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Your guide to forecasting revenues
Never make predictions about the future, and yet...
New York Yankees catcher Yogi Berra famously quipped that predictions were difficult to make – especially about the future. Be that as it may, companies have no other option but try. Without trying to predict things like revenue, expenses and so on, it would be impossible to run a business.
Revenue forecasting is the art of predicting the amount of revenue that a business or organization will generate over a specific period of time, usually the next fiscal year.
It is a critical part of financial planning and budgeting for businesses, as it helps managers to make informed decisions about resource allocation, investment opportunities, and growth strategies. Revenue forecasts can be used to develop sales targets, set pricing strategies, and identify areas where cost savings can be achieved.
There are several methods used to forecast revenue, including trend analysis, regression analysis, and market research. Regardless of the method used, accurate revenue forecasting requires careful consideration of all relevant factors, including economic conditions, market trends, competitive landscape, and customer behavior.
Here are five common methods for forecasting revenue:
Trend Analysis: This method uses historical data to identify patterns and trends in revenue growth. For example, a company might look at the growth rate of its revenue over the past five years and use that data to predict future revenue growth.
Market Research: Market research involves gathering data on customer behavior, industry trends, and competitor activities to forecast revenue. For example, a company might conduct a survey to determine how much customers are willing to pay for its products, or analyze market data to identify emerging trends that could impact revenue.
Regression Analysis: Regression analysis involves identifying the relationship between revenue and other variables, such as advertising spend or customer acquisition costs. For example, a company might use regression analysis to predict how changes in its marketing budget will impact revenue.
Expert Opinion: This method involves soliciting input from experts in the field, such as industry analysts or consultants. For example, a company might consult with a marketing expert to help forecast revenue for a new product launch.
Time-Series Analysis: Time-series analysis uses statistical methods to identify patterns in revenue over time. For example, a company might use time-series analysis to forecast revenue for a seasonal product, such as a toy or holiday decoration.
Each of these methods can be effective for forecasting revenue, depending on the specific circumstances and the availability of data. It's often a good idea to use a combination of methods to get a more accurate forecast.
What if my forecast is off?
If your revenue forecast turns out to be wrong, it could have significant implications for your business. However, it's important to remember that revenue forecasts are just that - forecasts. They are educated guesses based on available data, market trends, and assumptions about future performance.
If your revenue forecast is off, there are several steps you can take to address the situation:
Review your assumptions: Start by reviewing the assumptions you made when creating your revenue forecast. Are there any factors that you didn't consider or that have changed since you created the forecast? This could include changes in the market, customer behavior, or your own business operations.
Identify the root cause: Once you've reviewed your assumptions, try to identify the root cause of the discrepancy between your forecast and actual revenue. Did you overestimate demand for your product or service? Did you underestimate the competition? Identifying the root cause will help you develop a plan to address the issue.
Adjust your strategy: Based on your analysis, you may need to adjust your strategy. This could include revising your pricing strategy, targeting a different customer segment, or launching new products or services.
Communicate with stakeholders: If your revenue forecast was shared with investors, stakeholders, or your team, it's important to communicate any changes to your strategy and the reasons behind them. Be transparent about the situation and your plans to address it.
Monitor performance: Finally, monitor your performance closely going forward. Use the insights gained from your analysis to refine your forecasting methods and improve your decision-making in the future. Remember, a revenue forecast is not set in stone and can be adjusted as new information becomes available.
There are few if any metrics of greater import to FP&A teams than revenue forecasting. Software solutions like Firmbase let financial professionals mitigate the guesswork and change forecasts faster than before by making it easier to incorporate stakeholders in their process and removing data silos. In any case, FP&A teams need to remain vigilant and react whenever a variance appears and readjust their forecasts adequately.