Anyone who watches business pitch tv shows like Dragons’ Den or Shark Tank knows the importance of creating a revenue forecast. It seems like every business is always ready to whip out an upward-sloping chart displaying predicted revenue over the next 3, 5, or 10 years.
Indeed, those revenue forecasts are extremely valuable. They’re useful both for securing partners externally and for developing your growth strategy internally.
In your external relationships, revenue forecasts let your investors and lenders see where the whole endeavor is headed. On the inside, they help your leaders plan your growth trajectory and make key decisions as you move ahead.
But how did those businesses determine the numbers? And if you’re trying to develop your own revenue forecast, where should you start?
Of course, there are many different approaches, but the underlying principles are the same. Some of the key steps you can use to forecast your future revenue are described below.
Start with your business plan
Start with the basics — your business plan. With your overarching strategy in mind, take a close look at your industry, your place within it, and your business model.
Then, use that strategy to create a calendar that walks through the next several years quarter by quarter, displaying how your company’s priorities, activities, and tactics will change.
Just looking at this high-level overview will give you a good sense of where your periods of growth may occur, and what it will take to get there.
Ask questions about your future business activities
With that detailed calendar in front of you, it’s time to start asking some key questions about the ups and downs of your future business activities. You’re starting to forecast now! Consider the following points.
What are your initial expenses in the early years?
Your first consideration should be whether the early stages of running your business will include a lot of capital costs, like equipment. If so, then you should assume it will be a few years before your revenue stream makes it into the black zone.
Luckily, costs for equipment and supplies can be predicted pretty accurately. Payroll is equally predictable. It’s the other, less-obvious costs such as insurance, legal fees, regulatory fees and rent that somehow grow far beyond what you ever expected. It’s a good idea to take your original estimates and double them.
What are your sources of revenue?
Your second question should tackle the money coming in. How much money should you expect to make from your products or services?
Investors love businesses with recurring revenue, such as monthly software subscriptions or phone payment plans. This type of revenue offers a certain amount of stability when creating financial forecasts.
Of course, the most successful businesses have several revenue streams. While recurring revenue is ideal, generating other revenue at predictable intervals is pretty great, too.
Are there quarters or certain periods when you can drive more revenue?
Depending on your business, perhaps you know that you can bump up your sales in a particular season, or in association with a major industry event or conference. But if this isn’t the case, focus on maintaining consistent demand throughout the year. Seek out clients who require work on a regular basis — every quarter, or even every month. And take care not to rely too much on one big client or even one sector for your business; strategic diversification will help you get through industry downturns or unexpected payment delays.
Get the industry data
The business landscape changes constantly according to factors beyond your control. As such, your path forward also depends on what the competition is doing.
Now that you have your own path mapped out, it’s time to look around and add data from outside your organization. While small businesses generally don’t publicize their revenue, there are other ways to get your hands on valuable industry data. Start by checking:
- Industry-specific organizations
- National statistics departments
- News outlets
- Other sources of public information
You can also ask your local business incubator or library, as they often work with entrepreneurs and small businesses and have a sense of typical revenue patterns.
Plan for conservative and aggressive scenarios
As you plan the way forward for your business and the industry space you’re competing in, develop two different scenarios — a conservative case and an aggressive case.
While you may think it’s confusing to create multiple revenue forecasts, there’s no reason why you shouldn’t. In fact, there are a few key reasons why you should:
- Having both forecasts in your arsenal helps with your overall strategic planning.
- The best business plans strike a healthy balance between being realistic and chasing dreams. Ideally, you want to do both — tackle the real obstacles in your path while pursuing a grander vision.
- It makes you look better in the eyes of your potential investors. Producing revenue forecasts for both conservative and aggressive scenarios shows that your company planning is sophisticated.
Forecasting involves ongoing expenses, too
It’s tempting to focus only on the money coming in. But you can’t do that, because that’s not how running and growing a business works. You must also account for the expenses that drive your revenue generation. For instance:
- Does generating more revenue require hiring a larger sales team?
- Does acquiring more customers mean that you need a more sophisticated customer management system?
Whatever the case, don’t forget to account for those additional expenses.
Revise your forecast regularly
Once you’ve completed your revenue forecast, you just have to focus on putting in the months and years of hard work, right?
No! It’s important to revise your forecasts regularly based on the new data you acquire from your activities. For instance:
- Did you reach some milestones faster or slower than expected?
- Were your insurance and legal expenses higher than you predicted? (hint: they likely will be!)
- Are you gaining efficiencies and economies of scale?
- What have your annual revenue patterns looked like? What about your rates of growth?
It’s imperative that you revisit your growth plan with the most accurate data. Use the patterns you observe to forecast your future performance.
Create your planning toolkit
As a small business, you’re immersed in your daily to-do list. Most days it’s hard enough finding time to come up for air, never mind developing a revenue forecast. Nevertheless, it’s important to keep one eye (or at least part of one eye) on where you’re headed.
Keep your head above water by investing in technology solutions to better manage those day-to-day responsibilities. For instance, a CRM that integrates with your accounting software helps you minimize double data entry and follow up with customers more efficiently, all while empowering you to grow your sales.
It’s never too early to start forecasting your future revenue. And the more you simplify today’s tasks, the more time you can spend developing tomorrow’s strategies.
