How to make revenue forecasts
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.
- 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 including
- Rent
- Bills (utilities, phone, internet, hosting etc)
- Operational costs (accounting, legal fees, insurance, IP
etc)
- Computer hardware and software
- Marketing costs
- Staff salaries
- Variable costs including
- Manufacturing costs (materials, packaging, shipping etc)
- 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?
- Pricing: 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?
- Repeat sales: 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.
Points to take into account
- 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.
Jargon buster
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 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.
Example
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