If you plan to apply for a small-business loan, you’ll need to prepare a detailed revenue forecast before lenders will consider your request. But this type of report will also provide some much needed information that will help you know when you can afford to hire an employee, launch a marketing campaign, or expand your operations. Revenue forecasts are useful both for startups and existing businesses. Here’s how to prepare one.
Decide on a Timeline
Before forecasting your revenue, you’ll need to decide how far into the future you want to look. This will be determined by your reason for creating the report. For instance, do you want to determine whether you can add a second location in two years? Then plan a two-year forecast.
Forecast Your Expenses
Predicting your expenses is perhaps the easiest part of your revenue forecast because you’ll be working with past expense records if you’re an existing business and researched forecasts if you’re a startup. You’ll need to calculate two types of expenses:
- Fixed costs: These are the expenses that remain the same every month. They include things such as rent, fixed salaries, utilities, insurance, phone, internet and technology costs, postage, advertising and marketing expenses, and legal, accounting, and bookkeeping fees.
- Variable costs: Your variable costs are those expenses that change every month, depending on your sales volume. They include the cost of the goods sold (including materials and supplies), packaging costs, sales, cost of labor, marketing, and customer service costs as they directly relates to the sale of your product.
Forecast Your Sales
The thought of forecasting sales intimidates a lot of people, but in actuality, it’s simply an act of looking at some raw data and making some logical assumptions from it. If you own an existing business, look at your past sales figures, and then consider the following factors to make an educated guess about future sales on a month by month basis:
- Your customers: Identify your customer base and determine which ones you’ll include in the forecast. Remember, common wisdom says that you’ll get 80 percent of your business from 20 percent of your customers.
- Your service area: Do you have plans for expansion? If so, include your current geographical area as well as the area you plan to include in the future.
- Market conditions: What is the state of the market? Will it remain steady or increase?
- Business position: Consider the position of your business within your industry, and factor in your growth expectations.
- Seasonal adjustments: Many businesses have increased and decreased sales in a cyclical seasonal cycle. If your business falls into that pattern, take this into consideration.
If you own a startup and don’t have historical records to work from, forecasting your revenue won’t be as simple. It will take meticulous research on your part, and the outcome should be based on this research, rather than guesswork. Here are some good sources of information:
- Look at the most recent consumer spending habits in the 2013 Consumer Expenditures report [PDF] from the Bureau of Labor Statistics to see how in demand your products or services are.
- To find detailed information about your industry, visit to the bureau’s Industries at a Glance pages.
- Check the most recent Producer Price Index to determine price stability for your industry.
Next, you’ll take all of your research and mold it into a prediction for your future sales. If you offer more than one product or service, you should do this for each of those areas and then combine them for a total figure. Here are the steps to arrive at that figure:
- Determine how sales are calculated for your industry. For example, if you own a service business, sales are typically calculated by billable hours. Retail forecasts are typically based on sales per square foot.
- Create a profile of your ideal customer. For regional businesses, use the data from the Census Bureau to determine how many of them live within a reasonable radius of your business.
- Estimate your market share. Do this by determining the total number of available customers and then predicting how many of them will buy from you. Remember, you’ll start slow and gradually increase your customer base, and that should be reflected in your numbers.
- Determine how often your customers will buy from you. For example, if you own a beauty salon, you can count on your customers booking a service every four to six weeks. But if you run a tree-trimming service, once a year would be a good estimate.
- Predict the average dollar amount of each purchase for each of your product or service categories.
To arrive at your projected sales volume, take all the figures you have and input them into this formula:
Number of customers x average sales price x number of yearly purchases = yearly projected sales
Next, deduct your total projected expenses, and you’ll have your revenue forecast.
Now Repeat the Process
It’s easy to be overconfident or too conservative in your projections. That’s why you should run these numbers three times. Run an optimistic projection, a pessimistic one, and middle-of-the-road one. You can adjust your projections monthly as you see how real-world sales compare to your predictions.