Forecasting Revenue Growth
We’ve talked a lot in previous blog posts about the value of sales forecasting.
Predicting the future of your business may feel a bit more like astrology than science, but if you’re not attempting to forecast revenue growth rates, then you’re potentially leaving money on the table – or worse, spending money you didn’t need to spend.
The simple answer is that you really won’t. Going with your gut is always an option, but it’s rarely the best option.
We forecast to avoid making rash, emotion-based decisions about our business so we can maximize potential profits or mitigate risks.
A sales revenue forecast looks to the past and considers the present to help guide you to the future – whether that future is one of unprecedented growth or a temporary downturn. Without having an idea of what lies ahead, your business is more vulnerable.
Beyond that, if you’re a start up or a company looking to take on loans or an infusion of investment money, banks and backers are going to want to know what your revenue forecast looks like before giving you cash. And while it’s tempting to fire off pie in the sky numbers for the next five years by simply tacking a 5% or more growth rate on for each 12 month period, odds are that’s not going to fool anyone.
You need an accurate picture of where your company is headed to get banks and investors to buy in. Without it, securing additional funding becomes exponentially more challenging.
At the end of the day, if you’re not forecasting, you’re taking unnecessary risk and not maximizing your revenue.
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How to Forecast Revenue and Growth
Now that you know why revenue forecasting is so important, let’s discuss how to start making your projections.
As mentioned earlier, this process doesn’t have to be overly complicated. There are several software solutions available that can help you forecast future revenue by simply analyzing data you already have. These programs use complex Artificial Intelligence, predictive analytics, and machine learning tools to help you craft an accurate forecast for any given timeframe.
Of course, if you like to do things the old fashioned way, forecasting revenue growth in Excel is still a totally viable approach. It’ll just require more effort on your part than using modern software.
No matter which way you go, forecasting revenue growth is an opportunity to learn more about how your business functions – which is exciting (look, we’re nerdy about this stuff. Hopefully you are too.).
Ready to get started? Then let’s get forecasting!
1 Focus on Expenses First
We’re talking about forecasting sales revenue growth, but our first objective is to focus on our expenses.
Every business has fixed expenses and costs it will contend with year over year – and this extra true for startups, where the costs can really put a dent in your capital and revenue before you even start making money.
As such, it’s wise to focus on these first. Think of it like eating your vegetables before your dessert – get the yucky stuff out of the way before we get to the delicious income.
Here are some of the common fixed costs you will deal with year over year:
- Rent/Mortgage on Office and Manufacturing Space
- Communications (Phone, Internet, Etc.)
- Technology Improvements
- Marketing and Advertising
Those can add up quickly, but an accurate forecast for revenue growth requires you factor these into your projections.
That said, we’re not done yet. There are also variable costs to consider. Some of the common variable costs include:
- Manufacturing Costs (Items Used to Make Products)
- Direct Sales
- Direct Marketing
- Customer Service
Depending on your industry you might have other additional variable costs to consider – or you might not have any of these. The point is, you need to factor your costs into your forecast – because they affect the bottom line.
Other things to consider when forecasting costs include:
- Remember your advertising and marketing costs always exceed projections
- Same goes for your legal and licensing expenses. This category often goes well beyond what you budget
- Prepare for costs of things like salary and labor to increase as you grow
2 Do Two Forecasts
At this point, you might be reading that bullet point and thinking “two forecasts? I don’t even have one…” but hear me out.
The goal of two forecasts is to give yourself an aggressive forecast and a conservative forecast. Think of this as figuring the best- and worst-case scenarios for the upcoming year.
The aggressive forecast will naturally have you making assumptions that you’re going to make more sales, hire more staff, price your product at a premium and so on.
The conservative forecast takes the opposite approach.
You’ll have to define what constitutes aggressive and conservative for your business and industry to make this truly effective, but the result is you wind up with two forecasts.
