Unleashing the Power of a Revenue Forecast
In business, the annual revenue forecast works much like a game plan in sport. It’s the equivalent of required-runs-per-over in cricket, metres-gained in rugby or minutes-per-kilometre in a running race. It’s what you use to set monthly and weekly sales goals and provides the yard stick for gauging your success and the health of the company throughout the year.
So, given it’s such an important tool, how do we come up with a revenue forecast? And how should this forecast influence business day-to-day?
How to Set a Revenue Forecast
- Set a revenue range, not a single line. No matter how well you know and understand your business and your customers, creating a perfectly accurate sales forecast is near impossible—even the most established businesses will encounter the unexpected. Instead, we should aim to create at least two forecast scenarios: one conservative and the other optimistic (and ideally another somewhere in between). This allows you to model your business against both best-case and worst-case situations and to pre-empt what might need to be done in either situation.
- Look backwards in order to look forwards. There’s no greater predictor for the future than the past. Simply extending the trend of your annual revenue totals from the past few years is a crude but useful technique for understanding what might be coming this financial year.
- Take note of seasonal variations. By only looking at annual revenue totals, business owners can miss the all-important seasonal variations that can strain both cashflow and also resourcing and supply. Many businesses have huge spikes in sales volumes in the lead up to Christmas and a quiet period through winter. Anticipating these trends is a vital component in your revenue forecasting.
- Use intuition and numbers. Your forecast should be both a science and an art. As a business owner, you will have an incredibly strong grasp on how sales are trending and on any opportunities for future growth. While this intuition shouldn’t be overlooked, the science of statistics needs to be there as well. A good accountant is your go-to person when it comes to unlocking these stats. Additionally, a marketing consultant can bring further insight, particularly when it comes to future forecasting. In terms of marketing, a simple piece of annual research, like an awareness survey within your target market, can reveal opportunities or hurdles for growth (e.g. if you discover that only 30% of your target market are aware of your business, there is likely a huge opportunity for growth through simply boosting awareness in that market).
- Use case studies and benchmarking. A good accountant will also be able to draw on their experience to compare where your business is in its lifecycle in relation to other similar businesses in your industry. Knowing that other businesses have been where you are now and understanding how they progressed can be an incredible source of forecasting information and also assurance.
Unleashing the Power of a Revenue Forecast
The score keeper in a sports game doesn’t just keep the score to themselves; they share it with their team mates in order to strategise, direct and motivate. It’s the same in business with revenue forecasts and actual sales figures, rather than just being numbers that the accounts team look at, they can inspire and guide the whole business. Here’s how:
- Build culture. “The most important thing in business is getting everyone aligned and knowing what is trying to be achieved,” explains one of Chartered Accountants Scott Jackson. “If you have different components in your business not working together you can lose efficiencies and lose the direction that you’re wanting to go.” Revenue forecasts should be translated into marketing goals, sales targets and the in-house values and processes that all staff follow. For example, if a cafe has a target of increasing revenue by 20% and the majority of that increase is to come from upsells of food when coffee is purchased, then everyone in the team—from the chef designing well-presented snacks to the front of house staff prompting the upsell offer at checkout—need to be onboard with that mission.
- Use the right info at the right time. Scott says that as Strategy Collective accountants “our goal is to always front foot it by reporting two or three days after the end of the month so that you have enough time to try to make that next month better. It’s about setting basic metrics for business owners—two or three pieces of timely information can allow those key decisions to be made.” What metrics could help motivate and direct your staff on a monthly, weekly or even daily basis?
- Anticipate rising costs with sales. Achieving new heights in revenue isn’t just about offence; it’s also about the defence of making sure the costs don’t blow out comparatively. We all understand that the cost of goods sold (COGS) should naturally move in step with increasing sales, but more “fixed” costs can also be affected. The classic example is advertising costs that might increase 3-fold to only produce an increase in sales of 10 per cent. In such cases, it’s important to monitor the return on investment here and make sure the increased advertising spend isn’t eroding the sales gain. Similarly, sales time should also be accounted for, especially if you’re a small business where you, as the business owner, do most of those sales so you don’t record this expense. When growth occurs you may need to recruit to cover this sales role and suddenly find yourself with less profit as a result of suddenly having to pay for this sales time.
If you’d like help setting your revenue forecasts for the year and want to set up that feedback mechanism to keep your team motivated and on track, give us a bell on 06 759 7044 and we’ll talk it through over a coffee. As always, the coffee’s on us!
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Image credit: Angela Compagnone