Keeping your business’s monthly revenue growing and in check was never going to be easy.
We all know that budgeting is key to keeping your business on track but how exactly do you make those tough budgeting decisions without knowing your future revenue?
We all wish we had a crystal ball to peer into the future, but there are ways to relatively accurately estimate and predict your monthly revenue so that you can keep your spending in check. Business forecasting your revenue will allow you to figure out your profit margin and how much money to spend but it doesn’t come without its challenges. Here we’ll take you through how to forecast revenue and growth….
What is forecasting?
Business forecasting methods involve making future predictions of both past and present data for your business’s future. This can be used to make valuable predictions on things like inventory requirements, future sales and consumer trends. Pretty handy huh!?
How to forecast revenue:
There are two main types of revenue forecasting:
Judgment forecasting – this uses your gut feeling based off of your experience and intuition in the industry.
Quantitative forecasting – this scientific method uses your past data and revenue (or if you’re a startup, then data from similar businesses) to predict changes and track trends.
Overall, it’s best to use a combination of the two but your business forecasting techniques will vary depending on whether you are a well-established business with a long history or a newbie.
How to forecast revenue for established businesses:
The most logical move is to use your last year’s revenue statements. Make sure to also take into considerations things like; pricing, competition, personnel etc. To make get an even more accurate forecast, you could try separating income sources such as online vs offline sales, or sales from different product lines and merchants so that you can more accurately see the ups and downs from each revenue stream.
Make sure to do this on a monthly basis, rather than once a year (or at the very least, quarterly). This way the task becomes much easier at the end of the year and you can accurately keep track of all your revenue streams to better your future predictions and budget management. Better yet, by effectively using forecasting, you’ll be able to figure out at what point in the year it may be ideal to take out small business loans.
How to forecast revenue for startups:
Startup business forecasting is a challenging process namely because very new businesses will lack the useful data that more established businesses have to work. This is where judgment forecasting comes into play.
When it comes to starting off your business forecasting methods, it’s best to start with expenses and not revenues.
Estimate the following:
- Fixed costs – rent, bills, bookkeeping, legal fees, insurance, marketing, salaries, postage and any other fixed bills you may have.
- Variable costs – the cost of goods sold, direct labor costs, materials and supplies, packaging etc. (this will, of course, vary depending on your industry)
When it comes to startups, it’s always best to overestimate when forecasting expenses in this way.
Here are some tips you should take into consideration:
- Advertising and marketing costs should be doubled – they often escalate beyond what you expect
- Legal, insurance and licensing fee estimates should be tripled – they’re extremely hard to predict without sufficient experience and are known for exceeding expectations
- Take note of customer service time and direct sales as a direct labor expense – even if at the very beginning you are doing this yourself, you will want to eventually need to forecast this expense further down the line
- Make two forecasts, one that is more optimistic and one more conservative. Look to build at least one forecast and set of projections that are very optimistic, the best-case scenario for your business and a conservative forecast with a more measured approach
For this next section, we’ll discuss some general tips and formulas as to how to forecast revenue and growth…
How to predict business growth:
You’ll need to build growth projections from the following key ratios:
1. Gross margin
This is the ratio of total direct costs to your total revenue during a quarter or year. Gross margin doesn’t account for fixed business costs (such as taxes, admin) but rather the cost of your goods/services sold such as raw materials, inventory, labor costs, supplied and overhead directly relating to the manufacturing process.
Gross profit formula: calculate your net sales and then project your gross profit margin by using a simple two-step formula to determine net sales and then the gross profit.
- Net sales = total revenue minus the cost of goods sold
- Gross profit = net sales divided by total revenue
Simple working example: If total revenue is $200,000 and the cost of goods sold is $100,000, your projections would be: $200,000 – $100,000 = net sales of $100,000
Now for gross profit: $100,000 / $200,000 = 0.5 or 50%
2. Operating profit margin
Excluding your financing costs, this is the ratio of your total operating costs to total revenue over a quarter or year.
Operating profit margin formula: Operating Margin = Operating Earnings / Revenue.
3. Total headcount per client
Divide the number of employees you have (even if it’s just one and you are a one-man-show) by the total number of your clients.
Now you can better budget for the next quarter or even year! Keep in mind if you are a startup or new business this can be tricky. Our best advice would be to use your competition, using their current prices and an educated guess of the costs to get an idea of the gross profit margin.
Know when to ask for help
Projections not looking too great? Taking out a business loan is always an option to improve business cash flow and can seriously help seasonal business. This could be in the form of a line of credit, credit cards, SBA loans, invoice factoring and many more. To find out which loans you could qualify for, give Become a try – the free service will match you up with a loan most optimal for your needs and has over 30 reputable lending partners!
Find a mentor to help you with business forecasting techniques:
If you’re a business owner of an early stage startup, you may benefit from getting some help from a seasoned entrepreneur, preferably within the same or a similar industry to your own to help with the initial revenue forecasting process. If you can find a mentor through the contacts that you already have then even better! You can try looking to your suppliers, old colleagues and utilizing any member of trade associations that you belong to. If you have no one to turn to in your industry, alternatively you can seek the help of a reputable mentoring service such as SCORE.
SCORE provides confidential business advice completely free of charge where you can meet with mentors via email, video chat or even face-to-face (you’re welcome!).
Overall, to squeeze the very most out of your business forecasting, use all the data that you currently have and remember to make both a conservative and optimistic forecast. Armed with this information, you’ll be able to create a revenue forecast that can help guide your business in the right direction and budget correctly.