As a business, the goal is always to grow—be it in reach, revenue, or scale. In order to achieve growth, you need to make a series of sound decisions. This is where having a solid understanding of your finances come in. A clear view of your past and current financial standing allows you to project where you can be in the future.
Forecasting revenue growth is a good vehicle for arriving at this informed view. It holds three principles. One of them is analysis. You study the numbers, review where you’ve been, and figure out what you might need going forward. You need to see where the money is headed and where it could go.
The other principle of revenue forecasting is management. Revenue forecasting often spirals back to day-to-day structures that exist to manage the flow of money. So, it’s not about where your money might head but about where it’s currently going.
Next is strategy. When talking about revenue forecasting, it all boils down to growth. Without a grasp of where you might be making money, you won’t be able to decide what’s best for your business, such as product offerings, marketing, or even who your staff members are.
Overall, revenue forecasting is an in-depth analysis of your business’s past performance, helping you develop an understanding of how much your business might earn during the upcoming year. If you haven’t conducted this kind of analysis yet, you can try using a revenue forecast template.
Though revenue forecasting can be time-consuming, you can make the process more manageable. Read on to learn how.
Table of Contents
1. Set a timeline
The first step to forecasting revenue growth is setting a timeline. This will guide the analysis of data, resulting projections, and other factors that’ll be discussed below. If you’ve never done a revenue growth forecast before, start with a 12-month timeframe. You can go beyond a 12-month forecast, but that will only increase uncertainties.
You can also make quarterly projections, depending on the need. For example, if you’re launching a new product feature, you can make shorter projections for its business impact.
2. Study historical data
Historical data refers to standard expenses, seasonal fluctuations, past revenues, and other relevant information on incurred costs. If you don’t have ample historical data, you can look at competitors who are in a similar growth stage and use them as a benchmark. Moreover, you can use tech disruptions, industry financial reports, and case studies to help guide your projections.
3. Analyze external factors
Historical data helps set expectations, but you’ll also need to consider other factors that could fuel or hinder growth. A good example is the return to business as usual following the stricter lockdowns of the pandemic. This inversely affected businesses, depending on their industry. For example, while restaurants and hotels took a massive hit, e-commerce and delivery services made hay during the lockdowns.
Upcoming law implementations, major public events, and new technologies (or a Google update) are other factors you need to take into consideration. This will help you anticipate possible impacts to your operations, allowing you to make adjustments accordingly.
4. Focus on expenses
When you’re just starting out, it’s easy to be engrossed in looking at potential revenue and overlook expenses in the process. Keep in mind that you have a better idea of your expenses than revenues, so it’s best to start with that.
Classify your expenses, so it’s easier to enumerate. Depending on your field, it could have the following items:
- Rent, utilities, salaries, etc.
- IT (web, cloud, and other tech services)
- Cost of goods sold
- Order fulfillment expenses
- External labor expenses
When you’re forecasting expenses, remember it’s better to overestimate than the alternative. Doubling estimates for variable costs give you a buffer in case they go over (which they usually do). This might lead to a conservative revenue forecast, but again, that’s better than being in the red. Even a massive enterprise like Netflix has learned to take the conservative approach.
5. Forecast your revenue
This stage is where you’ll be using the historical data analyzed earlier to come up with a simple formula like the one below.
- Number of customers x average sale value x units sold = projected sales
Then stack your estimated expenses against your projected sales. As you move it along your timeline, include the anticipated effects of external factors on both expenses and sales. This should give you a base revenue projection you can work with.
6. Create and test scenarios
This refers to coming up with multiple preliminary projections, usually a conservative forecast and an aggressive one, and testing them against variables. These hypothetical tests give you better insight into how other factors can impact your revenue and expenses. This lets you be agile and quick to pivot strategies when the need arises.
For example, you decide to double down on your SEO efforts, as traffic from search results is your top traffic driver. Would that lead to noticeable impact on conversions and sales? What if you moved marketing spending to social media advertising in anticipation of a Google algorithm change?
Forecasting revenue growth is designed to help guide decisions, not be perfectly accurate. You’re likely not going to get the analysis right the first time, but that will only add to your historical data. You can also use forecasting tools and see if they come up with projections that come closer to reality.