Whether you are just starting out, or have been managing your business for a while or more, revenue forecasting is something that you can’t afford to not do, regardless of how small or large your business is.
We all have heard about strategic planning and when to hire new people, but do you really know when exactly you need to expand your team, start your next marketing campaign or launch your new product?
How do you go about planning your budget for advertisement, marketing and sales, when you are just a start-up and have no experience?
Or if you have been in the arena for long but are facing troubled times, how do you estimate taking on a business loan and the monthly payments that you can handle for sure?
The answer to the above and more such questions lies in the art of revenue forecasting.
What is Revenue Forecasting?
You all have heard the term once and probably know one thing or another about it, but just to make things easier, let’s just get down to the basics and get it out of the way before we discuss the important stuff.
A revenue forecast is an educated and calculated guess about how much money your company or business will bring in in the upcoming year.
At first you might think how is this going to help you with anything other than planning your budget, but as you go deeper you will realize the many benefits of this intelligent practice. And this is exactly what this blog is about.
1. Brings in more investors.
Whether you are an entrepreneur, or an established business, if you are looking for investors then revenue forecasting is going to get you some. A well-researched and detailed forecast, preferably one that is backed by market trends, facts and predictions, can help you convince investors and lenders that investing in your business is a lucrative and smart investment.
2. Budgets business expenses.
Forecasting your revenue for the upcoming year can help you budget your business expenses early on, providing you with a reliable forecast to compare your progress with. This ensures that you don’t stray far from the track, and accomplish all your set goals. However, you need reliable tools and methods for accurate revenue forecasting because otherwise you could end up in the wrong ballpark.
3. Justifies hiring decisions.
Just recently I came across how a manager had tactfully convinced executives higher up in the hierarchy to expand her team. She didn’t perform revenue forecasting for the company, but for her team – how much money her team will bring in after she has made a few hires. She further went on and compared her results with the past and current profits brought in by the team – and voila! Nobody could say no to her.
This is how effective revenue forecasting actually is. You can find out if you can afford new hiring and how much you can pay them by forecasting your revenue.
Do you need help measuring your team’s performance? ‘Your Back Office’ shows labor KPIs that will help you identify how they are affecting the revenue of your business.
4. Executes strategic planning.
So everyone in the business industry is about strategic planning. But how long are you going to wait before you execute your plans?
Revenue forecasting facilitates strategic planning and tells you how soon you will be ready for executing and implementing your plans. You will know when to make your next big investment to reap the loftiest benefits.
5. Improves production scheduling.
Revenue forecasting can help you better manage your production scheduling by preventing bottlenecks that could lead to lost sales. You can identify potential downtimes and your busiest days, helping you to cut your losses and up your revenue by efficiently planning your production tasks. One of the ways is by balancing your manufacturing and production processes by building your inventory during sluggish periods.
6. Helps you know your customers better.
Valuable customer insight is one of the greatest benefits of revenue forecasting. Analyzing customer patterns and sales data will help you predict customer behavior and future sales that will contribute to your company’s bottom line. By knowing your customers better, you can prepare your team likewise, leading to the development of better products and advertisement. You will also be able to price your products better, as you will know how much your customers are willing to pay for a particular service or product.
7. Manages cash flow and credit.
This is one of the most common reasons for forecasting revenue. Through efficient cash flow management, you can effectively plan timely delivery of your payments, project when you will receive payments, and avoid generating late fees and missing any payments to your vendors or suppliers. Forecasting is also very important when it comes to obtaining credit either for paying your employees or a new venture. You can negotiate better terms when you know when you will need credit.
‘Your Back Office’shows your cash flows and has a vendor tracker where you will be alerted for all payments and keep track of important documents.
8. Contributes to sales and product analysis.
Revenue forecasting not only includes the amount of money your company is going to make, but also where it comes from. Sales and revenue forecasting go hand-in-hand because sales forecasting helps you determine how much your product(s) is/are contributing to your bottom line. This highly impacts your decision to drop profitable products that don’t contribute to the gross profit, or increase the sales of other low-margin products that contribute more to the gross profit.
As evident, the importance of revenue forecasting is not just limited to budget allocation and planning for the next year. It highly impacts strategic planning and decision-making processes that lead to the company’s future success and growth. But to reap all the benefits of revenue forecasting, the most reliable of forecasting methods and tools should be used, and your numbers should be as accurate as possible.
‘Your Back Office’ allows you to know your numbers, manage your team and stay legal! Sign up for a demo today to learn more about how it can help your business.