5 Common Problems of Revenue Forecasting (and How to Solve Them)
It’s nearly impossible to predict annual revenue to the exact dollar—especially in the creative realm. However, it is absolutely critical for businesses to create high-quality budgets that are constantly monitored. And no matter how you look at it, revenue forecasting is a necessary evil.
To help your agency properly forecast your finances, try to avoid making these five common revenue forecasting mistakes.
1) Relying on Qualitative Assumptions
In the creative realm—where many campaigns are dictated by intangible metrics—it’s easy to speculate using qualitative data. The truth is that assuming conditions and outcomes only leads to false hopes. And while it’s completely normal to make assumptions in the thick of a project, it’s important to never rely on vague qualitative metrics.
Solution: Rely on qualitative data—cold, hard facts. Whether you use internal research or third-party data, make sure you assumptions are backed up by a verifiable, reliable source.
2) Ignoring Cost Assumptions
Average cost flow assumption is a calculation used to monitor inventory goods by determining the cost of your services or products sold against ending inventory. And any revenue project is based on cost assumption. The biggest mistake for most businesses? Ignoring these cost assumptions completely. Without an understanding of your assumptions, no one will know what your projects are based on.
Solution: Have a clear understanding of all your agency’s cost assumptions, such as market conditions, production costs, overhead estimates, and resource costs. Make sure you are able to explain these assumptions within your revenue projection documents—and make sure you can explain what they each entail.
3. Bad Math
On the surface, this one seems simple to avoid. But you’d be surprised how many revenue projections are botched because of simple math. It’s not rocket science! Make sure every column and row adds up and makes sense. Bad math simply implies a lack of attention to detail.
Solution: Double-check your work as you work. Don’t wait until the entire project is completed to cross-reference your totals. Have a trusted coworker triple-check your work as well.
4. Failing to Adapt
Whether you’re forecasting annually, quarterly, monthly, or even by the project, traditional forecasts are usually out of date. Think about it: a month-old snapshot inevitably ignores changing variables of your business or industry. And failing to adapt you projections—or simply running a campaign based on old metrics—can lead to disaster.
Solution: Utilize an automated accounting software platform to keep updates in real-time. Not only will collaborative software allow team members to stay on the same page, it clearly displays all vital signs of your business and enables you to track changes and update your forecasts.
5. Being Too Conservative
Like most creative firms, you’ve probably been in a situation where conservative reality trumped an otherwise aggressive dream state. And when it comes to finances, it is easy to err on the side of caution. Rather than completely ignoring optimism, however, we’re here to say that you should embrace a middle ground and create revenue projections that cater to both sides of the equation.
Solution: Build two sets of revenue projections: one aggressive, one conservative. This will force your agency to make the necessary conservative assumptions, but also unleash the undeniable power of thinking big. These ambitious forecasts may not always come to fruition, but you’re more likely to generate breakthrough ideas that will ultimately grow your company.
About The Author
Rod has had years of experience in the video production and IT industries and has worked for companies such as Universal Studios & IBM.