Agency Management, Operational Excellence

How Does Revenue Forecasting Really Work?

by Julie Huntley, June 1, 2016

Getting revenue projections right—or at least in the right ballpark, relative to actual results—is vitally important for agencies of any size. While it’s admittedly difficult (or downright impossible) to accurately predict revenue, it is possible to maximize your odds by following proven procedures for revenue forecasting.

But how does revenue forecasting really work? To help answer this question, let’s review some basic fundamentals of forecasting and how they pertain to your agency.

Establish Timelines

Before you delve too deep, it’s important to know that establishing timelines is the first step in forecasting your revenue. Revenue forecasts compare and contrast revenue prediction over a specified period of time—so understanding the timeline of your campaign, project, or larger agency goals is an important first step.

Project schedules are projections of future revenue. And utilizing automated accounting software is an excellent way to accurately predict revenue recognition as they pertain to agency timelines.

Forecast Your Expenses

Predicting your expenses is a relatively straightforward process, and it’s important to have accurate estimates. No matter the age of your agency, you’ll most likely have data to supplement your estimates: past expense reports if you’re an existing business; detailed forecasts if you’re a new business or startup.

Generally speaking, there are two primary expense categories:

Fixed Costs. Commonly referred to as overhead, these are expenses that remain unchanged each month. Below are some common fixed costs:

  • Rent and utilities
  • Phone bills/communication costs
  • Accounting/bookkeeping
  • Legal/insurance/licensing fees
  • Technology
  • Salaries
  • Inbound marketing

Variable costs. These expenses fluctuate over time, based on demand, economy, sales volume or other factors. Some common variable costs include:

  • Goods sold (materials, supplies, and packaging)
  • Labor costs (customer service, sales, and marketing)

Forecast Your Sales

Forecasting sales can be a daunting task—but in reality, it’s an act of analyzing raw data and making logical assumptions. Many companies develop sales forecasts by applying desired market growth rates to current annual revenue. If you own an existing business, you do this by comparing past sales figures to external factors such as market conditions, your service area, your business position, and seasonal adjustments.

To accurately gauge sales, it’s important to rely heavily on your agency’s analysis of sales channel productivity and customer purchasing behavior.

Effective revenue forecasting should consider the following projections:

  • The total number of customers your agency can realistically do business with
  • The productivity of your sales team: the number of reps your agency employs, average close rates, the number of calls each rep makes, etc.
  • Your agency’s incentive structure of the sales team: are sales reps rewarded based on gross monthly sales or commission?
  • Online sales channel productivity

Plan for the Future

Forecasting sales on a quarterly, semi-annual, or annual basis not only forecasts your expenses, it also helps your agency plan for the future and creates accountability across the organization. Having a sound idea of future revenue and where it will be generated in your business allows you to plan for future changes.

Detailed and deep research into customer buying trends, the state of the economy, new products, and your company’s previous projections creates a reliable forecast that serves as the basis for future planning. When changes do arise, you can always rely on forecasts for hints on what has worked in the past, providing you with a competitive advantage over competitors who utilize impromptu planning and operations.

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