How to make revenue forecasts
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If you're starting a business from scratch, making revenue forecasts will be particularly challenging: where established businesses use historical data to predict what will happen in the future, you may feel as though you're resorting to a certain amount of crystal ball-gazing to come up with figures for your business.
Don't worry if your forecasts aren't completely accurate - you can always alter them after your first few months. Concentrate instead on trying to make your figures as realistic as possible.
Why make a revenue forecast?
Investors will be more enthusiastic about putting money into a business which has taken a realistic look at the costs and risks involved. Use revenue forecasts to prove to investors and other stakeholders that you are serious about the business you are planning to start.Is a cashflow forecast actually worth doing?
Making a revenue forecast will allow you to plan how fast your business can grow and enable you to decide when you will take steps such as taking on members of staff, moving to new premises and developing new marketing strategies.
By looking at market data and taking into account your costs and the risks you plan to take, revenue forecasting will allow you to come up with a monthly, quarterly and annual budget for fixed overheads and variable costs. Revenue forecasting means you can use historical data to step back and take an objective look at the market, taking into account its seasonal peaks, troughs and micro-trends to give you an idea of when you need to save money and when you can afford to take risks.
How to make a revenue forecast
Start by looking at your expenses.
If you're starting a new business, these will be much easier to predict than where you will get your revenue.
When you're looking at your expenses, you should take into account:
Fixed Costs: Fixed costs include; rent, bills (utilities, phone, broadband, etc), operational costs (accounting, legal fees, insurance, etc), computer hardware and software, marketing costs, staff salaries.
Variable Costs: Variable costs include; manufacturing costs (materials, packaging, shipping), labour costs (customer service, manufacturing, etc)
Calculate an estimated run rate to give you an idea of what sort of revenues you will be looking at during the first few months. Most businesses calculate these by looking at their own historical data, but if you're starting a new business, you may have to cobble together figures based on knowledge gleaned from your competitors and statistics from your industry and local area. Once you have been trading for a few months, you can recalculate this using your own data.
Look at industry trends to determine what sort of response people will have to your business.
This might involve a certain amount of guesswork but again, use figures from competitors and your industry and local area as a guide.
Take into account:
Footfall and sales:
How many people will be passing through the area you plan to start your business? What percentage of people who enter your competitors' premises actually go on to buy something? What sort of response rate do your competitors get from marketing activity?
How much do you plan to charge for your product or service, and what sort of returns will you get from that? Is there any potential for creating loss leaders? If so, what and for how long? What about special offers to entice customers in?
How long does your product last? What percentage of customers is likely to buy from you again? How do you plan to convince customers to return?
Look at market trends for peaks and troughs which might affect your sales. For example, if you are planning to run a boutique, it's likely there will be a peak when your spring/summer and autumn/winter collections come in. You will also be affected on the first day of winter when people will be rushing to buy warm coats, and perhaps during Fashion Week, when the fashion-conscious will be rushing to keep up with new trends.
Word of caution
Be realistic about your estimates: advertising, marketing and operational costs are usually more expensive than you expect them to be. It might be worth setting an upper and a lower margin for these - sometimes they can cost up to three times what you initially budgeted for.
Some businesses create three scenarios: best case, worst case and in-between. These mean you have a plan if your business doesn't secure the investment you were hoping for or make the number of sales you had been expecting. Stay realistic when you're making these, just tweak the numbers slightly.
Run rate: takes your current level of sales over a certain period (be it a month, a quarter or a year) and see what your financial performance would be like if you continued at the same level. To work out your run rate, divide your total revenue to date by your sales periods to date. So if you've made £1,000 and you've been going for two months, your run rate would be £500 per month.
Footfall: The number of pedestrians who pass through a given area (a street, for example) within a certain space of time. Loss leader: A product sold at a low price (often below cost) to entice consumers and encourage sales.
8 other common finance terms explained
The Office of National Statistics (ONS)