot be recognized until the service has been provided.
This is where revenue forecasting comes in.
This type of financial planning considers this. It calculates the revenue based on the time frames in which the company recognizes its revenue. In this way, revenue forecasting shows what ultimately appears on their Profit & Loss (P&L) or income statements.
Why Is Revenue Forecasting Useful?
In today’s uncertain economy, revenue forecasting is more critical than ever. Forecasted revenue growth is an important metric to several groups of people including those within the company, inventors, and stakeholders. It can also help ensure that a company sets appropriate targets for growth.
The insights it yields are crucial when it comes to both short-term and long-term planning. By considering this data, businesses can determine the resources and capital available to them on a month-to-month basis, allowing them to plan and budget accordingly.
And, when it comes to securing investment for your business, this data plays an important role. This is because the data supporting the forecasts gives investors a clear and proven idea of what the company will achieve based on what it has done in the past.
The process of forecasting revenue needs to be fast-paced to stay relevant. This is because it has to take the latest changes in sales and the wider market into consideration. To get the most precise revenue estimates, your business should consider using an automated forecasting tool.
Revenue forecasts are also one of the most important inputs to financial forecasts. Comparing actual data with forecasted data also allows companies to assess their performance over a certain period of time.
Sales Forecasting vs Billing Forecasting vs Revenue Forecasting – What’s The Difference?
Although they each deal with forecasting a company’s finances, the three are very different. Each type of financial projection is important in allowing companies to assess their future financial health, but for different reasons.
The key difference between sales forecasting, billing forecasting, and revenue forecasting is the time frame they consider.
Sales forecasting is based on the total size of business deals. It gives broad insights into sales performance based on the size of deals that are expected to close.
Billing and revenue forecasting, however, take into account the whole lifecycle of the deal and how the capital it yields will manifest itself over time.
Both of these methods provide a shorter-term, in-depth perspective from which to view a business’ finances.
How Do They Apply To Your Financial Planning Process
While each type of forecasting deals with a different time period, they also diverge in another key manner. As they have different uses for a business, they need to be considered at different stages of the financial planning process.
Looking At The Bigger Picture
Examining a sales forecast allows you to make achievable long-term goals based on an overarching view of the deals your business will close. It will also let you assess your company’s overall sales performance, which is important when it comes to allocating funds to different areas of the business.
Refining The Focus
The next thing to consider should be billing forecasting.
By projecting the actual cashflow into the business, invoice forecasting gives insights into the shorter-term financial health of your business.
Those All-important Details
Last but certainly not least, we have revenue forecasting.
Because it depends on when an individual business recognizes its revenue, this method of financial forecasting is focused on the immediate future. For this reason, it tends to be more detailed and accurate.
Revenue forecasting is crucial to any SaaS business as it considers deferred revenue. By forecasting a company’s income based on when it invoices clients, revenue forecasting allows businesses to make better decisions; now.
It also gives an overview of the company’s future performance. So, when it comes to your planning process, this should be the information you take into consideration.
Each of sales forecasting vs billing forecasting vs revenue forecasting plays an important role in long-term business planning.
They deal with different time periods and are therefore useful at different stages of your financial planning process. Assessing long-term goals and gradually zooming in to shorter-term plans can improve efficiency and growth in your business.