Measurement

What Is Revenue Forecasting and Why Do You Need It?

CopyPress

February 7, 2023 (Updated: March 8, 2023)

Here’s a simple fact about business: you can’t spend more money than you make. True, you can get loans, but those always come due. If your expenses are more than your revenue, you won’t be in business for very long. Luckily, there are some analysis and predictive processes you can use for determining how much money you’ll have coming in for the future so you don’t overspend. Today, we’re looking at what revenue forecasting is and how doing it for your company helps predict what kind of marketing and sales initiatives you can undertake:

• What Is Revenue Forecasting?
• Why Does Revenue Forecasting Matter for a Business?
• What Happens When You Don’t Forecast Revenue?
• Are There Different Methods of Revenue Forecasting?
• Is There a Revenue Forecasting Formula?
• How Often Should You Forecast Revenue?
• What Information and Tools Do You Need To Forecast Revenue?
• Can You Use AI To Predict Your Revenue?
• How Does Revenue Forecasting Fit Into Content Marketing?
• Can You Trust Your Revenue Forecast?
• Tips for Forecasting Revenue for Your Company and Content

What Is Revenue Forecasting?

Revenue forecasting is a predictive business process that helps you estimate future company revenue based on your past performance and current trends. The forecast tells you the projection of overall business income over a specific period. Even though it’s called a revenue forecast, it’s important to remember that you’re not just looking at the efforts of the sales team. Revenue forecasting looks at numbers from across your business in areas like marketing, HR, outreach, philanthropy, and other areas that contribute to your income, besides direct sales.

Though forecasting is a highly mathematical process, revenue forecasting incorporates a combination of qualitative and quantitative factors to create models and help your company learn more about what it’s likely to earn.

Why Does Revenue Forecasting Matter for a Business?

Forecasting is a necessary part of any business or marketing plan. Without it, you wouldn’t be able to make informed decisions about how you spend your budget or what new ventures you could undertake. You also wouldn’t be able to tell if your business might grow, shrink, or stay stagnant in the upcoming year. No matter the industry or size of your company, here are a few advantages to doing revenue forecasting for your company:

It Helps Create a Realistic Financial Plan

One of the biggest benefits of revenue forecasting is being able to create a realistic financial plan that you can rely on. Even though forecasting is just an estimated guess for your future finances, it’s still helpful in giving you a range to follow. For example, if you forecast you can spend a maximum of $7,000 per month on advertising while keeping some marketing surplus, you know you can’t go over that number. Even if it turns out to be a little more or a little less, you’re closer to the right budgeting than you would have been without forecasting.

It Allows You To Predict Your Hiring Capacity

When you know how much money you can spend in each area of your business on a monthly or quarterly basis, you can also predict if you can expand your team. If you barely have enough money to cover your current expenses, you shouldn’t be adding to your team. But you won’t know that unless you did deep into your current financial situation.

But you also have to account for where your company is going. Are you planning to scale up your output or production? Did you just sign a lot of new clients or get a lot of new customers? If so, your revenue could go up in the future. With more money coming in, you could expand your team. But your current financial data won’t be able to give you the numbers you need. Only a forecast can do that.

It Helps You Set Revenue Goals

The better you can predict what your revenue income might be, the easier it’ll be to set sales and marketing goals for your company. For example, let’s say you project making $5,000 in a month for a brand-new startup company. You can use that projection to set goals by campaign for your marketing. How much do you want to bring in with each one? You could also use the forecast to set sales benchmarks for your sales associates. You could use them to structure your bonus tiers or set an expected quota for all of your salespeople.

It Gives You an Idea of How You Can Scale Your Brand

Every business wants to grow. You’re not doing hard work day in and day out to watch your revenue stay stagnant. Most companies want to scale up their sales, production, and other key areas. But that’s hard to do if you don’t know what kind of income you can rely on. Forecasting your revenue helps you predict what you’ll bring in over time based on the changes you make and the current economic conditions in your industry. This data can help you create a scaling strategy that makes sense for your business without growing too fast or slow.

What Happens When You Don’t Forecast Revenue?

If you don’t forecast your revenue, is your entire company going to go under? Maybe not. But do you want to take that kind of risk? If you’re planning to scale your company or invest in any kind of new business venture, doing so without forecasting revenue is like walking the high wire without a net. If you don’t forecast, you don’t truly know where your company’s headed. This could lead to cash flow problems, unexpected challenges, and missed opportunities to grow and expand.

Any of these situations could cause minor, preventable challenges. Or they could tank your entire company. You don’t know until they happen, but you can try to stop them before they start with forecasting.

Are There Different Methods of Revenue Forecasting?