Your true forecast will probably land somewhere in the middle, but understanding the extremes can help you make decisions, and find ways to be creative.
3 Test Your Projections
Once you’ve considered all these different factors, the last step involves testing your projections to see just how accurate they are.
If you’re a new company or you haven’t been tracking your data for long, this will be a difficult thing to do. You need some older data to really test your forecast.
If you’ve been forecasting revenue for a while, and have solid data from the past, take those numbers and apply your methodology to them and see if your forecast matches what the real numbers were. If they do, great – your forecasting system is working and likely to work on new numbers.
If there’s a discrepancy, figure out why and adjust.
Don’t get tied to your projection methodology – everything here is a guideline, and the reality of the situation is that you’ll often have to tweak formulas and customize things to make them fit your business’s unique needs.
Testing allows us to at least establish a baseline of whether the approach you’ve selected is accurate. Even if it is, don’t be afraid to play around with it and see if you can figure out ways to make it even more effective.
Of course, all of this is even easier with sales enablement software, which will allow you to easily shift parameters and measurements without having to break out the calculators and spreadsheets.
Sales Revenue Forecasting Methods
Now that we know more about why we should be forecasting sales revenue and how to get started, let’s take a quick look at the four main methodologies for forecasting.
1 Straight Line Forecasting
If you’re not wanting to relearn math (or use software tools) and would like something simple and relatively straightforward, Straight Line forecasting could be for you.
This method essentially uses your historical data as a way to predict future growth. If you see growth of 4% year over year, you can then extrapolate your forecast for the next several years based off those numbers.
The downside of this method is that it operates on the assumption that your yearly growth is going to be relatively consistent. In the real world, that’s not always the case.
That said, if you want simple and easy, this is a pretty good starting point.
2 Moving Average Forecasting
In this method, we get a little more in-depth with our predictions, but the moving average forecast is still not super math intensive.
How the approach works in the simplest terms is that it takes a set of data and looks for patterns or trends and then uses that to estimate future data.
In sales forecasting, a 3-month and 5-month moving average are commonly used.
There’s a lot more detail to how this particular method works, but for the purposes of this article, knowing that it builds off data trends over a period of time to predict what comes next is enough to get you started.
3 Simple Linear Regression
Now we start to get into the heavier math approaches to forecasting. If you don’t remember your college math classes, you’re going to want to get some help in the form of Sales Management AI Software to assist you with this type of forecasting.
In this approach, we strive to predict the relationship between two variables and then use that information to make projections. In a simple linear regression, we need one independent variable to compare with one dependent variable.
For example, you may want to examine how your sales fluctuate based on Gross Domestic Product. In this scenario, your sales are the dependent variable – they depend on the GDP figure.
From there, more math magic happens – but the basic idea is that you determine the relationship between your variables. And once you know how the independent variable affects its counterpart, you can forecast forward from there.
4 Multiple Linear Regression
And finally, we come to multiple linear regression.
All told, this is the same basic idea as simple linear regression, except we now have two or more independent variables to correlate with our one dependent variable.
Think of it as a more detailed version of the previous entry and you’re on the right track.
Forecasting revenue growth can be as simple or complex as you’d like it to be – whether you’re utilizing a straight-line approach or running multiple linear regression forecasts isn’t super important.
What does matter is that you’re actually taking the time to forecast revenue growth rates, so your business is prepared for the things looming on the horizon – good or bad.
If you’re not forecasting sales revenue, you’re largely flying blind. A good revenue forecast can help you plan for the months and years ahead, helping you capitalize on opportunity and avoid taking unnecessary risks when conditions are less than favorable. You ignore it at your own risk.
The good news is that there are countless tools out there to help you make this process quick and painless.
You can go the old school route and bust out the Excel spreadsheets or you can use sales management AI software to make your life easier (and get even more detailed results). No matter what you choose, the value of revenue forecasting can’t be understated. Start forecasting today and reap the benefits.
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