As an entrepreneur, knowing how to forecast revenue is a valuable skill that will guarantee your business’ success. With an accurate financial forecast, you can gain a clearer picture of your financial performance that will help you make smarter financial decisions.
What is Revenue Forecasting For?
Having a proper revenue forecast can help you prepare for the future. With the right tools and data, you can get an insight as to when you need to ramp up on staffing, increase product manufacturing, or even when you need to invest in marketing efforts.
For instance, if you project to have significantly higher sales in the last quarter of the year, you can make necessary adjustments to prepare for the seasonal rush. You can start investing more on marketing by September or even hire temporary staff.
During the startup stage, financial forecasting can be intimidating, even downright scary. However, you need to spend time on preparing a thoughtful forecast if you want to attract investors to your business.
Practical Tips on Forecasting Revenue
For those new entrepreneurs whose business are still in the startup stage and do not have the luxury of experience yet, you might be wondering how you can prepare a sales forecast for your new business. If that’s you, read more to get details on how you can get started.
Take a look at your expenses.
Start by taking stock of your current expenses and build a forecast on what your recurring expenses will be. You can review common expense categories as follows:
- Overhead and fixed costs – your rent, utilities, licensing and insurance fees, professional fees, salaries, equipment, etc.
- Variable costs – your costs of goods sold and direct labor costs
When you have an idea how much the projected expenses will be, you can better track of your business cash flow. For good measure, consider doubling or even tripling your estimates for overhead costs, especially legal and licensing fees, which almost always exceed what new entrepreneurs expect.
Do your research on how other businesses are doing.
Since you don’t have much data to work with at present, it’s important to do your research on the revenue opportunities other businesses in your industry have. You can also look at how companies in the same region, with a similar customer base or business model, are performing.
You can use this as a benchmark. However, remember to make concessions for the first few months of your business, which you can expect to be lean.
Review your projections and check the key ratios.
After preparing your forecasts, check whether your figures are sound. Entrepreneur suggests that you reconcile your revenue and expense forecasts by checking these key ratios:
- Gross margin – ratio of the total direct costs to the total revenue in a given period
- Operating profit margin – ratio of the total operating costs to total revenue in a given period; don’t expect that this will reach a break-even point too soon without seeing positive growth in your revenue
- Total headcount per client – ratio of employee to the total number of clients that you currently have; if you’re a one-man team now, by how much will you want to grow your team as your client base expands in the future?
Forecasts and revenue projections can only be as good as the quality of your financial data. If you feel like you’re in over your head with these numbers and don’t know how to forecast revenue, we’re here to help.
Contact us, your financial and accounting outsourcing partners, at D&V Philippines to learn how we can help. You can also download our whitepaper, Premium CFO Solutions, to find out more about our scalable finance and accounting services for your startup.