A company’s financial management doesn’t just depend on sales planning and controlling accounts payable and receivable. Preparing revenue forecasts is also a central element of operational strategy.
The reason is that the procedure allows management to prepare for future market scenarios and trends. In fact, efficient revenue forecasting often provides a significant competitive advantage.
Want to learn how to create your own? In this article, you’ll learn how revenue forecasting works and see the 5 steps to implementing it in your company.
Follow the reading!
What is a revenue forecast?
Revenue forecasting consists of projecting the business’s future revenue. It is based on sales history, market trends, business goals, and other operational factors.
The goal is to keep the business prepared for future market cycles. For example, a company that forecasts revenue tends to make more strategic plans and protect itself against potential risks, such as a drop in revenue.
Why do this procedure?
Forecasting revenue is a strategic process for several reasons. As we’ve seen, it contributes to corporate financial planning. To illustrate, imagine your business has experienced a period of declining revenue.
Had this scenario been anticipated, the company could have planned strategies to minimize the negative impacts, such as reducing operating costs and renegotiating debt. This way, even if there are still consequences, they tend to be smaller than if the business were surprised by the numbers.
Forecasting revenue is also important for aspects such as:
- make strategic decisions: when managers understand what the indicators may be in the future, they can plan the next steps based on this information;
- Optimize financial management: forecasting allows you to have greater control over cash flow and other important factors for business finances;
- Set goals: the revenue forecast can be a reference for establishing key performance indicators (KPIs) for the team, especially the sales team.
What are the 5 steps to making a revenue forecast?
So far, you’ve learned what a revenue forecast is and why it’s important for your company. Now it’s time to learn the steps to successfully implement the process.
See the 5 steps to make a revenue forecast!
1. Evaluate the business history
The first step is to analyze the company’s operations and history. While there’s no guarantee that past data and scenarios will repeat themselves, they provide guidance for what might happen in the future.
To better understand, imagine you’ve evaluated the company’s business history over the past three years. In your research, you’ve identified that, in all of them, first-quarter revenue fell compared to the previous period.
Based on this information, you can develop strategies to prepare your business for a potential revenue decline again during this period. Viable approaches include reducing operating costs and creating promotions to generate more sales during this period.
If the company doesn’t have this history, you can consider general market data. There are several studies and consolidated figures that can help you understand the seasonality of your industry.
2. Consider financial goals
The next step is to align the revenue forecast with the company’s financial goals . For example, if the plan includes expansion into new markets or product launches, the projection needs to reflect these factors to be realistic.
In this sense, by setting growth goals, the business can establish a revenue target and work to achieve it. This measure tends to motivate team productivity, as they work with a clear objective in mind.
However, it’s crucial to emphasize that these goals must be realistic, considering the company’s track record and market trends. When identifying the possibility of a revenue decline, setting unattainable goals tends to have the opposite effect—demotivating the team, which will then work toward an impossible goal.
3. Analyze cash flow
A company’s cash flow controls the inflow and outflow of capital from its accounts. It’s one of the key indicators of liquidity and operational health. After all, a positive cash flow usually indicates the business is in good shape to meet its financial commitments.
Cash flow figures are also crucial for forecasting a company’s revenue. This is because businesses often have good revenue but are burdened with bills to pay—such as lines of credit and suppliers.
Therefore, even if the projected revenue is high, if cash flow is poorly managed, the business may face difficulties. Therefore, in addition to analyzing past data, consider future income and expenses to obtain a more accurate revenue forecast and set goals.
4. Have alternative scenarios
It’s impossible to predict with certainty what will happen in the market, as various variables influence a company’s results. There are both internal factors—such as sales—and external factors, such as the entry of competitors and the country’s political and economic climate.
Therefore, the forecast must consider alternative scenarios, such as an optimistic, a neutral, and a pessimistic estimate. Thus, even with market uncertainties, it is feasible to have contingency plans to maintain a healthy operation.
5. Monitor the numbers
Finally, constantly monitor your numbers, without viewing revenue forecasting as a single, immutable process. As the market changes and trends emerge, the analysis must be constantly updated.
To do this, consider review cycles, such as quarterly or semiannual. Additionally, assess the team’s progress toward goals to determine whether a change in direction would be strategic.
To facilitate the process, you can also hire a financial consultancy, such as AB Consult . In addition to monitoring indicators and suggesting adjustments, the service can structure revenue forecasts from the outset, providing greater confidence in financial decision-making.
