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3 Tips to More Accurately Forecast Revenues

Let’s be blunt: Financial forecasting is difficult. There’s no such thing as a crystal ball that perfectly predicts revenues, income and cash flow – if there were, corporations and Wall Street analysts alike wouldn’t consistently be off the mark a little here and a little there (and sometimes a lot there) when it comes to guessing quarterly financials.

Every company needs to be able to at least somewhat reliably forecast revenues with some accuracy, however. Sure, the skill isn’t as widely touted as, say, being able to successfully market to customers or be an inspiring CEO that gets max effort from their workers. But it’s more important than you’d think.

For one, accurate revenue forecasting allows you to plan for the future. When you know how much you’re bringing in, you know how much you can spend on making product, paying employees, keeping up with rent, etc. This has a cascading effect – knowing all these things lets you project profits and cash, which gives you an idea of what may be left over to pour back into the business. Not to mention, forecasting becomes supremely important when, say, applying for small business debt or exploring acquisition options.

But how do you more accurately forecast revenues? Here is our advice:

3 Tips for Accurate Revenue Forecasts

1. Start With the Basics: As long as you have any revenue history, you at least have somewhere to start. The overly simplified version is: Take last year’s revenue (full-year, or if you only have a partial year of revenue history, annualize it), then factor in any significant changes – say, additional clients, new product lines, new retail locations – to tally a simple projection for the coming year’s revenues. Modeling revenues for a completely fresh-faced business is a little trickier because of the lack of history; this typically involves using market research about demographics, demand and price-testing to come up with a very rough estimate. Small business owners in this situation should frequently revise their forecasts as they collect new information.

2. Don’t Do One Forecast: You may go your whole life without nailing a financial forecast right on the nose – and that’s fine. But that’s exactly why one estimate is not enough. You need to be prepared for various scenarios, from the likely case to a down year to bumper sales. Always do at least two revenue forecasts. A conservative-case scenario, which assumes several things will not go your way, will help you determine your ability to survive in the event of unexpectedly lousy business. Meanwhile, an aggressive-case scenario, which factors in optimistic (but still realistic) goals for the coming year, can prepare you for a situation in which you have more cash, so you can plan ahead on how to put that cash back to work in the business.

3. It’s a Forecast, Not a Contract: The biggest mistake you can make is treating a revenue forecast like a chiseled stone tablet. A forecast is just that – a forecast. It’s a look ahead that uses past data and estimates to create some theoretical picture of what the future might look like. So if six months into the year, you suddenly have much different-looking data, and you’ve learned a few things that drastically change your opinion about how the next six months might play out, why force yourself to try to stay to your original start-of-year forecast? Instead, go back through the process, draw up new conservative and aggressive forecasts, and map out your business’ future accordingly.

Creating accurate revenue forecasts is a difficult but vital part of planning any business’ future. That’s why it’s often a task best left to the pros. McManamon & Co. has provided business services to small and mid-size companies for years, including a full suite of accounting needs such as preparing financial statements and providing guidance.

Don’t let a flawed forecast be the thing between you and important capital or a transformative deal. Call McManamon & Co. at 440.892.9088 or contact us online.



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