You may have just started a new venture and would like to know more about businesses forecast revenue. According to industry experts, the startup stage is considered to be art than science. It does take plenty of time and greater accuracy to develop forecasts. Without thoughtful forecasts, you cannot expect investors to line up to finance your business. It also helps develop staffing/operational plans, thereby helping to achieve sure business success.
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Businesses forecast revenue detail to consider
- Check key ratios to ensure sound projections: Once aggressive revenue forecasts are developed many tend to forget expenses. Entrepreneurs tend to have an optimistic approach to reach revenue goals. They think that reality is adjustable if revenue fails to materialize. The fact is that positive thinking can help grow sales, but not pay the due bills. Reality checks should be carried out for key ratios. This can help reconcile expense/revenue projections. Some ratios to guide you to think properly are:
- Total headcount/client: This ratio should be given special preference by entrepreneurs working on their own without support. Then, divide by total client numbers possessed. Find out if you desire to manage those accounts in 5 years as your business grows. Otherwise, you will have to revisit assumptions on payroll expenses/revenue or both.
- Operating profit margin: Identify the total operating cost ratio. Is it overhead and direct costs excluding financing expenses to total revenue earned in a given year or quarter? In this ratio expect positive movement. With revenue growth, overhead costs are to represent some part of the total costs. You can expect improvement in operating profit margin. However, many entrepreneurs make the mistake to forecast break-even point much early. They think that financing will be essential to reach this particular point.
- Gross margin: Identify the ratio during the given year/quarter for total revenue to total direct costs. It is an area where aggressive assumptions tend to become quite unrealistic. Do not make assumptions of increasing gross margin to 50% from 10%. If you find direct sales and customer service expense high now, they are only likely to increase further with time.
- Businesses forecast revenue using aggressive/conservative case: Most entrepreneurs are likely to fluctuate constantly between aggressive and reality dream state. It is referred to as ‘audacious optimism’. It is essential to embrace our dreams and use aggressive assumptions to develop a projection. Develop revenue projects of two sets (one conservative and another aggressive), you can create conservative assumptions and relax some from the other.
- Begin with expenses and not revenues: Forecasting expenses during the startup stage is much easier than Businesses forecast revenue. Estimate common expense categories like:
- Variable costs:
- Direct labor costs:
- Direct marketing
- Direct sales
- Customer service
- Goods sold cost
- Overhead/fixed costs:
- Licensing/insurance/legal fees
- Communication/phone bills costs
- Utility bills
- Direct labor costs:
- Variable costs:
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Thumb rule to follow while forecasting business expenses:
- Track customer service time and direct sales as direct labor expense even if these activities are performed by you. As you get more clients you can forecast this expense.
- Double estimates for marketing/advertising costs as they escalate beyond expectations.
- Triple estimates for licensing, insurance and legal fees as it will require experience to predict them. They may exceed expectations.
It takes some time to project growth accurately for your startup. During the startup stage, you can avoid developing detailed projections since your business model is likely to evolve and change. Businesses forecast revenue when done correctly can offer you peace of mind.