Do You Really Need Revenue Forecasting?
Through any number of various experiences, you may have noticed that it is nearly impossible to precisely predict revenue. There are a variety of factors that can lead to a forecast failing to accurately predict your future revenue. Between a dynamic economic climate, decisions made company-wide, and the general marketplace, revenue forecasting can sometimes fall short. That begs the question, do you really need to forecast your revenue?
Large companies have taken to breaking up revenue forecasting by the quarter. This affords a much closer time interval to forecast revenue, and can boost accuracy. However, for a small or mid-sized company, quarterly revenue forecasting may be cost-prohibitive. After all, the whole point of revenue forecasting is to predict business income and to potentially improve profits. Spending more money than you expect to gain from more accurate forecasting seems like a bit of a mistake.
So again, do you really need revenue forecasting? In short, yes. Despite the potential shortcomings, having at least a rough idea of your future revenue can help you plan for major events. If you want to expand your business, either by adding additional staff or launching a new marketing campaign, revenue forecasting can help you make the decision whether to start now, or wait until things look a bit more rosy for predicted revenue. Similarly, if you are anticipating a slow month, season, or year, you can plan ahead and start tightening the proverbial belt.
There are two main ways to forecast revenue: judgemental forecasting is where you invoke your own intuition to make a prediction for future numbers, and quantitative forecasting involves using previous revenue data to come up with a predicted figure while accounting for trends and any possible changes in the market for the coming months. While each method has its own merits, the best approach for revenue forecast is often a combination of the two.
By taking a quantitative forecast, which accounts for all of the cold and objective factors, and by applying your own judgement to the numbers, you can come up with the most accurate revenue forecast. This has a very subjective aspect because you, not a machine or equation, are in full control of the final revenue forecast. With that in mind, it’s important to keep your head clear of any hopes or thoughts of what you might want the forecast to indicate. If you are planning on increasing marketing spend, but the quantitative forecast is quite contrary to any additional revenue available to increase spending, your subjective analysis must still be impartial. A clouded judgement can lead to false predictions, and then making decisions based on the faulty view of the future can be disastrous.
You’ve got your revenue forecast. It’s been through the quantitative analysis and then you put your own personal (unbiased) spin on it. Now what? Well, chances are you have a strategic business plan for the coming months or year. Take a look back at what the goals are for the direction of the company, and try to fit them in with the revenue forecast. The questions below are ones that you can probably answer easily with a detailed revenue forecast:
- When should I stock up on supplies to prepare for a down month?
- When is it a good idea to hire new creative personnel?
- At what point should I cut expenses to get ready for tight times ahead?
- When would be a good time to take a business loan to float through an extended period of lower revenue?
Do you really need revenue forecasting? The simple answer is yes. The more complicated questions that arise because of the revenue forecasting? Well those are yours to answer once you’ve taken a good look at what your creative future holds.
About The Author
David studied at the Northern AZ University & spent years working with agencies like J. Walter Thompson and McCann-Erickson and Fortune 100 companies in Tokyo.