One of the hardest aspects of small business planning is forecasting your revenues. However, this is an important aspect of business planning because it gives you an idea of how aggressively you should be advertising and how much inventory you should produce. It can also be important if you seek additional funding for your business. Here are some ideas to help you forecast revenue for your business.
Calculate Expenses
You know what your expenses will be, so they're easier to calculate. Doing this part of your forecast first makes the whole process seem less daunting. There are two types of expenses you need to calculate.
- Fixed expenses. These expenses will be the same no matter what your production is or how much you sell. They will typically be the same or nearly the same from quarter to quarter. Examples include rent, utilities, marketing and salaries.
- Variable expenses. These expenses are related to how much you produce and/or sell. They include costs to produce goods that are sold and cost of labor to produce goods or services.
Forecasting Revenue
When creating your revenue forecast, create two separate forecasts: a conservative approach and an optimistic approach. A conservative approach allows you to look at the worst case scenario and allows you to consider your business situation if the worst occurs. On the other hand, the optimistic approach allows you to think big for your business and find creative ways to reach your financial goals.
Forecasting Methods
While it may seem daunting to try to predict the future, there are a few methods that can be used to forecast revenue.
- Compare with previous financial records. Using this method, you can look at past sales to look for patterns and use that to determine your revenue forecast. The more financial history you have, the more accurate you will be able to make your comparisons. However, if you are in the first years of your business, using this method will be likely just as accurate as guessing.
- Compare with companies similar to yours. If you don't have a long financial history, this method can give you more accurate forecasts than the previous methods.
- Compare by marketing strategy. All marketing activities have specific rates that customer will respond at. You can use the high and low respond rates of your marketing strategies to determine your conservative and optimistic forecasts.
- Guessing. While no means the most accurate method of forecasting sales, you can use guessing to come up with a conservative estimate of what your revenue will look like. This will at least give you some look at what you should be planning. Guessing, however, should be done only as a last resort.
Forecasting revenues is an important aspect of your small business planning. While it may seem to be a daunting task to take on, it need not be so bad. By starting with the things you know already, and working on it one simple step and a time, you will be able to provide yourself with a powerful planning tool for your business.
