Complete and unbiased revenue projections are essential for any business. Valid projections can be used to measure success, plan for the future or secure funding from investors. The projection process is fraught with pitfalls, however, which could lead to erroneous estimates that could hurt your business in the long run. Even worse, bad revenue projections can lead to losing funding or the confidence of your business’ investors.
Below are seven mistakes to avoid when projecting revenue and a few tips on how to avoid them.
1. Not Including Your Cost Assumptions
Any projection is based on a set of cost assumptions, but one of the most common mistakes that businesses make is forgetting to include them in the first place. Without an understanding of how you came to these assumptions, no one will know what you’re basing your projections on.
How to avoid: Have a clear understanding of the cost assumptions you used, such as market conditions, production expectations, overhead estimates, etc. Explain these assumptions within the revenue projection document and outline what specifically these assumptions entail. Be sure to include timeframes, historical data or any other information you used to arrive at these estimates.
2. Nothing Adds Up
Believe it or not, another cardinal mistake of revenue projections is that they literally don’t add up. Spend extra time double- and triple-checking your numbers. Make sure every column and row adds up and makes sense based on what you assumed. Bad math implies a lack of attention to detail, which is too important when talking about finances.
How to avoid: Keep adding things up and triple-checking your work. Don’t wait until the entire assumption is done before you start to cross-reference your totals. Have someone else look at it as well, since prolonged staring sessions at columns of numbers can easily become a blur.
3. Excluding Bad Debt Allowance
No matter how diligently you follow-up, there will always be a percentage of clients who won’t pay. It’s important to include this in your revenue projections, and to account for increases or decreases over time by reviewing past history.
How to avoid: Being honest and upfront about all of your accounting practices, including bad debts or financial shortcomings, is essential to accurate revenue projections. Hiding them or attempting to gloss over these issues will hurt you and your business.
4. Being Unfamiliar With Necessary Equations
More than likely, you’re going to use an accounting software to record your revenue projections. Make sure that you are familiar enough with the program to understand how to make the figures dynamic. For example, if you change one number in a cell that is part of a series of interdependent numbers, it will affect other numbers too. You should also understand the equations you’re using to get the correct end result.
How to avoid: This is about showing your work. Don’t puzzle out your projections on scrap paper and then enter them into a spreadsheet or program. You need to include the equations and other functions within the document so that it can be updated efficiently and accurately.
5. Using Qualitative Assumptions
As much fun as it is to speculate using only qualitative data, the hard truth is that assuming certain conditions and outcomes only amounts to daydreaming. You want to use quantitative data, cold, hard numbers that can back up the assumptions you make. While some assumptions might be based on an initial flight of fancy, make sure to vet them thoroughly so you can find the data you need to make your them stick.
How to avoid: All of your assumptions should be backed up with data. This can be external, third-party data or your own internal research. But whatever data you choose, it should be verifiable and come from a reliable source.
6. Forgetting the Basics
When figuring your assumptions, you need to include all of the figures that affect your revenue flow, even things that you may consider second-nature, such as payroll, employee benefits, utilities, rent, taxes, insurance and other variables. Anything that relates to money that comes in or goes out of your business needs to be accounted for in your projections.
How to avoid: Make a list of your current expenses and compare it to your monthly financial statements. Highlight every recurring expense, including contract renewals that may only be due once a year. Apply your assumptions to these amounts too.
7. Being Too Conservative or Not Conservative Enough
Anyone who has ever had to present a budget for approval knows there is a fine line between including a bit of padding to account for an unforeseen circumstance and keeping your budget low enough to get approved. While you don’t want to submit inflated numbers, you also don’t want to cut it so close that any over or underage will cause investors or lenders to become nervous.
How to avoid: Be sure to include a little “wiggle room” in your cost assumptions. Again, it shouldn’t be such a high amount that it throws your revenue projection out of alignment. But if any of the values you’ve assumed are too high or too low, and your projection is figured down to the penny, it will be difficult to absorb any change that may happen.
When dealing with numbers, accuracy is important. This is especially true when you’re talking about the financial forecast for your organization. If you’re looking to calculate revenue projections for your business make sure to adhere to the seven tips above to avoid any costly mistakes from the start.
If you’re ready to dive in, read our article from small business expert Rieva Lesonsky on how to create financial projections for your startup.