What Is Revenue Forecasting and How Can You Use it?
Every business faces the challenge of predicting future income. That’s where revenue forecasting comes in and why the financial forecasting market is set to reach $1.4billion by 2027.
It’s a way to project your financial outlook based on data you already have so you can make better decisions about everything from marketing campaigns to stockpiling.
In this guide, we’ll dive into what revenue forecasting is and why it matters. You’ll also get a straightforward, step-by-step process so you can start using forecasting today.
What is revenue forecasting?
At its core, revenue forecasting estimates your future sales over a specific period. It’s not about guessing; it’s about using historical data and other relevant factors, such as market trends, to make informed predictions.
Whether you’re a startup trying to anticipate your first profitable quarter or an established company trying to refine your finance strategy, revenue forecasting offers useful information beyond just numbers. It’s a way to gauge the health of your business and make proactive adjustments.
Why it’s crucial for business
Revenue forecasting isn’t just a finance tool. It’s also a decision-making tool. Here’s why it matters:
Improved financial planning
Image sourced from bankofamerica.com
Optimizing cash flow is a top concern for businesses, and a well-informed forecast is the backbone of effective budgeting. Projecting future revenue means you can set realistic financial goals, anticipate potential shortfalls, and plan for investments without stretching your resources too thin.
For example, if your forecast shows a dip in sales during the summer months, you can prepare by tightening your budget. It’s all about moving from reactive decision-making to proactive financial management.
Informed decision-making
Whether contemplating a product launch or planning a new outbound sales strategy, accurate revenue predictions give you the data to make choices confidently.
That’s because when you can anticipate income trends, you’re better equipped to decide on the right time to, for example, adjust your pricing strategies or trial a new sales tactic. It reduces the guesswork and helps you weigh opportunities against potential risks.
Resource optimization and increased efficiency
Image sourced from tmf-group.com
With a third of businesses feeling that their ability to adapt their staffing according to demand is slow, revenue forecasting is increasingly useful. It helps you pinpoint when your business will be flush with cash or when you might need to tighten your belt.
This foresight is essential if you want to optimize resources. You can do everything from planning your hiring schedule to timing your promotional activities to match your cash flow peaks and troughs.
For example, if a forecast indicates a strong sales quarter, you might decide to ramp up production and hire temporary staff to meet demand so that you’re prepared but don’t overextend your budget.
Step-by-step guide to implementing revenue forecasting
To help you navigate the process, here’s an in-depth guide on immediately implementing an effective revenue forecasting strategy.
1. Collect and organize data.
The foundation of any good forecast starts with the data. Collecting the right info will mean that your predictions are built on a solid base.
To get started, you should consider gathering the following data:
- Historical sales data
- Future revenue
- Customer acquisition and retention rates
- Market and industry trends
- Pricing and promotions
- Business changes
When it comes to which tools to use, plenty of data-gathering platforms and software are out there.
CRM software is especially useful for managing and tracking your sales and revenue performance data, along with info about everything from customer buying journeys to acquisition channels.
Additionally, for a more consumer-oriented business, consider using Google Trends to analyze broader market and industry shifts. If you examine search trends, you can identify seasonal patterns and spikes in demand to have a clearer picture of potential revenue changes.
Image sourced from hubspot.com
Once you’ve gathered all your data, you need to organize it easily to analyze. Create a clear structure for each data type. Separate sales data from customer acquisition rates, for example.
Finally, use spreadsheet software or a financial accounting solution with integrated budgeting features to efficiently track and manipulate your data.
2. Choose the right forecasting method.
With your data organized, you must choose the correct revenue forecast method. The right approach depends on the nature of your business and the data available.
Quantitative forecasting
Image sourced from sage.com
A quantitative method, such as time series analysis, is ideal if you have a significant amount of historical data. This approach analyzes patterns in past data and uses them to predict future trends. For example, you could analyze monthly sales data to predict the next quarter’s revenue.
Tools: Look for a solution that provides cloud-based solutions and real-time forecasting. This will speed up the process and ensure all your data is safely stored on the cloud for protected but easy access for your teams. For example, if you’re a fintech company, you can select financial services software with robust quantitative forecasting features. This will enable you to analyze large datasets, predict financial trends, and make data-driven decisions with greater accuracy, ultimately driving your business forward.
Qualitative forecasting
If your business is new or lacks sufficient data, you may need to rely on qualitative methods, such as expert opinions or market research. For example, conducting surveys can provide direct feedback from your target audience.
Tools: SurveyMonkey can easily help you collect and analyze customer data, and Microsoft or Google Forms are also cost-effective solutions for gathering smaller quantities of customer data.
Blended approach
Many businesses use a combination of both methods. You might use historical sales data to establish a baseline and then supplement that with input from your sales team or any expert advice on market dynamics that you can gather.
3. Build the forecasting model.
Once you have your data and a clear forecasting method, it’s time to build your model. This is what you’ll use to predict future revenue.
Simple models (for beginners)
A simple method, such as a moving average model, may be sufficient if you’re just starting. This method averages revenue data from a set number of previous periods (e.g., three or six months) to predict the next period’s revenue.
Tools: Excel is an excellent tool for creating these simple models with built-in formulas for moving averages.
Advanced models (for established businesses)
Image sourced from tableau.com
As your business expands and data becomes more plentiful, sophisticated modeling techniques, such as regression analysis and predictive analytics, will be even more useful. These advanced models can account for multiple influencing factors, such as seasonality and the impact of marketing campaigns.
Tools: Tableau is a useful platform for building and analyzing complex forecasting models. You can create predictive models using machine learning capabilities and analyze the impact of different variables.
4. Validate and adjust the forecast.
A forecast is only useful if it accurately predicts future revenue. To ensure your forecast is reliable, you must validate it against actual performance and adjust it regularly. Regularly updating your forecasts will ensure your business stays as agile as possible with the most up-to-date information.
To do this, you’ll need to:
- Track actual revenue: After each forecast period, you should compare your accounting and accounts receivable software data with your forecasted figures. This will help you understand your predictions’ accuracy and which variables might have caused discrepancies.
- Analyze variances: If there’s a big difference between forecasted and actual revenue, investigate why. Was there a sudden market shift? Did a marketing campaign underperform? This feedback loop allows you to fine-tune your forecast.
5. Monitor and refine over time.
Revenue forecasting isn’t a one-time task. It’s an ongoing process that needs to be monitored and refined regularly. As your business grows, your model should evolve, too.
Regular monitoring
Set a schedule to review your forecasts regularly. For most businesses, a quarterly review is ideal. That said, monthly reviews might be more appropriate if you’re in a rapidly changing industry. You should always update your model with the latest data, too.
Refining the model
As you collect more data, you can further refine your forecasting model. This could mean adjusting methods based on what’s working and what isn’t. You must incorporate new market conditions (for example, a recession or new competitor) into your model.
Tools for ongoing refinement
Image sourced from salesforce.com
Salesforce is another popular platform that can keep your revenue forecast current. With its CRM platform, Salesforce automatically pulls in the latest sales data and customer interactions so that you have a full view of your income at all times.
Final thoughts
Implementing a revenue forecasting strategy can be a game-changer for your business. Whether you’re using simple models or advanced predictive analytics, the key to successful forecasting is always continuous refinement and flexibility. Take up a culture of constant improvement. That way, you’ll stay ahead of market trends and keep your business on track.
Try our step-by-step process and watch your business transform!