Most organizations create sales forecasts by calculating an anticipated market growth rate to the present year’s revenues. The forecasts are then supported utilizing a bottom-up forecasting method that recognizes inputs such as projected product units sold, price, sales productivity and seasonality.
A revenue forecast is a calculation of the amount of money that an organization will receive from sales during a particular period. Constructing forecasts is often viewed as tedious and time consuming. Revenue forecasts are necessary to attract investors, as well as create operational and staffing plans to ensure success.
Consider the following tips when developing financial forecasts:
- Rather than starting with revenues, begins with expenses. When a business is starting out, it is easer to forecast expenses than revenues. Expenses include fixed costs and overhead, such as rent, utility bills and marketing, as well as variable costs, such as cost of goods sold and direct labor costs.
- Forecast revenue conservatively and aggressively. Conservative revenue projections could include a low price point and no sales staff while an aggressive projection could include a higher price point and a sales staff paid on commission. Doing so will help you simultaneously think big and realistic.
- Examine key ratios to ensure projections are solid. Ratios include gross margin and operating profit margin.
Creating accurate revenue forecasts takes time. Revenue forecasts recognizes weaknesses and strengths before an organization sets its budget and marketing plans for the coming year. It also enables efficient purchasing and expansion plans.