April 12, 2012
In one of your key business planning activities you will need to accurately project revenue streams. As part of revenue management, the information on your revenue forecast would be your strongest indicator in your business plan.
Your revenue forecast will illustrate how successful your financial situation is projected to be. Investors, partners and bankers will be reviewing how you arrived at your numbers, at how you justified revenue and sales levels. Your forecasting will need to be more than just an educated guess, however, an educated, experienced background is essential to forecasting.
Everything in your financial and business planning will be centered on revenue numbers, from estimating variable and fixed expenditures, to determining the amount of debt that can be serviced with the projected revenue levels. So many factors, differing in various industries, need to be included in revenue projections. Integral to forecasting revenue, your marketing plan will include some factors and will need to incorporate market potential information.
Revenue Forecast – Tools
Spreadsheets and calculators can assist in a formula based approach, but some are generic and do not take into account industry specific factors and differing revenue projection models. In essence, you will need to incorporate specific factors into your calculations and run differing simulations to capture all potential circumstances.
The following describes some of the various factors and models to determine your revenue forecast:
If you are forecasting revenue for an existing business, revenue projection may not be as difficult as you may think. There is a historical track record of data for existing businesses to build on. In reviewing revenue and sales trends in the historical financial data, you can estimate the ongoing continuous trend forward.
When reviewing and analyzing financial trends, pay attention to the rate of growth or rate of change in revenue and expense categories. The rate of change must be taken into consideration, and don’t rely on a calculation of straight-line revenue projections. If negative growth or declining trends are showing, differing strategies may need to be developed to get trends back on the right track.
Using Intelligence for Your Revenue Forecast
As an experienced entrepreneur you may carry some intelligence from past employment, from operational and management experience. If your experience was industry specific and applicable to your start-up or existing business, you may have the intelligence to develop some close to accurate projections.
You may also be able to surround yourself with professionals that also have this intelligence. We are not suggesting that you steal information from a competitor, but acquire professionals that are well-versed in a certain applicable industry, that have an innate ability to complete an accurate revenue forecast. Accountants also specialize in this area but will need access to information and intelligence on the industry and markets.
Revenue Forecast – Industry Standards Data
Revenue models can be generated from using the industry standards data. Loads of generic industry data has been compiled for decades. The US Census Bureau is also a good source for industry data to base your projections on. In Canada, you may want to search through Statistics Canada for general industry data. Note that utilizing this data is more along the lines of a theoretical, averaging approach and may not take into consideration the factors of your specific business circumstances, area and markets.
Marketing Information for Your Revenue Forecast
Good potential sales data can be obtained from surveying your potential customers and potential markets. You can base your revenue forecast on the total market and on your estimated market share. If you have excellent relationships with your potential customers and there is a mutual agreement to supply products or services you may be able to sign into a preliminary agreement, or Letter of Intent (LOI) for future sales. You can definitely extrapolate more solid information from this for your projected revenue and sales.
In addition to your own surveying efforts, you can obtain the services of a marketing company to do the work for you or to provide you will more specific market information for you to base your projections on. Depending on the firm used and type of information obtained, this would be an additional reliable source of information, and more valuable to your revenue forecasting.
Tips to Assist in a More Accurate Revenue Forecast
- Be realistic, and plan modestly
- Generate projection scenarios, from conservative to optimistic
- Back all projections with information to make it more objective
- Use multiple information sources in developing projections
- List your assumptions and justification for your numbers
- Seek advice and feedback on your information
- Develop strong relationships to build in LOI, MOUs with potential customers to assist in revenue projections
- Adjust wherever needed and frequently; the more effort you put in the better the forecasting will get.
- Remember this is not a perfect science but are tools for estimating
Using a fusion of models and factors indicated above may result in more comprehensive, more accurate revenue forecast. Ensure you complete the due diligence required on detailed business planning, including using revenue projection models to minimize risk, and you will experience actual results closer to your financial projections and goals in the future years.
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© 2012 Strategy Plan One