There are a few primary forecasting methods most companies use to predict their revenue for an upcoming period, They include:

Straight-Line Forecasting

Straight-line forecasting is one of the simplest methods you can use to predict revenue. Use this method when your company growth rate is constant to predict future developments with your financial and budget goals. You can also use this model when a rough estimate of projected revenues is enough for your current project. A benefit of using the straight-line model is that you only need your past revenue statistics and a basic understanding of math to do the forecasting. To forecast revenue this way, multiply your revenue from the last year or time period by your company’s growth rate.

Moving Average Forecasting

A moving average model is a form of trend analysis. It compares the current performance of your brand in shorter intervals with the performance over previous periods. You use the moving average model so you don’t have too much lag in your results and they become unhelpful over time.

This type of forecasting has more variables than the straight-line model. You can use it to identify an underlying pattern in how your company earns money. A rising moving average, which shows growth, is an uptrend. A dropping moving average, which shows a loss, is a downtrend. This type works best for businesses that aren’t seasonal or don’t have a backlog of historical sales data.

Simple Linear Regression Forecasting

The simple linear regression model uses the connection between a dependent and independent variable to create a trend line. Done on a coordinate plane, the X-axis represents the independent variable and the Y-axis represents the dependent variable, which is always your revenue. When one changes, so does the other. The relationship between the two variables creates a graph line with an upward, downward, or stable trend.

Multiple Linear Regression Forecasting

The multiple linear regression model works similarly to the simple linear regression one. The biggest difference is that it uses more than two independent variables in its calculation. This model shows how all the relationships among the independent variables play out in response to the dependent variable.

Is There a Revenue Forecasting Formula?

Because forecasting is a mathematical process, yes, there is a formula you can use to predict your revenue for an upcoming period. But because there are multiple types of forecast modeling, the formula for each one is slightly different. At the most basic level, the revenue forecast formula reads:

R = p * u

In this formula, “R” stands for revenue, “p” stands for the average sales price of each product or service, and “u” stands for the number of units you expect to sell. There are more complicated formulas that help you predict your average price and the number of units you estimate selling. This data all comes from your past performance ledgers.

Then, when you add in more variables to fit certain types of modeling, the formulas also get more complex. Remember, your revenue forecast focuses on more than just the number of sales you plan to make within a quarter or a month. While this formula is a helpful starting point, it’s not the only calculation you need to predict your revenue.

How Often Should You Forecast Revenue?

Most companies forecast their revenue at least once a year. The most common times to do it are at the end of the last quarter for the upcoming year or at the beginning of the first quarter to predict revenue for the current year. Some organizations break the forecasting down into smaller chunks, such as looking at predictions by months or quarters. Others forecast farther in advance, with yearly, three-year, and five-year predictions.

It’s important to remember the more amount of time your forecast covers, the more uncertain, and potentially less accurate, it may be. Whether you’re working with short or long forecasts, it’s always helpful to update them as your industry, audience opinions, and external factors change. This way, you’re always dealing with the more certain predictions possible.

What Information and Tools Do You Need To Forecast Revenue?

Before you can go through the actual revenue forecasting process, you need to know exactly what information and tools to collect. If you don’t bring the right data and technology to the table, you won’t get the most accurate results. Here are a few things you should collect before starting your revenue forecasting process:

Past Financial Statements

You can only predict the future by analyzing the past. Your marketing and sales departments, or your company leadership, should have previous financial statements and data for the brand. Data segmented into different periods could be helpful, especially if you’re running different forecasts based on a yearly, quarterly, or monthly basis.

If your business is too new to have sufficient financial data, you may turn to information from similar brands in your industry. For example, maybe there’s another company in your niche that’s a few years older than yours but started with similar beginnings. You may use that company’s financial data as a baseline for what your company can expect and tweak the information based on what you know about your brand’s progress so far.

Context for Your Numbers

The numbers in your past financial statements only tell you what happened with your revenue in the past, but not why it happened. Believe it or not, the “why” matters just as much. For example, maybe your revenue grew big time last fall. If you just looked at those numbers alone, you may think your revenue will shoot up every year at the same time.

But let’s say your industry took a tremendous hit last fall and a bunch of other companies went under. It wasn’t that your revenue skyrocketed because your company is so outstanding. It happened because you lacked competition. If you have more competitors this year, you might not see the same jump in revenue. Researching your coverage area’s economy, the political climate, and the beliefs of your audience can tell you more about why the numbers are what they are.

Related: The 5-Step External Marketing Audit Process

Spreadsheets or Software

The easiest way to collect your revenue data and share it in graphic form is to use a spreadsheet program like Microsoft Excel or Google Sheets. You can create different tabs and sheets for different information. You can also set formulas to auto-calculate data and produce charts and graphs. If your team doesn’t want to do the math, you may choose a different software program that lets you input data and it makes all the calculations for you. Choosing the right software programs to streamline your forecasting process can help make developing and updating your revenue predictions much easier.

