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Finance basics: How to forecast revenue?

In the last blog, we acquainted you with the process of forecasting expenses and why it is important. The 2nd part of the Finance Basics series talks about forecasting revenues. One of the most obvious advantages of forecasting revenues is that a business firm can take vital decisions about the operations and recruitment of the business.

Of course the caveat is you would never be able to forecast completely accurate revenue, the projections would still help you take some realistic steps.

How to forecast revenues?

Every business begins with tall orders because you have dreams and aspirations. Most of our goals are based on some of those dreams. You must have noticed, often your initial goals were quite aggressive and they did keep your motivated for a long time. But then reality sank in and you realized things take their own time and there are unforeseen factors that you cannot control. It’s precisely why you need to forecast your revenues. But does that mean you have to stop dreaming big? No, not at all. It only means that you need to forecast your revenues taking the aggressive as well as the conservative approach.

Conservative approach to revenue forecast

This approach assumes that things will go wrong (Murphy’s law) eventually so you tread carefully and have conservative projections. Your conservative revenue forecasts would look like these –

  • Only two marketing channels
  • only support staff, no sales staff
  • low price point
  • one or two new product or service per year for first four years

Aggressive approach to revenue forecast

This forecast is not being suggested to make you feel better about your former goals. But it simply means that setting up higher goals will set you on an ambitious path. And here’s how to do it –

· a clear distinction between base product with low price point and premium product with higher price

· multiple marketing channels managed by your marketing manager and yourself. You have two direct sales people — either commission based or on salary.

· start with one new product or service in the first year

· four to five products or services introduced under segments in first two and three years

Why are both approaches important?

The first approach keeps room for contingencies and competition. This keeps your expenses in check and you learn to ask why with every overhead. The second approach keeps you competitive and your eyes on target. No business can progress without ambition and the second approach ensures you are ambitious.

Now that you have learnt to forecast both your expenses and revenues, what do you do? You actually make some realistic growth projections. This takes us to the next blog about forecasting your growth. See you soon.