Basics of Revenue Forecasting

Amy Pattinson
August 4, 2022
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5
 Mins Read

How much is the company going to earn in the next fiscal year? What are sales figures going to be, which products are going to be successful and which ones are not? Every enterprise needs to know this information.

In order to predict the future with a degree of certainty, the finance and accounting team should follow the fundamentals of revenue forecasting. Some of these basic steps of financial analysis for this exercise are described below.

Fundamentals of Revenue Forecasting

1. Get the expenses out of the way first.

Fixed costs are easy to predict. They are probably going to remain roughly the same as last year. At the most, the business may invest in new assets, such as buildings or machinery. Some additional provisions might have to be made for depreciation and maintenance, but the finance teams ideally would not have trouble pinning down the numbers.

Variable costs can be calculated as well – if not with the same certainty as fixed costs, then roughly as a percentage. They will vary with the level of business productivity, and sometimes the figures of previous years may not be a clear indicator. A rough ballpark can be estimated, in such a case.

2. Create two forecasts, one conservative and the other optimistic.

The conservative forecast will be made on the assumption of worst-case scenarios. Assume that economic factors will not be in the company’s favor. Assume that the team will not meet its sales targets. Even assume that the end result will not necessarily be profitable. What will the revenues be then? Then take the opposite route and work on the most optimistic scenarios. The business will thrive. Sales targets will be exceeded. Find creative solutions to help the company reach its financial aspirations. Use innovative strategies to overcome problems. In the best case scenario, how much revenue can the company generate? This way, the business can prepare to reach for the stars, while keeping its feet firmly on the ground.

3. Make maximum use of trends, charts, diagrams and dashboards

The purchasing patterns of customers must be analyzed for changes. Similarly, the reaction of the organization and its sales team must be taken into consideration as well. This will help the company to develop realistic sales targets, and practical revenue estimates. The company should also analyze which markets and which products are profitable and which ones are not. The sales team should analyze how much time it will take for them to convert leads into purchases, and give the finance team rough estimates of the sales numbers.

4. Analyze economic factors

The business should base its projections on the basis of economic conditions. It will be foolhardy to expect spectacular profits during an economic recession, just like it shows a lack of ambition to have low targets during an economic boom. If the company makes seasonal products, then naturally revenues will be higher during festival times and lower during non-peak months. If the company sells necessities, then they might have demand for the whole year, but if they sell luxuries to a niche market, then demand will peak only when those niche customers are flush with funds. Revenue estimates are impacted greatly by the market, and in this sense, the sales team is best placed to judge how successful the business will be.

5. Make maximum use of trends, charts, diagrams and dashboards:

There is nothing better than a good chart or an informative trend line to display exactly which way the company’s numbers are headed. As they say, a picture is worth a thousand words, and dashboards and graphs can say a lot more in an image than an extensively worded report. These graphs and charts should be prepared after taking inputs from the whole company, and also be circulated to the whole company. This way everyone is on the same page. If needed, any staff member from any division can give additional inputs. After all, everyone would want the trend lines to be going up rather than down.

Revenue forecasting can be challenging. There are several factors that are outside the control of the company: the economy, the behavior of customers, the strategies of rivals, unforeseen calamities. Companies invest considerably in trying to estimate what factors will affect their revenues, in order to plan activities with some level of certainty.

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Article by
Amy Pattinson

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