Revenue forecasting doesn’t just show you how much money you may make. It also indicates how much you may be able to spend. Forecasting revenue helps you maintain profitability by allowing you to offset your projected expenses. Therefore, the accuracy of your revenue forecast is paramount for planning and for completing your project on time and within budget. The more precisely you project sales and expenses, the more accurate your resulting revenue forecast will be. Here are five steps for choosing the right revenue forecasting technique for your agency:
1. Establish timelines
Determine how far ahead you want to forecast revenue. Align the timeline with your goals.
When working on annual agency goals, your forecast should cover your fiscal year. When working on a campaign or individual project, your technique should call for you to shorten your projections to the respective time frames.
2. Estimate costs
Forecasting expenses is as important as forecasting revenue. Ensure that you can cover your costs and fulfill your profitability goals by choosing a revenue-forecasting technique that incorporates all relevant expenses. Start with fixed costs like your agency’s rent and utilities. Base your projections on previously paid bills.
Then factor in variable costs such as goods sold (packaging, supplies, and materials) and labor costs. If you’re forecasting revenue for a project, include holiday and vacation time for your team members if you will absorb those expenses. Account for risks like unexpected costs that may arise from issues with third-party vendors and suppliers as well. Even factoring for such variable costs at a small percentage of their likelihood of occurring will help you offset any overages
Determine whether you will evenly divide total expenses across each period in your forecast or if you will account for them at one particular point, like in the last month.
3. Forecast sales
Defining the “sales” that your forecast will include will greatly affect the amount of “revenue” you have to spend. Weigh carefully your sales team’s ability to close possible deals, as well as the likelihood that you will retain and add clients.
Choose whether or not to include the following areas, depending on how aggressive or conservative you would like to be in your projections:
- Potential projects
- Approved projects
If you have confidence in your agency’s ability to convert opportunities and potential projects, then include them in your forecast. But you should consider your previous history of closing similar work before including revenue associated with any possible “sales” in your forecast.
Also, consider available bandwidth. Your team can only do so much work, so don’t include revenue for projects that you can’t complete without adding resources.
4. Consider the market
Now that you’ve reviewed internal resources like the success of your sales team and the capacity of your creatives, look outward for shifts that could affect the demand for your services or the ability of customers to pay. Your revenue-forecasting technique should account for changes to competitors or customers. Are you competing with more agencies? Or fewer? Or perhaps a competitor is aggressively seeking business with lower prices. Any of these scenarios could affect your ability to land clients.
Similarly, are customers dealing with trends in their markets that could affect how much they can or will pay you? Or are they particularly satisfied or dissatisfied with your services to the point that they will increase or decrease the business they do with you?
Incorporating an evaluation of customer satisfaction and market conditions into your forecasts will help you increase their accuracy.
5. Review your forecast
Avoid forecasts that are irrationally exuberant or overly conservative by targeting the sweet spot in between. Per the Entrepreneur in an article on how to forecast revenue and growth, reconcile revenue and expense projections by confirming that they are in line with key ratios like gross margin, operating profit margin, and total headcount per client. If your calculations are sound, then your forecast is likely to be more accurate.
Accurately forecasting revenue is essential for maintaining profitability. Following these five steps will help you choose the right revenue-forecasting technique for your agency.
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