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How to forecast the revenue?

July 8, 2022

How to forecast the revenue?

Ariel Gottfeld

Ariel Gottfeld

Businesses forecast revenues to learn how their operations will perform over time. You can run weekly, monthly, quarterly, yearly and other forecasts using sales predictions and historical data.

And if you don’t know how to forecast revenues, we’ll explain methods, formulas and how to do it with the world’s leading app.

What is a Revenue Forecast?

Forecasts are a major part of business, but what is revenue forecasting? It's computing your business’s revenue over a period of time. For example, you can generate a weekly, quarterly or monthly revenue forecast to have a general idea of how much money will be flowing into the business at any given time.

While the accuracy of businesses forecast revenues may not be 100%, there are ways to have a very good idea of where your overall revenue will be for a specific period of time.

How to Start Revenue Forecasting?

If you’re just starting as a business trying to forecast revenues for the first time, follow the steps below to get started:

  • Create a list of all of your products and services, along with their pricing and purchase frequency.
  • Gather any historical data that you may have to use for predicting growth over a period of time.
  • Calculate your past revenue growth rates.
  • Separate your income sources to learn how each revenue stream performs and project their individual growth or contraction rate.

For simplicity, let’s assume that you sell five products:

  • Widget 1 had 1,000 sales last year at $1 each
  • Widget 2 had 2,000 sales last year at $2 each
  • Widget 3 had 3,000 sales last year at $3 each
  • Widget 4 had 4,000 sales last year at $4 each
  • Widget 5 had 5,000 sales last year at $5 each

Now, if you have historical data from the year before, you might be able to calculate that your year-over-year growth for the products was 5%, 7%, 10%, -5% and –10%.

Using this data, we can assume that you’ll make:

  • 1,050 sales of widget 1
  • 2,140 sales of widget 2
  • 3,300 of widget 3
  • 3,800 sales of widget 4
  • 4,500 sales of widget 5

We determine this number using the following formula: Sales - (sales x growth) or for widget 1 = 1,000 +/- (1000*.05), which equals 1,050.

Based on this simple calculation, we can then start multiple sales by how much they each cost and come up with a very basic revenue forecast.

In this example, you would generate the following sales:

  • Widget 1: $1,050
  • Widget 2: $4,280
  • Widget 3: $9,900
  • Widget 4: $15,200
  • Widget 5: $22,500
  • Total revenue: $52,930

Newer businesses without historical data to go off of will need to work with a specialist that focuses on startup forecast revenues.

Note: You can get very complex when trying to determine growth, such as churn rate, sales, market share forecasts and more. The example above is just one of many ways that a business can forecast revenues.

Revenue Forecasting Methods

Revenue Forecasting Methods

If you want to forecast sales revenue, you’ll find many methods to choose from. Some models are simple to understand and calculate, but they’re often less accurate than other options. Typically, the more intricate the method of forecasting is, the more accurate it will be.

A few of the most popular methods include:

Straight Line Forecast Method

A straight line forecast method is very easy to use and is meant for non-accountants that want to have a general idea of how their revenue will look at a certain point in time. However, you’ll need historical growth data for this model or a way to determine what growth may look like.

In fact, it’s the same method we used in the above example.

You simply:

  • Find your growth rate
  • Multiply the rate over the desired period of time

However, the straight line forecast method doesn’t account for things like seasonal ups and downs or rapid product sales.

Moving Average Forecast Method

A moving average forecast accounts for more of the growth patterns over time. Generating forecast revenues using this method is best for short periods of time, such as:

  • Weeks
  • Months
  • Quarters

What makes this method different is that it accounts for upward and downward trends. You may have an average growth of 1% per week in January before a dip in sales in February and so on.

The idea behind the moving average method is that sales are never linear, so they’ll go up and down during the year. You may experience a massive increase in sales for the first two months of the year due to product releases during this time and then experience flat growth in March.

Time Series Forecast Method

You can forecast revenues using the time series model, which does a few things:

  • Looks at historical data
  • Identifies revenue trends
  • Estimates which trends will happen again

However, there is a time and place to use the time series method. For example, the method to forecast revenues is only very accurate when your performance is steady and follows external trends.

During peak seasons, when sales skyrocket and drop quickly, this method may be a valuable tool for forecasting revenues.

Linear Regression Forecast Method

The linear regression forecast method shows a relationship between multiple points on a graph. Oftentimes, businesses will use this method to forecast revenues when they’re using Excel.

You might create a correlation in your forecast revenues between:

  • Sales growth
  • Profit growth
  • Revenue growth

Revenue Forecasting Formula

Professionals will use a revenue forecasting formula to help them determine their revenue over a period of time. However, one thing to consider is that sales forecasts are rarely accurate. Manual forecasts are slowly being replaced by two main things:

  • Machine learning (ML)
  • Artificial intelligence (AI)

When a business has big data sets, ML and AI can work to help spot trends and generate a more accurate revenue forecast.

How Often Should the Revenue Forecast Be Updated?

It's up to you. Often, businesses will generate forecasts for investors, business plans or during quarterly meetings. For a long time, all of the calculations were manual and required a lot of resources to produce. However, with the computing power of today, it’s possible to run forecasts in almost real-time.

How to Forecast Revenue Accurately?

How to Forecast Revenue Accurately?

If you want to forecast revenues accurately, you need to use the data that you have available and also consider external factors. For example, if you have a large business that has been selling the same products or services for a decade, you can reflect back on this data to forecast revenues more precisely.

New businesses do not have this level of luxury.

Startups often have to create forecasts for investors or to secure financing. However, some experts recommend that at this stage in a business, it’s best to focus on expenses and to maintain a LEAN operation that will minimize outflows.

A few tips that can help any business forecast revenues more accurately are:

  • Gather all of your past sales data to help look through historical sales and how they may have fluctuated
  • Use software and tools to help forecast revenues because they’ll lower the risk of errors
  • Utilize multiple forecast methods to better understand potential revenue
  • Regularly schedule forecasts to have a better understanding of the process
  • Analyze how off you were in past forecasts to judge your own accuracy
  • Use multiple sets of data and try eliminating the data that may be biased, especially when using external factors to forecast revenues
  • Learn about deviations and refine your methods to account for these deviations

As your business tries to forecast revenues, you’ll slowly make sense of how your revenue goes through ebbs and flows.

Predict Revenues With The Cash Flow Frog App

Forecast revenues do not need to be complicated. You don’t need to run a manual revenue forecast report, thanks to Cash Flow Frog.

With Cash Flow Frog, you can:

  • Create cash flow forecasts
  • See your future bank balance
  • Sync data 24/7 with Xero and QuickBooks
  • So much more

With the power to forecast revenues, you can be confident in the decisions fueling your business. Project what your revenue will be, know when the right time is to hire new employees and learn when you might need to secure financing to keep operations going smoothly.

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