In our previous episode, part I, we defined revenue forecasting and the components of how to revenue forecast. In the second part of revenue forecasting, we explore how to apply and use this roadmap to help your business grow.
What we cover in this episode:
- 01:38 – Developing a Revenue Model
- 07:25 – Techniques for Revenue Forecasting
- 14:27 – Fine-Tuning your Revenue Forecast
- 21:00 – Leveraging Revenue Forecasting for Growth
Developing a Revenue Model
The basics of revenue forecasting start with developing a revenue model. Modeling can become complex so it is important to remember to keep it simple. Keep in mind that it won’t be perfect, especially your first iteration.
It is usually best to start with one year, 12-month cycle. Whether that starts with the first month in your fiscal year or the first month of the calendar year. Then you will want to break down the different segments of your business and look at their seasons, trends and history. With this information you can make growth assumptions and create a starting revenue goal for each segment.
There are a few ways to create your revenue goals. You may want to start with a flatline approach with a goal to grow by a percentage or a number, month over month or for the overall average. If your history shows that the first quarter is slow and not profitable, set a growth goal only for the remaining quarters.
Keep in mind current market trends, the economy, customer and industry trends. Also if the goal is attainable. If it is the first goal, it doesn’t need to be a crazy growth goal, just attainable.
Techniques for Revenue Forecasting
Business owners can use many techniques to forecast revenue. The techniques however can be specific to your business and industry. Once again, do not become overwhelmed when working with various techniques to find the best one for you and your business.
Start with plugging in your growth rate across the year. It won’t be accurate the first year until you get some data behind it and that is normal. As you gather more data throughout the year, you can make changes to improve and achieve better outcomes.
Two Specific Techniques
To develop this growth rate for your segments, look at the underlying drivers and figure out what makes sense. Although there are different approaches for each industry, two major techniques are the top-down forecasting and the build up, or bottom-up, forecasting techniques.
Top-down forecasting may be the easiest way to start if this is your first time or you are new to revenue forecasting. It is simple, you pick a revenue number + your growth rate and that is your new revenue goal and then apply this to your budget and strategy.
Bottom-up, or build up forecasting is the best option, once you have had some practice at creating and forecasting your revenue. This is determined by the driver that drives your revenue. For example, your man hours x your price per hour = the revenue goal. You can play around with both and see what way you like best or if the outcome for both ways is the same.
Fine-Tuning your Revenue Forecast
In case we haven’t mentioned it enough, we are not looking for perfection here. Fine-tuning is just that, tuning, not perfecting. You will go through your assumptions for your revenue forecasting, on average, 3-4 times and maybe even more before you make a decision you feel comfortable to move forward with. This can and should be done over multiple sessions.
Sometimes you subconsciously think of things when you are not thinking of them. This tends to happen when you step away from analyzing your assumptions. If you give yourself time, the right answers will come to you because you know your business. Once you get it going you will then enter the feedback loop.
You start with your revenue forecasting and then compare it to the actuals that are occurring throughout the year. What you forecasted and what is actual will be different. You figure out what works, why it worked and then tweak it and start the process all over again with the decisions that you feel are the most impactful.
This data and feedback you get will also give you important impacting factors like market and client trends. You can use these to make the necessary changes to your strategic plan as well. Now that you know these trends and these impacts, it will become less stressful for you as time goes on.
Leveraging Revenue Forecasting for Growth
Revenue forecasting is a HUGE planning tool for your business. You can leverage it to assist in identifying the steps you need to take for growth, like increasing or decreasing your customer base, etc. It dives into the process you need to get to the growth you want.
You have to dive into your budget and your business in order to forecast revenue, which in turn causes you to know more about your business and what components are needed for the growth you want. Or even if the growth you want is realistic at this time.
Consider leveraging your revenue forecasting as a tactical plan or a road map to growth. You need to understand your revenue driver to help you formulate this map. This is the map of next steps on how to get to the next level.
Don’t forget that this will be trial and error, and perfection is not anticipated or expected. Grasp the basics of your revenue drivers in your business and where you want to go, and then just do it. Put together a plan that incorporates these components and tweak it continuously until it fits the growth path you desire.