Do you know how much money your business will make in the next month, quarter, or year? Getting your revenue forecasting right is essential for every business regardless of its size. Your business's growth might stagnate or rise based on your ability to predict your revenues accurately.
Most businesses predict their revenues every quarter while some businesses carry out the exercise only once or twice per year. It may seem like a great deal of work, but being confident in your forecasts allows you to accurately track your results against your goals.
What is revenue forecasting?
Revenue forecasting is estimating your revenues over a fixed timeframe, either quarter or year.
A business needs to consider several factors when forecasting revenue. The same way a weatherman looks at wind speed, precipitation, or local factors to predict the weather, a business must consider past financial performances of the business, macro-economic trends, and market sentiment to forecast its revenue.
What are the benefits of revenue forecasting?
Revenue forecasting helps your business in several different ways.
Revenue forecasting can help your business use objective data to raise funds from investors. It can, also, help you secure a business partner or get more money from a lending institution.
Staffing & planning
Hiring is a difficult thing to plan for. A revenue forecast can help you determine the best time to hire new staff, without hurting your cash flow.
Managing cash flow
Managing your business cash flow is typically one of the stressful things business owners have to do. You need to ensure you are not running late on paying bills and maintain a good credit record to help support your business in the future. Revenue forecasting helps you plan your cash flow to help you maximize your resources.
Optimizing business decisions
As a business leader, your job is to make the best decisions for the growth of the business. Revenue forecasting helps you decide when and where to allocate your resources. It can help you know when to make capital investments or cut expenses.
Why is it difficult to accurately forecast sales?
Accurate sales forecasting is vital for every business because if the final results are significantly below or above your forecast, it can greatly impact the health of the business. Most companies face challenges during sales forecasting because of factors like:
Economic shifts and competitive pressure can affect your business revenue. Forecasting how you expect the industry to grow in the coming years and whether competition will be stiffer is extremely difficult.
For example, the economy could go into an unexpected crash and affect your business's growth, or new competitors could enter into the market and attract more customers, taking your sales.
Predicting consumer behavior
Sometimes, it is difficult to predict how consumers will engage with your brand. Consumer tastes and preferences might change, adding variability to your forecasts.
Many businesses use a quantitative forecasting model based on historic data. However, things can change over time, leading to erroneous forecasts.
Using a forecasting model that does not go beyond historical data will eventually lead to a wrong forecast, due to changes in the world and consumer behavior.
Variables your revenue projections need to account for.
You want to forecast your business's revenues as accurately as possible to avoid unpleasant surprises. However, several factors out of your control can affect your revenue projections.
You need to take these factors into account when making your revenue projections.
Most businesses experience seasonal cycles. Some companies make the most money during holiday seasons and less revenue during other months. These seasonal swings can affect your business's revenue forecasts on a monthly or quarterly basis.
As a customer base shifts, that can change a business’ sales and revenue. For example, if your customers shift from one geographical location to another, you’ll need to account for that shift in your forecasts.
Competitors can have a huge impact on your revenue. You must keep a close watch on what your competitors are doing and account for that in your revenue forecasts.
Changes in consumer behavior
Consumer behavior is constantly evolving, driven mostly by changes in technology and how we interact with the world around us. Businesses need to plan for changes in revenue as people change the way they shop.
Considering economic trends is essential when making revenue predictions.
For example, if an economy is doing well, it means consumers will buy your goods and services, and you can expect more sales and revenue increases. While in a recession economy, there will be fewer sales, lowering your revenue.
The Bottom Line
Accurate revenue forecasting is essential for your business as it helps you determine how much money your business will make next month, quarter or year. These predictions allow you to make decisions that will help you grow your business.