Forecasting your revenue means taking a peek into the future and predicting how much money your business can bring in. For businesses that are sensitive to the economic cycle, this can be a daunting task. Depending on which phase of the economic cycle the economy is in — expansion, peak, contraction, or trough — that glimpse you take of your present numbers may be skewed, especially if your business is in a cyclical industry.
What Is a Cyclical Industry
A cyclical industry is an industry whose performance follows the ups and downs of the business cycle. If your business is sensitive to these high and lows, your revenue is generally higher in periods of economic prosperity and expansion. Those numbers typically take a downturn as the economy contracts.
For example, if unemployment is high and disposable income is scarce, people tend to hold off on making non-essential purchases. But when the job scene begins to improve, these spending patterns change and cyclical industries tend to benefit. The automotive, construction, heavy equipment, and airline industries all depend upon spending of discretionary funds, making them cyclical industries.
Using Forecasting Software
Predicting the economy can be made a little easier if you use the right tools. For starters, you can take advantage of accounting software, such as QuickBooks, which has a sales forecast template. Understand your business and the factors that push revenue. That way, you can determine how much of your business is affected by the economy. You may choose to forecast your revenue based on recent economic performance, since you likely see trends changing prior to economists. When you’re relying on history, the most recent period is usually the best to use. If you see major changes in the economy, update your revenue forecast. Just forecasting your top line once a year isn’t enough. Go back to a similar economic time, such as when GDP growth was fast or slow, and see how this impacted your revenue.
Studying Industry Trends
Another tool is to study industry trends. For instance, if you are a supplier to automobile manufacturers, you can check their monthly sales figures. You can also see how your peers are doing through word of mouth or by looking at financials if it is a large enough business. Keeping on top of your revenue forecast helps you plan future initiatives and affects your cash flow. While challenging, projecting your revenue is a crucial step in running your business. Improve your cash flow with invoices, payments, and expense tracking. See how much cash you have on hand with QuickBooks.