Understanding revenue forecasting practices is important in assessing budget planning as well as management process. It defines the budget envelope and forms the principle for effective medium-term plans. Financial experts say that when revenue forecast is done and in a transparency way, it creates accountability in the overall revenue collection process and conceal governance problems in addition to helping in budget planning. Well, if you want to develop operational and staffing plans in your business through proper revenue forecast, here are the principles and process you should keep in mind to make it a success.
start with expenses and not revenues
When you are in the startup stage, you should begin with the estimates for the most common categories of your expenses. Consider things like rent, utility bills, accounting or bookkeeping, legal or license fees, communication costs, postage, technology, and advertising. When doing this ensure that you follow the rule of doubling or tripling some of the estimates since sometimes they can escalate beyond your expectations. For instance, tripling your legal, licensing or insurance fees will be very helpful in a case where unpredictable occurrences present, requiring you to spend more. You should also keep in mind the cost of goods and your direct labor cost.
Forecast revenue using both an aggressive case and conservative case
Majority of entrepreneurs constantly fluctuate between conservative and aggressive dream state, which keeps them motivated and help inspire others. Rather than just ignoring the audacious optimism and creating your forecasts based purely on conservative thinking, it would be best if you embrace your dreams and build at least a single set of projections with aggressive assumption. Financial experts say that, you won’t become big unless you think big.’ You should make it your interest to build two sets of projections (one conservative, one aggressive) and you will be surprised how big your business will grow in a short span of time.
A good example of conservative revenue projections should have assumptions like, low price point, two marketing channels, and introducing a new product or service every year for about three years. On the other hand, your aggressive case may have assumptions like, low price for base product and higher price for premium product, around three to four marketing channels managed by a marketing manager, salespeople paid on commission, and new products or services introduced for each segment of the market in a span of two or three years.
check the key ratios to ensure that your projections are sound
Fine, you have made positive revenue forecast, but remember that this is not enough to pay your bills! When making the projections, don’t forget about your expenses. You should not focus so much on reaching your revenue goals and assume that your expenses can be adjusted to accommodate the reality in a case where revenue doesn’t materialize. You should consider checking ratios such as gross margin, which is the total direct costs to your total revenue in a given year, and total head count per client. This way you will be sure that all your projections are sound and will be effective.
It may take time to accurately set your revenue forecast but it’s worth the wait. This process and principles will guide you to your revenue planning and help your business grow to greater heights.