Accurate revenue forecasting helps you budget effectively, make more informed decisions and plan for growth.
What is revenue forecasting?
Revenue forecasting is the process used to estimate how much money you’ll make selling products or services over a certain period. By looking at the state of your business, your previous performance and outside forces, you may be able to better predict future gross sales.
Revenue forecasting can also help you make strategic decisions, such as how much advertising to buy, how many employees you need and what sales targets you should set.
Why is forecasting revenue important?
Revenue forecasting is important because it informs financial planning and decision making. This can lead to better financial health and performance. By forecasting revenue and estimating expenses, you can better manage cash flow, profit margins and investments.
Benefits of revenue forecasting
Benefits of revenue forecasting include:
Better decision-making
Better decision-making is a key benefit of revenue forecasting. By analysing your business’ current state, past performance and external factors, you can estimate future income. This forecast becomes a valuable tool for developing data-driven strategies and decisions.
Improved resource allocation
Improved resource allocation is a significant advantage of effective revenue forecasting. When you can accurately predict future income, you can better prepare for potential slowdowns or growth opportunities. It also helps you set the right level of investment in your team, marketing activities or product development.
Better budgeting
Better budgeting comes from having a clear picture of your expected income. Instead of relying on guesswork, your revenue forecast helps you make more informed decisions.
Improved cash flow management
Improved cash flow management lets you better predict and control money movement in and out of your business. Revenue forecasts can deliver this insight, allowing you to plan more effectively and avoid potential cash flow problems.
Revenue forecasting methods
Revenue forecasting methods include:
Simple linear regression
Simple linear regression tracks data points to show how an independent variable will impact revenue. It’s important to note that this method assumes a consistent, linear relationship between revenue and the variable, which may not always reflect real-world complexity.
Multiple linear regression
Multiple linear regression is more complex. You can use it to compare two or more independent variables that impact revenue. You might use it to understand how promotion and advertising expenses relate to revenue. By examining these relationships, you can make more informed decisions about allocating the marketing budget to maximise returns.
Straight line
Straight-line forecasting is one of the simplest methods for predicting future revenue growth. It uses historical growth rates to project future performance. This method calculates your average growth rate for a recent period. Then, you apply this rate to your current revenue. For example, if your business grew by an average of 5% over the last year, you might predict a similar 5% growth for the upcoming year.
Moving average
Moving average forecasting uses averages of a data set to predict future trends. This technique helps smooth out short-term fluctuations and highlight longer-term trends. First, calculate the average revenue for a period — this becomes your forecast for the upcoming period. For example, if you’re projecting monthly revenue, you might use the average of the last 12 months to predict the next month’s income.
How to forecast revenue
To forecast revenue, follow these key steps:
Gather historical financial data
Gathering historical financial data is the first step in creating an accurate revenue forecast. The primary sources for this data are your income statements, balance sheets and cash flow statements. Together, these reports give you a comprehensive view of your financial history.
Tip: MYOB automatically tracks transactions, categorises expenses and generates financial statements. This saves time and reduces the risk of human error in this step.
Analyse financial data
Analyse financial data using your income statements to look at:
Revenue trends: Look at how your income has changed over time.
Gross profit margin: Subtract cost of goods sold (COGS) from revenue and divide this amount by total revenue. You can then multiple by 100 to get your gross profit margin as a percentage. This shows how efficiently you're producing your products or services.
Operating profit margin: Divide operating income, which is your profit after deducting operating expenses, by total revenue and multiple by 100 to see how well you manage your resources.
Net profit margin: Divide net income by total revenue and multiple by 100 to see overall profitability relative to revenue.
After calculating these figures, compare them to industry benchmarks and your own historical data. These insights can inform your revenue forecasts and identify potential strategies for increasing profitability.
Account for internal and external factors
When creating your revenue forecast, account for internal and external factors. Internal factors include product and service offerings, your production capacity and staffing. External factors can include how your market is performing and initiatives that are likely to drive revenue, such as major marketing campaigns or acquiring other businesses.
External factors, often called drivers, can boost or hinder business growth. Examples of common drivers include:
Consumer demand: Changes in customer preferences or needs
Seasonality: Regular fluctuations in sales due to time of year
Regulatory or legal changes: New laws or regulations that affect your industry
Economic conditions: State of the economy, including factors like inflation or recession
Significant events: Global, national or local occurrences that could impact your business
Use software
Use financial reporting software to automatically gather, consolidate and analyse data using pre-built models.
