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Creating Your Revenue Forecast

Revenue is the lifeblood of any growing small business, and a Revenue Forecast is the backbone of any effective business plan. As a business owner, if you’re exploring small business loans or sources of alternative funding, then having documentation that forecasts your sales and revenue is vital.

If you haven’t already created one, now is the time to look at your numbers from the prior 12 months and project forward what you see the business accomplishing with the resources you have this year.

There are four main ingredients to any solid small business Revenue Forecast:

      Duration

      Expenses

      Sales

      Tiers

 

Duration

First, decide how far out you’re going to build your Revenue Forecast. Is this for 6 months, 12 months, or 3 years? Generally, you’ll want to build out a revenue projection, month by month, for the full year (i.e. Year 1), then create projections in aggregate for Years 2 and 3.

For smaller or younger businesses, a 12-month forecast may be enough. Other businesses will have multi-year goals, such as opening a new location in two years, or doubling the staff in three years. In this case, you’ll want to build out a Sales Forecast that aligns with the duration of your multi-year goal.

 

Expenses

Your expenses will be the next ingredient in your Revenue Forecast, and this should require very little guesswork. Simply plot out your expenses on the timeline that you’ve laid out over the 6- or 12-month period based on your prior year’s expenses, month-for-month.

There are two flavors of expenses that you’ll be plotting out: Fixed and Variable. Fixed costs, as you would imagine, are consistent month-to-month, and can include things like rent, utilities, salaries, and professional feeds (e.g. accounting, bookkeeping, etc.). Variable expenses depend on how much you sell, so they can range from the cost of goods sold (COGS), to packaging and shipping costs, to customer service.

In the end, you should be able to easily see what your expenses will be for the planning period, and what percentage are Fixed versus Variable.

 

Sales

Projecting your sales is a little more work than your expenses, but it’s based on much the same data. You’ll want to be looking at your sales from each month for the prior year or two, and combine that with some market research.

First, separate out your historical sales numbers into the different categories of product or service that you sell, and then into units. For example, a pizzeria might sell food and beverages; food might be broken into sandwiches, slices, etc. and beverages might be broken into fountain, bottles, etc. How granular you go in your projection will be up to you.

Then you’ll want to apply some new information to last year’s sales data. Factors like:

      Staff: have you hired new sales or delivery staff that will change your capacity?

      Customers: has anything changed about your customer base since last year?

      Market: what about the market has changed over the past year?

      Seasonality: how do your projections fluctuate quarter-to-quarter?

      Geography: have there been changes to the area you serve, or have you expanded?

With last year’s sales figures as a guide, you can project this year’s sales using information and research across these five factors. You can then subtract your expenses, and the result will be your Revenue Forecast.

 

3 Tiers

Finally, it’s best to go back through and do the calculations three times to create three different tiers of projections. Do an ultra-conservative projection, a middle-of-the-road projection, and an aggressive-growth projection.

Having these three Revenue Projections allows you to look at them side by side and determine what success looks like for your business over the next twelve months. What will it take to jump from the middle-of-the-road projection up to the aggressive-growth projection? What will it take to ensure that you avoid the ultra-conservative projection?

Doing this high-level analysis should provide you with some tactical objectives for each quarter of the year, while also providing you with some benchmarks to measure up against throughout the calendar.

 

Conclusion

With a Revenue Forecast in place, you’re positioned well for success this year. But it’s not enough to simply have projections in place. You need a plan to realize those projections.

How are you going to increase sales by 10% this year? Who will buy the incremental product? What’s your strategy to reach them? How will you enter those new markets? How will you do all of that cost effectively?

At Market Street Funders, we can help you to map out where working capital can factor into some of those plans. The faster you can put a Revenue Forecast in place, the faster you can receive funding to fuel your growth.

Reach out to a Funding Navigator today for a free conversation about your business goals.