Inaccurate revenue forecasting can have devastating consequences for businesses, from potential decreases in company stock and less cash flow to inadequate inventory. According to data from Clari, 93% of sales leaders cannot accurately forecast their revenue within a 5% margin, even when only two weeks remain in the quarter.
By implementing key steps and aligning operational forecasting with other key departments, such as accounting, companies can streamline their forecasting models and gain access to valuable business insights.
Revenue Forecasting Defined
Revenue forecasting is an attempt to estimate the future sales of a company over a specific period, such as a quarter or a year. To predict future revenue, a company will analyze a variety of factors, including:
- Historical Data
- Current Economic and Market Trends
- Sales Pipelines
- Market Competition
- Consumer Behavior
- Product Pricing
Revenue forecasts guide data-driven decisions, from advertising budgets to hiring limits to sales projections. The more reliable the forecast, the smoother the company can run.
Operational Forecasting: Supply and Demand
Operational forecasting is a vital component of revenue forecasting and is used to predict production scheduling and future operational conditions of an organization. Operational forecasts can be divided into supply and demand.
Supply forecasts address inventory and production needs to meet demand. They rely on internal data like inventory and production capacity. Demand forecasts estimate future customer purchases to guide marketing and sales strategy using market and consumer data.
By aligning supply and demand forecasts with the company’s accounting, businesses can create a cohesive strategy that aligns production, sales and financial goals.
Benefits of Revenue Forecasting
Accurate forecasting provides essential insights into the financial health of a business and allows for enhanced risk and opportunity identification. Additionally, it allows for better market demand prediction, allowing companies to effectively plan their production and marketing strategies.
When done well, revenue forecasting can also optimize:
- Operations Management: Prioritizing specific services and products for supply and demand planning, setting realistic sales quotas, hiring the right amount of talent to avoid shortage or surplus
- Strategic Decision-Making: Executing market expansion, launching new products, undergoing mergers and acquisitions (M&A) valuation
- Performance Tracking: Flagging deviations, correcting operations, ensuring sustained growth
Revenue forecasting allows companies to gain a competitive edge by adequately meeting consumer needs and strategically planning for growth opportunities.
The Costs of Inaccurate Forecasts
Inaccurate, inefficient and data-deficient forecasting can lead to numerous hidden costs for companies. When business revenue comes in under the forecast, the company faces potential layoffs, decreased stock value and less overall cash flow.
Additionally, investor confidence may decrease, employees might experience lower morale, and the brand could be perceived as less trustworthy by consumers, stakeholders and third-party partners.
When business revenue exceeds the forecast, it may not have enough inventory to meet demands and could encounter wasteful, last-minute spending to meet new fiscal period requirements.
Underestimating revenue also costs businesses missed growth opportunities, under-resourced teams and the premature increase of future quotas.
Tips for Enhanced Accuracy
While revenue forecasting is a vital business tool, 67% of organizations lack a formalized approach to forecasting, found CSO Insights. Data can originate from multiple sources within a company, and different departments might be asked to contribute to a forecast.
Accounting and operations teams must align for an accurate forecast. For example, companies using the accrual method with long order-to-cash timelines will not have a sales team’s forecast that aligns with the financials unless it takes into account things like contract terms, billing efficiency, etc.
If multiple teams are providing a forecast, they need to work together to ensure their projections align and the business is utilizing a data-driven forecast with accurate source data. Cross-department collaboration helps increase the accuracy of a sales forecast. Compiling insights from multiple teams offers a more holistic view of the organization and provides more opportunities to spot issues and opportunities others may miss.
Additional steps for forecasting success include:
- Leveraging Automation Tools for Data Collection
- Starting with Simple Models
- Validating Data
- Analyzing Historical Data To Spot Patterns
- Revisiting Assumptions
While a 100% accurate forecast is unlikely, leveraging data and reforming processes can help teams gain greater precision.
Pitfalls To Avoid
Without effective strategies in place, companies are more likely to make forecasting mistakes and calculate inaccurate projections. Newer companies may struggle due to the lack of historical data available. Companies can use competitor information and industry benchmarks to create predictions if there is not enough business-specific data to utilize for a forecast.
Other mistakes businesses should work to avoid include:
- Overreliance on qualitative methods: Companies should not rely solely on qualitative methods, such as expert opinion and market research, for forecasting. Quantitative methods that use hard data and statistical techniques must also be used for accurate projections.
- Ignorance of external factors: Businesses must monitor current market trends, regulatory changes and competitors in order to accurately forecast future outcomes and revenues.
- Irrelevant forecasts: Projecting revenue is an ever-evolving task. Regularly update forecasts to maintain accuracy and relevance in changing business environments.
Challenges for Professional Services
Professional services firms may experience industry-specific challenges regarding revenue forecasting because they sell experience and expertise rather than physical products. The project-based nature of professional services can mean irregular revenue streams and variability of projects, which often makes projections difficult. Using forecasting models that account for project flexibility will help offset these challenges and refine predictions.
Your Guide Forward
Cherry Bekaert’s CFO Advisory and Financial Planning & Analysis (FP&A) Services practice is equipped to help your business execute a streamlined, successful revenue forecast. Our industry-focused team makes your data digitally accessible, interactive and easy to understand. Our solutions help you think differently about your data, resulting in smarter decisions and more impactful business outcomes.
From technical accounting advisory and finance transformation to co-sourcing services, Cherry Bekaert’s experienced professionals provide solutions tailored to the unique needs of your business.
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