Everything You Need to Know to Master Revenue Forecasting
There are tons of reasons why a business of any size needs to adopt the practice of annual revenue forecasting. Can you afford to make key new hires? Source a new product line? Spend more dollars on marketing and advertising? Or might you need to think about downsizing, cutting expenses or taking a loan if times look tight?
It’s important that you have some idea of how the upcoming year will look for your business. We’ve put together some questions you want to ask yourself and then some tips to master annual revenue forecasting.
Questions to Ask Yourself When Forecasting Annual Revenue
Some businesses run sophisticated mathematical models to forecast their annual revenue while others simply add 10% to last year’s forecast and hope for the best. While you may not have the bandwidth to create your own algorithm, you probably want your revenue forecasting to be a little more scientific than the “add 10% and hope” method. So here are some questions to ask yourself before you create your forecast:
- What was our revenue last year?
- How has our revenue changed over time in the history of the company?
- Have we introduced new products or services or landed new customers that have made a significant change in our revenue?
- Have any new competitors emerged?
- Have we made key hires or lost important personnel?
- Have we raised or lowered prices?
- How is the ROI on our advertising and marketing dollars?
- Have trends or events in the news affected our business?
Not only will answering these questions help you create an annual revenue forecast, they will force you to look at the state of your company and the market objectively. And that’s a valuable mindset in itself.
How to Predict Your Own Annual Revenue
Follow these tips to ace revenue forecasting:
Consider the Pieces, then the Whole
Predict your revenue from each product or service you offer and then add them all together. This reduces confusion when one product line is on the rise while another is on the wane.
To make this even simpler, narrow your focus to a month-by-month prediction. Your holiday items may only sell in Q4, while another product line sells steadily. Come to an accurate prediction by considering these factors separately before considering them in aggregate.
Breaking your predictions down into detailed predictions by product and month also allows you to go back and make changes should anything happen. Did your distributor stop carrying a certain popular product? Go erase it from the forecast. Did you make a key hire who has doubled your sales team’s results selling a certain widget? It’s easy to go back and change up your forecast.
Use a Simple Formula
While you shouldn’t substitute a formula for the homework steps we mentioned above, these formulas will give you a quick and dirty annual revenue forecast.
monthly sales / percentage of total sales expressed as a decimal = annual sales forecast
For example, say your monthly sales are $100,000 in January and – because you did your research from past years – you know that busy January traditionally represents 10% of your annual sales throughout the year. (Maybe people are redeeming their holiday gift cards at your store!)
So let’s plug in the numbers:
$100,000 x .10 = $1,000,000
Your simple annual revenue forecast is a cool million dollars.
I have my annual forecast. Now what?
Most revenue forecasting is inexact. For example, we pay quarterly “estimated” taxes until we get to the end of the year and can tally up our actual tax bill down to the penny. The same is true for your business’s annual revenue forecast. While it won’t be exact, taking these factors into consideration can ensure that it’s, at the very least, an educated guess.
What you can do, though, is make your annual revenue forecast a living document. Keep up with it and make necessary changes. Try updating it every quarter or even every month with new information. This will help you determine:
- When to stock up on products or materials
- When to hire
- When to spend more marketing dollars
- When to cut expenses
- When to pursue options like a small business loan
We hope this article has helped you to get a handle on your small business’s finances for the upcoming year. Do you have a method for predicting your annual revenue?
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