Key people in the company must know how to forecast revenue. Especially during an economic crisis or fortuitous events. Forecast revenue gives a picture of the company’s annual performance. Forecasting revenue differs in every business industry. Some business industry revenue forecast is accurate or close to reality. These are usually long-term investments, recurring subscriptions, rental contracts, and consulting fees. It’s easy to forecast revenue in this business industry because the income is certain. Moreover, the income history is reliable and useful in forecasting revenue
Ways to forecast revenue
1.) Get the average sales/service for the past 5years. This serves as gross sales/service. Then, get the average cost of sales in previous years (5years). This serves as the cost of goods sold (sales). There is no cost of goods sold for services. After that, get the difference between the two, it will serve as gross income. Finally, deduct the projected budget from gross income to get the net income. Some company includes their taxes to the projected budget (expense). This is a conservative way of forecasting revenue.
2.) Revenue forecast is easy to some industries having a fixed income. Ways to forecast recurring revenue is to get reports of maturing income for the year. Then, get the projected revenue for a probable subscription or rental contract that will be a close deal for the year. Otherwise, get the interest of probable investments for the year. This will be added to the existing revenue. Future projections depend on what kind of recurring income the company has. If cold calls are the means of generating income, then getting the number of calls per close deal. This will help in forecasting revenue targets.
3.) Do research on companies having the same industry. Their numbers will give you the lowest possible to highest possible range of income. Income mostly depends on how much sales the company made. There are ways to increase sales/service revenue. One is marketing, the other is improving the products.
What to do before forecasting revenue (income)?
Here are some companies do before forecasting revenue:
1.) The company should prepare a report of the 5 years sales history. Otherwise, 5 years service income history as a reference in forecasting future revenue. This is essential in forecasting revenue because it gives an idea of the company’s 5-year performance. It also gives an idea of what company plans that give more income. Moreover, what plans and promos have a fast return on investment. It is a good start for the company to formulate new ideas based on past performance. It also gives an insight on what promos to create, duplicate and double down.
2.) The company should have a roadmap. The generation of income is partly based on the roadmap of the business. This roadmap indicates how much variable cost the company is facing as well as how much income.
3.) A projected budget is also done before forecasting revenue. The projected budget for expenses is aligned with the plans of the company. The company’s Roadmap is considered in projecting the budget. After knowing the projected budget (expenses), the company will add the desired income to get the gross income. Having an idea of what the gross income will be, gives an idea of how much sales/service the company needs to produce.
Additional information:
4.) Plans in generating more sales/service revenue in the future. It is essential in forecasting revenue because sales/service revenue is the main factor in generating income. Effective plans help to achieve target sales/service revenue. Effective plans make the forecasting revenue reliable as projected.
5.) Stress testing. A company should have done the stress test before forecasting revenue, during, and after forecasting. The stress test is adding or subtracting a significant amount to a specific account to test the stability of financials. For instance, the company may overstate variable costs to see if the income is sustainable. If the income result is alarming, then the company should formulate ideas on how to sustain income. If it resulted in a negative, then the company should find ways to make income or find alternate income. Overstating expenses gives a certain emotion that drives the company to provides solutions. At times of crisis, the company has an idea of what to do. Because it has done scenario analysis or stress testing before which formulates plans and ideas beforehand.
Why do you need to have a revenue forecast?
Companies should have a revenue forecast yearly. Because it gives insights if a company can pay its fixed and variable costs. Not doing so will lead to possible bankruptcy. The purpose of a revenue forecast is to see if the company is liquid. Stable and capable to pay obligations. Moreover, sustainable to pay fixed and variable costs. Because it requires fixed and variable costs to generate income. Forecasting revenue also helps improve planning. In addition, it helps the company’s strategies to maximize resources. It also helps in decision-making
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