Why you need to have a revenue forecast, and how to create one that actually works

The importance of revenue forecasting can’t be understated: regardless of the size of the business a good revenue forecast can help a business understand where they’ll be in the future, so they can make strategic decisions now.

If forecasting feels a bit like guesswork for you, you are not alone. However, there are techniques that can help turn that guesswork into an informed, knowledgeable plan.

Before you start your revenue forecast

Before you even contemplate your revenue forecast it’s important that you make sure your business plan is up-to-date or – if you don’t have a business plan – you start one.

According to business.gov.au, “A complete, thoughtful business plan … gives your business direction, defines your objectives, maps out strategies to achieve your goals and helps you to manage possible bumps in the road.”

This roadmap will help inform your revenue forecast.

Find out more about how to write a business plan from Bankwest.

Avoid these revenue forecast pitfalls

Focusing on last year’s results alone

Jon Manning, CEO of Pricing Prophets, says one of the forecasting pitfalls is that businesses – both new and old – tend to look at surface issues regarding pricing instead of taking a holistic view.

“It’s a more acute problem than some businesses think,” he says.

For instance, many small businesses might simply look at last year’s performance, then apply a multiple – either positive or negative – depending on changes in price points.

This technique ignores the variety of variables that could affect any forecast, such as business seasonality; when stock is ordered, business overheads; and staffing. All of these factors need to be considered when developing a revenue forecast.

After all, costs are arguably just as important as revenue when it comes to revenue forecasts.  

It is essential that businesses understand these variables so they can prepare for the known peaks and troughs that come with running a business.

Ignoring your customers

Another crucial area that businesses need to consider, Manning argues, is their regular customer base.

Manning points out that businesses that aren’t reaching out to customers and clients – and finding out about their spending plans as part of a revenue forecast – are inviting inaccurate forecasts.

Planning on a consistent year

Manning suggests that business owners do a number of forecasts that take into account fluctuations at different points in the year, rather than simply on day one. For example, if you know your sales peak in July, factor that into your forecast.

It’s important to allow for the unknown when you’re forecasting. While we all like to think the year will be straightforward, it’s smart to forecast for the occasional bump in the road.  

“I usually do a few modelling curves, an optimistic, a pessimistic, and then somewhere in the middle,” Manning says.

This way, he suggests, there are realistic forecasts for business owners to consider, depending on circumstance.

What to include in your forecast

So, what needs to be included in a forecast? You would be forgiven for thinking a revenue forecast is purely about sales revenue. However, as outlined above, costs are a significant factor when looking at the year ahead. Before you even think about your sales revenue for the year it’s important to factor in the following to your forecasts:

• Rent/mortgage – this should be a stable cost, but if you are planning on moving premises this should be factored in to your forecast
• Accounting and legal services – this can be a fluctuating cost. Just remember, it’s good to forecast for a different scenarios when developing your forecast
• Wages – don’t forget to allow for fluctuations, commissions, superannuation, any outstanding leave and potential recruitment costs
• Bills – if you know that your business uses more power over winter, make sure you factor this fluctuation in your forecast
• Stock – when do you order stock? This is a good time to assess the stock you keep on hand, and how that affects the overheads of your business

Once you have factored in your outgoings you can add in any anticipated revenue for the year, including new products.

However, Manning cautions, businesses would be well advised to get feedback from their regular customers if they are in a product development phase. This includes service businesses.

“Ideally, products should be built around the customer,” he says.

“You should work with customers during that build phase, then explore their willingness to pay for the products and features.”

“If you actually get that product development phase right, then it makes revenue forecasting a hell of a lot easier.”

Ask yourself:

• How willing are your customers to part with their cash for your product?
• Is that same product meeting their needs?
• What about it doesn’t meet their needs?

“That’s when you successfully identify the products and the features, and what the potential price points are,” Manning says.

Seven takeaways to help you develop an accurate revenue forecast

1. Get feedback from your regular customers on their spending plans for the foreseeable future
2. Talk to your customers to find out if your price points are right for existing and new products
3. Allow for fluctuations in your business – thinking changes will happen from day one can be a big risk – and forecast for different scenarios
4. Don’t apply a blanket percentage growth or decline in your forecast – a realistic forecast will be more nuanced than this
5. Review your business plan – does your forecast align with what you’re planning in the foreseeable future?
6. Factor costs, such as stock, wages and overheads, into your revenue forecast
7. If in doubt ask for help – recognise when you’re out of your depth and seek expert advice. It could save you time and money in the long run.