Tip: Choose the MYOB business management platform to suit your business needs.
Financial reporting software comes built into MYOB Business and MYOB AccountRight, helping you enhance your revenue forecasting processes.
With MYOB, you can get insights into your tax, cash flow and finances in just a few clicks. You can set, manage and edit budgets at any time. You can also view data from bank transactions, receipts, past reports and employee timesheets.
Choose forecasting methods
Choose forecasting methods that best fit your business model and assumptions.
For example, if your business follows seasonal patterns, your chosen method should account for these fluctuations. A trend projection or growth curve model might suit you if you're expecting growth. Using multiple forecasting methods and comparing their results can help you identify the most realistic projection.
Revenue forecasting challenges
Revenue forecasting challenges can arise from:
Not having accurate and adequate data
Not having accurate and adequate data is a major cause of inaccurate revenue forecasting. The quality of your data directly impacts the reliability of your predictions. Several factors can affect data quality. Simple human error, system errors, outdated information, incomplete records and duplicate entries can all impact data accuracy, skewing results.
Manual data entry issues
Manual data entry issues can significantly impact the accuracy of revenue forecasts. When employees input data by hand, the risk of errors increases substantially.
Tip: Eliminate these issues with financial software like MYOB.
Because data is updated automatically and in real-time, there’s less chance you’ll be dealing with incorrect, duplicated or outdated information.
External factors
External factors you weren’t expecting can often lead to inaccurate revenue forecasting. These factors might include:
Economic fluctuations
Consumer trends
Competitive actions
Regulatory actions
Technological innovations
Revenue forecasting principles and tips
Here are some basic revenue forecasting principles and tips:
Regularly update forecasts
Regularly update forecasts to include new or changing influences. To create more accurate forecasts, stay informed about market trends and potential disruptions in your industry. Regularly monitor news sources, industry reports and competitor announcements.
Don’t ignore external factors
Don't ignore external factors when creating your revenue forecast. They can significantly impact your business performance. These factors include the overall economic conditions, industry trends and competitor activities.
Don’t fall into a lack-of-data trap
The lack-of-data trap is a common pitfall. Either your business is too new to have historical data, or you haven’t been capturing it effectively. If this is your situation, take steps to gather and clean your data. Then, seek out industry benchmarks, market research or competitor information.
Use both qualitative and quantitative data
Use both qualitative and quantitative data in your assumptions. Qualitative data may provide valuable context, while quantitative data can help produce a more accurate forecast. Using both data sources reduces the chance of bias or over-optimism.
Revenue forecast example
Say you sell ice cream and want to predict your shop’s future revenue so you can make smarter staffing, inventory and marketing decisions for the upcoming summer. You could simply expect this summer to follow similar patterns as previous years. However, this year is expected to be especially hot – and hotter weather usually means higher ice cream sales.
You find average monthly temperatures for the last three years and plot them against your sales data for the same periods. Using a simple linear regression model shows you how temperatures have affected sales in the past. Now you can run scenarios: what could happen to your sales if average temperatures were two, three or four degrees hotter than in past years? And, how will the increase in sales affect expenses? Having these predictions means you can capitalise on increased demand without over-investing in stock or employees.
Revenue forecasting FAQs
What is the best revenue forecasting method?
Your business’s best revenue forecasting method will depend on your industry, data availability and specific needs.
Can Excel be used for revenue forecasting?
Excel is widely used for creating revenue forecasts. However, the necessary manual data entry and complex spreadsheet formulas increase the risk of error and wasted time.
What is the difference between sales forecasting and revenue forecasting?
The difference between sales forecasting and revenue forecasting is in the factors each considers. Sales forecasting helps you predict future sales based on data like the value of your pipeline and historical sales figures. Revenue forecasting is broader. It projects sales figures alongside other income and influencing factors and then compares them to expected expenses.
Accurate and actionable revenue forecasting with MYOB
Revenue forecasting can help small business owners evaluate their current status, assess potential opportunities and risks and develop strategies for success.
Software from MYOB makes that process faster and more accurate. MYOB Business and MYOB AccountRight automatically gather data from across your business so you’re always working with timely, accurate and complete data. This means you can focus on modelling your revenue forecast and making better decisions instead of managing manual entry errors.
Ready to get started? Try MYOB today.
Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.