Revenue Forecasting Techniques

Accurately forecasting your business revenue makes it possible to plan for the future. Revenue projections give you an idea how many people to hire and whether you need to cut costs. There are multiple methods for doing this, so you should pick the technique that works for you.

Weighted Averages

The weighted-average technique looks at, for example, how many sales proposals result in an actual sale. If your sales team closes 20 percent of the time and makes 30 proposals per quarter, you can forecast six successful sales next quarter. If the average revenue is $10,000 per sale, that's $60,000 in revenue.

If you have a few very large sales, it may be better to assign them an individual probability: A $100,000 sale has a 10 percent chance of success, so you add $10,000 in revenue to the forecast.

Market Analysis

Pragmatic Marketing magazine says that if you're launching a new business or a new product, the best forecasts come from studying the market, specifically as it relates to:

  • The number of potential customers.
  • Seasonality — whether sales slump in winter or peak in spring, for instance.
  • How much customers are willing to spend.
  • How strong the competition is.
  • Whether your business will have to take market share from established firms.

This approach requires good, accurate market analysis. You can use it even if you don't have a past sales history to draw on.

Warnings

  • Revenue is only part of the picture, Entrepreneur says. If, for example, you're planning to expand your sales force or launch a big advertising campaign to boost a new product, you need to consider those added costs when you look at whether your business will stay profitable.

Low/Medium/High Estimates

Kimble, a consultant to professional service companies, says online that it recommends clients generate a low, medium and high estimate for each of their current customers:

  • The low estimate assumes the customer keeps paying the same amount for the same service and nothing more.
  • The medium estimate projects how much revenue the account is likely to generate.
  • The high estimate is the optimistic scenario, the maximum revenue you could hope for.

You should go over each estimate to confirm it's valid. Once you have all the estimates, add up each list to get the net revenue for the low, medium and high projections. Kimble says professional services firms can usually expect revenue equal to 30 percent of the difference between the medium and high estimates.

Tips

  • Entrepreneur says making at least two projections — conservative and aggressive — is a good idea with any revenue forecast. The conservative estimate keeps you grounded in reality; the aggressive estimate lets you think about expanding.

About the Author

A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.