In market conditions as fast-paced and changing as they are today, this capability is becoming a competitive necessity for companies of all sizes and in every industry.
Read on to explore what’s involved in revenue forecasting, why it’s important, specific benefits it creates, and 4 revenue forecasting models you can implement for your business.
- Revenue forecasts look holistically at a company’s ability to generate revenue across the organization.
- Benefits of regular revenue forecasting include more accurate budgets, better resource allocation and higher financial resilience.
- Four common and effective revenue forecasting models are straight line, moving average, linear regression and time series.
- The best way to manage revenue forecasting is with an automated, AI-driven software tool.
What is revenue forecasting?
Revenue forecasting is the process of projecting the overall amount of revenue your company will earn during a specific time period — typically monthly, quarterly, or annually. It’s performed by analyzing a number of data points to create estimated but informed projections. These include historical performance data, competitor data, supply chain metrics, current pipeline data, and larger market demand (among others).
Unlike sales forecasting, revenue forecasting looks holistically at your company’s ability to generate revenue. It considers all revenue streams (sales included, but not sales exclusively) and aims to understand the entire financial picture for your organization in the future.
Accurate revenue forecasting positions leaders across your organization to develop informed strategies and make smart decisions. It helps you foresee upcoming opportunities and challenges and prepare effectively for both. By doing so, you can prevent unfortunate surprises that could impact your company’s profitability and growth potential.
Benefits of Revenue Forecasting
With accurate revenue forecasts, you have an informed idea of how your company can spend money. This means a better ability to plan things like marketing campaigns, hiring and equipment purchases. You can also maintain a more accurate view of cash flow and manage it with more intention.
Better Resource Allocation
Accurate budgeting means you can allocate resources across your organization with greater confidence. When you have a clear understanding of revenue from both a business-wide and department-specific perspective, you make better decisions about the smartest way to divide, purchase and leverage resources to drive business results.
Ability to Garner Investor Interest
For some companies — especially high-growth startups — attracting the interest of financial investors and building their confidence in the business is a high priority. Detailed and accurate revenue projections are a key contributor to success in this regard.
To be willing to take a stake in your company, investors will expect a clear vision of your financial future and data-driven forecasts to back it up.
Data-driven revenue forecasts remove the guesswork from financial planning. Today’s tools and software allow for sophisticated data analysis and insights, meaning your company leaders no longer have to rely on assumptions or intuition to decipher what’s likely to happen in the future.
Higher Financial Resilience
Business today is becoming increasingly fast-paced and interconnected. Likewise, markets have proven especially unpredictable (and even volatile) over the past few years. Companies need to have accurate revenue forecasts in order to navigate this constant change and stay profitable in adverse economic conditions.
Beyond that, revenue forecasting gives your company a better ability to recognize and pursue opportunities amidst uncertain conditions to maximize revenue and growth potential.
4 Models for Revenue Forecasting
True to its name, the straight-line revenue forecasting model is the most straightforward. It looks at historical revenue data and makes the assumption that your company will continue on a similar trajectory in the future.
For example: If your company experiences a consistent 7% growth rate over the past 3 years, your straight-line revenue forecast will assume the same will continue in the year to follow and will calculate revenue estimates accordingly.
The moving average revenue forecasting method is a trend analysis that looks at shorter chunks of time to understand revenue trajectory over a particular period. Moving average forecasts are helpful when you’re trying to understand how revenue ebbs and flows over certain time periods (for example, depending on product demand).
A real-world situation where this may be applied is to understand seasonality of particular product offerings in order to pinpoint the right inventory levels to order throughout the year.
Linear regression revenue forecasts analyze two related variables on an X and Y axis to measure how they impact revenue growth. Sales and profit are two common factors businesses use for this method. For example, if sales are growing but revenue is not, it can indicate a problem with your pricing strategy or another growth challenge that needs to be addressed. In short, linear regression forecasts help companies understand if the moving parts contributing to revenue are aligned as intended.
Time series revenue forecasts take a cyclical view of revenue, aiming to use historical trend data to predict future earnings. It looks at historical data over a particular set of time periods (i.e. months, quarters, or years) and looks for recurring trends based on factors such as seasonality or common fluctuations in the market. They’re especially helpful for companies that rely on cyclical revenue models, like subscription-based SaaS companies.
What are the right tools to use?
In the past, companies often used spreadsheets to track revenue and conduct forecasting. You can still find plenty of free revenue forecasting templates online. But the truth is that spreadsheets have become outdated with the rise of platform-driven solutions equipped with automation and AI capabilities.
These tools can analyze much larger data sets in a fraction of the time it takes to do manually, and they uncover more sophisticated insights to inform your strategy. If you’re looking for a tool to power your future revenue forecasting strategy, consider a platform solution that can meet modern business needs and keep pace with the competitive landscape.
Achieve Accurate Revenue Forecasting with Xactly
Xactly’s comprehensive Revenue Performance Analytics solution gives you a 360-degree view of your revenue. It enables you to compare your results to industry trends, make informed decisions, and act in time to grow revenue, reduce risk, and contain costs. Key pillars of the Revenue Performance Analytics solution include:
- Automated - Integrate seamlessly with your existing tech stack and automate processes to eliminate time-consuming and error-prone manual tasks.
- Collaborative - Create iterative snapshots of your plan, model “what-if” scenarios, monthly plan updates, and analyze side-by-side comparisons.
- Data-informed - Enhance decision making by leveraging AI to predict key metrics, including optimized territories, ideal ramp times, productivity targets, and seasonality in sales.
- Continuous - Proactively monitor and continuously improve sales plans with changes in business conditions to course-correct in real-time.