What Does Revenue Forecasting Mean for Your Business?
What, me worry? Nah… Sound familiar? Many small businesses find that they can get their day-to-day work done just fine without resorting to the kinds of complicated financial projections and reports characteristic of larger firms. But what about when things change when you least expect it? There is tremendous value in having a heads-up view around the financial corner. Revenue forecasting is one of the most useful of these projections for small businesses.
How Revenue Forecasting Works
The most important thing to take into consideration here is that your expenses are much easier to forecast than revenues themselves. That’s why any revenue forecast should first be based on the best estimates of those expenses. Start with fixed costs like rent, utilities, wages, and anything else that usually manifests as a stable expense each month. From there you can move on to more flexible expenses like sales costs and marketing. In particular, those kinds of expenses tend to be higher than original assumptions, so prepare for a range of scenarios.
“Here are some rules of thumb you should follow when forecasting expenses:
- Double your estimates for advertising and marketing costs since they always escalate beyond expectations.
- Triple your estimates for legal, insurance and licensing fees since they’re very hard to predict without experience and almost always exceed expectations.
- Keep track of direct sales and customer service time as a direct labor expense even if you’re doing these activities yourself during the startup stage because you’ll want to forecast this expense when you have more clients.”
Once you’ve taken costs into account, then you’ll be able to continue the revenue forecasting process and start estimating income and profits.
On the subject of estimates, you’ll have to remember the power of human biases. Optimism is important in creating the drive that motivates a company and its personnel to push the whole enterprise forward to success. Optimism untempered by a knowledge of just how badly things could go, however, is dangerous. Plan for the best and prepare for the worst, and you’ll come out all right either way.
Why You Need Financial Projections
Without revenue forecasting and other glimpses into the future, you’re sailing into uncharted waters. These reports, which we at SyncLedgers can generate for our clients, give companies a look ahead. They allow you to see just how much breathing room you have for future expansion efforts. They let you know whether you can afford to offer better benefits or introduce a new product line.
Contact SyncLedgers today to start generating the kind of financial reports that give you a vision of the future you can work with!