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? Accurate forecasts are crucial for effective planning and decision-making in these areas.
How do you plan your budget for advertisement, marketing, and sales? Especially when you are just a start-up and have no experience. 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 Financial 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. Financial forecasting encompasses predicting a company’s future financial performance based on historical data such as revenue and expenses.
At first, you might wonder how this will 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 looking for investors, you need revenue forecasting to raise funds. Creating accurate revenue projections by analyzing historical revenue data can help in convincing investors. 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. This ensures that you don’t stray far from the track, and accomplish all your set goals. However, you need reliable forecasting 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 a manager who tactfully convinced executives higher up in the hierarchy to expand her team. She didn’t perform revenue forecasting for the company but did it instead for her team. An accurate sales forecast can help justify hiring decisions by predicting the revenue impact of new 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 revenue forecasting.
Do you need help measuring your team’s performance? ‘Your Back Office’ team can show you labor KPIs that will help you identify how they are affecting the revenue of your business.
4. Executes strategic planning with forecasting tools.
So, everyone in the business industry is about strategic planning. A well-defined forecasting process is crucial for strategic planning and achieving business success. 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 to execute and implement your plans. You will know when to make your next big investment to reap the loftiest benefits.
5. Improve production scheduling
Revenue forecasting can help you better manage your production scheduling by preventing bottlenecks that could lead to lost sales. Leveraging sales forecasting software can help improve the accuracy and efficiency of production scheduling. 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 way is to balance your manufacturing and production processes by building your inventory during sluggish periods.
6. Help you know your customers better
Valuable customer insight is one of the greatest benefits of revenue forecasting. Analyzing historical data and sales patterns 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 advertisements. You will also be able to price your products better. That is why you must know how much your customers are willing to pay for a particular service or product.
7. Manage cash flow and credit
This is one of the most common reasons for forecasting revenue. Estimating future revenue is crucial for effective cash flow management and planning the timely delivery of payments. Through efficient cash flow management, you can effectively plan the 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. Our team can also keep track of important documents.
8. Contribute to sales and product analysis
Revenue forecasting not only includes the amount of money your company will make, but also where it comes from. Sales and revenue forecasting go hand-in-hand because sales forecasts help 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 recap all the benefits of revenue forecasting, the most reliable of forecasting methods and tools should be used. Your numbers should be as accurate as possible, as well.
‘Your Back Office’ allows you to know your numbers, manage your team and stay legal! Sign up for a call today to learn more about how it can help your business.
