A business surely runs better with forecasting. That business runs smoothly which has forecasting in its planning foundation. With this said, let’s dive into our topic: How to Forecast Revenue!
Well, forecasting is, like, a tower-light to the business; it assists in projecting the future of the business. In the broader sense, forecasting uses accounting services to make future assumptions, totally, based on the past and present data by analyzing a series of trends in business. An entrepreneur must understand that effective forecast revenue leads to a clear picture of where the business is standing and where it is headed.
Let us understand forecasting with an example:
| For example, a revenue manager, named as Mr. A, of a firm has forecasted that its annual revenue this year will be the US $500,000. Mr. A has forecasted this revenue figure after analyzing the historical & present revenue data that the company has with it. |
If we go by the broader sense in how to forecast revenue, then forecasting is just an assumption, without any standing proof to it. If you forecast revenue for your business, you can’t have proof that you will earn that forecasted revenue. You may deviate from your numbers; you might earn more or less in the end.
But this doesn’t mean that you won’t take the path of forecasting. Proceed as per your forecasting, and in the last, check how much you deviated from it. It is vital to know you much you can expect revenue in a year. The point is that the business requires money to run, and if the forecast revenue is forecasted rightly, then it can do wonders to the business.
A point to remember: If you know your revenue generation and expected cashflow for a year, in advance, then you can plan your business decisions according to it.
Business runs better if you go by your forecasting. As we have already said earlier, you may or may not reach according to your forecasting, but the point is that you should work according to it. Reaching that forecasting milestone, set by you or business, might be filled with obstacles (internal or external). And suppose, all is going right and a contingent calamity occurs, which purely failed the forecasting.
How To Forecast Revenue: The Stages
Rome was not built in a day, and so, does forecasting is not meant to be done in a day. Forecasting exists as an on-going and dynamic process. It is an on-going process because it has to remain to go with a flow. And it is dynamic because it needs to change whenever is required.
A set of historical and present data is collected by a manager or business owner and then the data is thoroughly analyzed.
A point to remember: Your business must have a team which can perform forecasting in a way that it brings the best ways to forecast your revenue.
| For example, a sales manager of a big corporation forecasted that the sales would be of US $100,000,000 in next 6 months. The manager has come out with this data not only on an assumption basis or an arrow has been shot in the dark. There is proper planning to it; proper case studies are applied to every bit of the forecasting. |
It is wrong to say that forecasting is done from scratch, as we already have historical and present data with us, but sometimes, the forecasting is done from the scratch, while making a new business plan.
Best Ways to Forecast Your Revenue
Forecasting done in the best way can be fruitful, not only for the present but for a future also. But how the best forecasting is done? How can you easily forecast revenue? We will guide you through our blog.
1. Research Enough & Thoroughly:
Dive into the ocean of data and analyze every bit of it. You must have a clear picture of forecasting in your mind.
The list should be made of standard expenses and recurring payments. If you have resources, then take a look into the competitor’s forecasting also
- How much they will grow?
- How much will be there expenses and revenues?
A series of data should be available to you before you make forecasting. The data can be fetched from your various department heads, like, finance and accounts, sales, operation departments, etc.
2. List down your Expenses first, then comes your Revenues:
The basic thing but the most important is listing down your business expenses, and then revenues.
A point to note: If you prioritize your expenses before revenues, you will get to know that from where you can stop the money leakage.
Proper classification of expenses must be done, based on their nature.
Fixed Costs: This cost means that it won’t change with the production level. In simpler words, the fixed cost won’t increase and decrease with the increase and decrease in production.
One thing to bear in mind is that these costs will have to be bear by the business, whether the business runs or not.
Few examples of fixed costs are
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Variable Costs: This cost simply changes with the change in production. More productions mean you have to bear the more variable cost, and less production means less variable cost/s to bear.
| The most common examples of variable costs are the cost of goods sold (COGS) which includes material & supplies, packaging. Other is direct labor costs which include customer service, direct sales, and marketing. |
The most common examples of variable costs are the cost of goods sold (COGS) which includes material & supplies, packaging. Other is direct labor costs which include customer service, direct sales, and marketing.
3. Review your company’s cash flow:
Yes, it is true that you can’t chase sudden high growth with forecasting, but you will get an idea of your future income.
All these future incomes can be predicted with your past and present data. Forecasting can guide you in accepting big changes in the business.
| For example, if you are going for large machinery, with an aim, to increase your production. Then for this, look into your past data, if you have had taken big decisions like this or not. If there is no sign of decisions like this, then you can opt for your competitor’s forecasting. Might your competitor has taken the decision like this in their business operations. |
Our Verdict on Revenue Forecast
Forecasting is not a decision that a business takes it overnights, and applies it. It takes a sufficient amount of time to forecast revenue decisions, as forecasting decisions will not only affect the future but also hit the present.
A proper analysis of data must be done before making any planning and you should choose only the best ways to forecast your revenue.
Basically speaking, business owners take a path of revenue forecasting, mainly, with two specific options in mind:
- The optimistic approach
- The conservative estimate
If your target is to go for a high level of success, then there comes an optimistic approach to apply. And the conservative approach is playing safe, and look that how much revenue can a business brings in by forecasting.
It solely depends on you that which approach you will go by for your business. And make those decisions that will affect your future, and plus the present also.
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