In business, there are always risks involved in making decisions. One wrong move and your company could be set back for months or even years. That’s why financial forecasting is so important. Now, this may include sales forecasting, revenue forecasting, billing or invoice forecasting, capital forecasting, etc, all of which play an important role in helping businesses stay aligned to their growth plan and in control of their finances.
In this article, we’ll dive deep into revenue forecasting, and understand the reasons why it’s critical for businesses to get their revenue projections right.
In simple terms, revenue forecasting is the process of estimating the total revenue that the company may realize in a particular period of time in the future. Revenue forecasting considers the company’s process for recognizing revenue and splits the sale value based on this.
Many SaaS businesses recognize their revenue monthly, which means that their income statements will show how much money they made each month. However, many of these businesses offer an annual subscription to the same monthly services. A client who pays upfront for 12 months of service will receive 12 months’ worth of revenue at once. This leads to deferred revenue until the service has been fully provided.
This is where revenue forecasting helps. A company’s revenue forecasting considers all the different time frames that it recognizes its revenue. These are then added together to calculate total revenue and determine revenue forecasts. This forms an important part of subscription revenue management.
Companies use revenue forecasts to make very important decisions about production, inventory, and staffing levels. It allows businesses to plan and make necessary adjustments to their sales strategies. Without accurate revenue forecasts, businesses would be operating blindly and would likely miss out on opportunities or make poor decisions that could negatively impact their bottom line.
Revenue forecasting can be categorized into three based on the methods used for predicting revenue. These are opportunity stage forecasting, test market analysis forecasting, and historical forecasting.
As the name would suggest, opportunity stage forecasting is focused on calculating revenue based on the current sales prospects of the company, while test market analysis forecasting predicts revenue based on projected interest in a product. Lastly, historical forecasting is done based on past data and the assumption that the revenue patterns of the bygone years will continue unless there are economic, political, or natural disruptions.
Revenue forecasting not only includes the amount of money your company will make but also where it comes from. Here are a few reasons why businesses must forecast revenue as accurately as possible.
Bring in Investments: Businesses that forecast their revenue well tend to bring in more investors. This is because investors want to see that the company has a plan and knows what it is doing. They want to see that the company is making money and is on track to continue making money. Revenue forecasting shows them this and makes them more likely to invest.
Set Realistic Business Budgets: Revenue forecasting is important for businesses because it allows them to set budgets for their expenses. By forecasting how much revenue they will generate, businesses can make sure that they have enough money to cover their costs. Without accurate revenue forecasting, businesses may find themselves in financial trouble.
Resource Planning: Revenue forecasting is an important tool for businesses to use when making hiring decisions. By projecting future revenue, businesses can make informed decisions about how many staff they will need to support that revenue. If a business forecasts that its revenue will increase in the future, it may need to hire additional staff to support that growth.
Revenue forecasting is incredibly important for subscription-based businesses, particularly those in the SaaS space. Forecasting subscription revenue is the process of estimating how much recurring revenue a company will generate.
Without accurate revenue projections, it’s difficult to plan for future expenses, hiring needs, and other critical aspects of running a business. And then there is the concept of deferred revenue that makes revenue forecasting all the more complicated for these businesses.
Here platforms like saaslogic can contribute by streamlining subscription revenue management. It uses advanced analytics features to quickly draw near-accurate revenue forecasts that automatically compute deferred payments. It can also auto-adjust the settings whenever there is a fluctuation in the market or changes in realized revenue due to various reasons. Some of the key metrics used for forecasting subscription revenue are Average Monthly Recurring Revenue (Average MRR), Customer Churn Rate (CCR), Average Revenue Per Account (ARPA), and Customer Lifetime Value (CLV).
Revenue forecasting is not an exact science, and there will always be some uncertainty involved. However, having a well-informed forecast is essential for making sound business decisions. Revenue forecasting helps businesses plan for the future and understand where sales trends may be going. Businesses must use their long-term revenue projections to plan important projects and milestones and then focus on short-term projections to strategize an execution plan.