Related: How To Calculate Return on Investment With Excel

Forecasting Model

As we already noted, there are multiple methods and models you can use to track your revenue predictions. Choosing which one works best for your team and current projects is just as important as picking the right software program. Your team has to be able to read and understand the charts and graphs produced. Otherwise, revenue forecasting is a waste of time. Make sure the model you choose aligns with the data you have and the predictions you want to make about your upcoming financial plans.

Can You Use AI To Predict Your Revenue?

Image via Unsplash by @austindistel

Artificial intelligence (AI) has infiltrated every area of business, and revenue forecasting is no different. Some companies use machine learning to find their predictive revenue for a period based on data collection. Using a revenue forecasting AI program could be a solution for your brand, but you need to consider a few things first:

• Is this a good opportunity for your brand? AI isn’t the right choice for every company. Smaller companies especially may not have enough data to make it a worthwhile investment.
• Can you afford it? AI programs often aren’t cheap. If you’re trying to predict your revenue using AI it might be better to use your human team first and then decide if it could be a future investment.
• What type of models do you need and in what time frame? Each AI program is unique. They collect data in different ways and share it differently too, so you need to understand exactly what works for your brand before committing to a program.

How Does Revenue Forecasting Fit Into Content Marketing?

By now you’re probably thinking, “okay, revenue forecasting has some value for my brand. But what the heck does it have to do with my content marketing?” Since content marketing is often a top of the funnel marketing activity, we may forget the importance it actually has on the bottom-of-the-funnel conversions and revenue. When your revenue might not directly affect how much content your team puts out, it does affect aspects that get your content to the publication stage.

Lower revenue may mean fewer resources, like access to publishing tools or new technology. It also may mean fewer staff members, which means slower production and few content pieces. Most companies often use revenue forecasting in addition to calculating the return on investment (ROI) of content marketing to see if this strategy helps them gain new paying customers. If content marketing isn’t helping the company gain revenue, higher powers may decide to cut the practice or the team altogether.

Can You Trust Your Revenue Forecast?

Since forecasts are just predictions, how do you know if you can trust them? Here are three ways you can make sure you’re looking at a trustworthy forecast that’s reliable:

1. You have enough data: More data means more accurate forecasts. Whether you’re working with internal data, competitor data, or a combination of the two, make sure you’re using enough to get accurate results.
2. The process is complex enough: As we said before, the simplest revenue forecast formula probably isn’t enough for most companies. Make sure you’re factoring in enough variables and being honest about the state of your company and where it’s headed.
3. The result has realistic numbers: If your results say your revenue is going to grow 500% in the next month, chances are you did something wrong. Make sure the forecast data is something your brand or any other in your industry could reasonably achieve.

Tips for Forecasting Revenue for Your Company and Content

Here are a few tips for getting started with revenue forecasting for your brand and content marketing:

Use Data for Your Calculations

This may sound simple, but all your forecasting should come from the analysis of your actual financial and business data. If you want an accurate forecast, you can’t make things up. Use actual facts and figures from past reports. Even if your numbers aren’t where you want your business to be, you’re never going to get there by overestimating or fudging the results.

Don’t Picture an Ideal Forecast

Forecasting is not the same as goal setting for your company. A goal is a benchmark or milestone you hope to achieve. Though they shouldn’t be, some of your marketing goals might be lofty or even unattainable. Your forecast should never look that way. You shouldn’t try to force your forecast model to show a desired outcome. Instead, you need to create a forecast model that accurately reflects the data collected. It’s also important to remember that no forecast is perfect even your best analysis could be slightly different than the true outcome.

Update Your Forecast Frequently

Forecasts are just estimated guesses about your upcoming revenue. Granted, they’re good estimated guesses, but a guess isn’t reality. If the COVID-19 pandemic taught us anything, it’s that the unexpected happens and it can completely topple your business plans. That’s why it’s important to update your forecast frequently, such as every month or every quarter.

Updating your forecast allows you to account for additional variables that may not have existed when you did the initial predictions at the beginning of the year. Revisions also allow you to account for new technological advancements, an increase or decrease in staff, and any other unplanned changes that affect your budget and revenue.

Make Forecasting a Team Effort

Revenue forecasting is too big of a job for just one person. It requires input from several departments and data collection from different areas of your business. Loop in marketing, sales, human resources, and any other departments that play a direct role in earning or spending company revenue.

Revenue forecasting is a great way to make sure your budgets align with your growth plans. Any brand can grow, no matter how small, in a given period. But to do growth right, it’s important to understand your scaling potential. Tools and processes like revenue forecasting can help make scaling easier so that your company doesn’t grow too fast. This helps you from blowing through any potential revenue without a solid strategy or plan.

CopyPress

February 7, 2023 (Updated: March 8, 2023)