Methods to Predict Business Revenue
Being able to accurately predict your business’s revenue can be a tough task, but it’s a necessary skill that will help you set and measure your business goals. Plus, an accurate revenue prediction is vital for securing small business loans, attracting potential investors, deciding when you can afford to hire more employees, and more.
The process is both an art and a science. It will take some time to become comfortable with making these revenue predictions, but here are some methods to help you do it correctly.
Begin by asking yourself a series of revenue-related questions
You don’t need to create a complex mathematical algorithm to accurately predict your revenue. To begin, start with some information gathering. Fundera suggests asking yourself a number of questions, including the following:
- What was last year’s revenue?
- How has revenue changed throughout the company’s history?
- Are there any new products or services that we’ve introduced that have had a large impact on revenue?
- Have any new competitors entered the market?
- Have we made any new hires, or lost any employees?
These questions will get you started on creating your revenue forecast, and you’ll learn a lot about your company in the process.
Assess your expenses
You can’t predict revenue without first looking at your regular expenses. Thankfully, this part is easy—review your past records, and determine what your fixed and variable expenses are. Fixed expenses include rent on an office, salaries, utilities, insurance, and other costs that the business incurs regularly and without fail.
Variable costs can change from month to month, and they’re important to assess. Variable costs include the costs of goods sold, packaging and shipping costs, and other expenses that aren’t set in stone. Don’t forget to include taxes!
Forecast your business’s revenue
Now, it’s time to figure out your business’s ballpark revenue for the next month, quarter, year, or years. Using a simple suggested formula from Fundera, you can come to a rough revenue estimate:
Monthly sales / percentage of total sales expressed as a decimal = annual sales forecast
Fundara uses the following (very simple) set of numbers to demonstrate how the formula works, factoring in busy periods of the year:
“For example, say your monthly sales are $100,000 in January and – because you did your research from past years – you know that busy January traditionally represents 10% of your annual sales throughout the year. (Maybe people are redeeming their holiday gift cards at your store!)”
Now, let’s do the math: $100,000 x .10 = $1,000,000. Your projected revenue would be $1 million.
Your business may be different
Fundera’s formula is wonderful in it’s simplicity, but certain industries may require different calculations and methods. A service-based business may need to focus more in billable hours, for example.
Quickbooks suggests another formula:
Number of customers x average sales price x number of yearly purchases = yearly projected sales
Just remember to deduct your expenses from any number that these formulas give you, and you’ll be on your way to predicting your business’s revenue.Do you predict your business’s revenue, and have you had success? Share your most helpful tips below in the comments, so that other business owners can get to work forecasting their revenues!