Why businesses fail at forecasting revenue
There is an idea circulating in B2B communities that forecasting revenue is part art, part science. It’s not.
That revenue forecasting is, in fact, a science is of great advantage to you. It means there are set rules that, when obeyed, create predictable, reproducible results. All you have to do is follow a formula with the right metrics to reach reliable, fact-based conclusions, cutting down significantly on the potential for error.
Certainly, hunches and anecdotal evidence have no place in forecasting revenue. But there’s a bigger reason it happens to be a particularly frustrating area for many of the services firms we speak to.
Astonishingly, companies with annual revenues of 75 million plus are still cobbling revenue forecasts together with numerous spreadsheets. Considering today’s advanced technological offerings, the spreadsheet method is becoming something of an anachronism that leaves data vulnerable to typos, miscalculations and good, old-fashioned human error. More to the point, there’s no guidance with spreadsheets. Businesses are pulling irrelevant data from disparate systems while ignoring data that matters.
Little wonder that actual revenues don’t square with projections. Frankensteining data together this way is a time-consuming and highly fallible process. And at their own peril, CEOs are basing leadership strategies on more fiction than fact.
How do you forecast revenue correctly?
To reach your targets and bring your growth ambitions to fruition, you need these four elements in your forecast:
- Actual revenue
- Planned order book
- Unplanned order book
First, financial planners of any professional services or SaaS business should be employing standard revenue recognition, which, as you know, your accountants are well versed in. Paying attention to the point at which revenue is actually revenue is critical for accurate monthly numbers.
This is the course your team should implement: Combine revenues of performed, planned and unplanned contracted work with pipeline projects you’ve sent proposals for and which you have a decent likelihood of contracting. The most realistic revenue forecast will only include pipeline projects that meet or exceed a 50 percent probability threshold. Any lower and you’re taking big chances using pie-in-the-sky data that could skew results toward higher, albeit false, revenue projections.
If you were to put this into a revenue forecast formula, it would look like this:
The bottom line
The fact is that most companies cannot easily obtain a reliable revenue forecast because their teams are working with a flawed spreadsheet system. The best forecasting software—really, the only forecasting software—to produce fast, easy and reliable revenue predictions is a holistic platform that integrates and automates the progress of opportunities to projects as well as the forecast itself.
Because it guards against forecasting errors that could compromise your organization’s ability to grow, thrive and indeed survive, modern forecasting software is also part and parcel of risk management. In a world where new risks are always popping up, the tools that produce the speed and agility to respond faster will determine who comes out on top.