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Which Revenue Forecasting Model is a Fit for You?
Blog / Sales Management / Nov 30, 2016 / Posted by George Braun /

Which Revenue Forecasting Model is a Fit for You?

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Revenue forecasting has become a necessity in the world of business, no matter how big your particular business might be, or the role one might play within it. Obviously, a budget is a necessity, and businesses tend to have business plans, as well. These are fairly difficult without some form of revenue forecasting. How can you know how much money to spend if you don’t have some idea of how much you’re going to be taking in?

People involved in sales have some idea of how capable they are at their jobs – the problem is the market they have to face. How receptive will people be, especially in a new area or with a new product? Revenue forecasting can actually help determine this, as well.

Naturally, forecasting isn’t magic. You’ll never get the exact numbers you’re projecting. But you’ll be able to tell when your expectations are off enough to make some adjustment to your budget or to your tactics before any unexpected events or trends become an unavoidable problem – or before you can take advantage of an unexpected advantage.

There are basically two kinds of revenue forecasting. Judgment forecasting, also known as qualitative forecasting, is a more intuitive kind of prediction which relies upon experience and a general feeling of what will come to pass in the upcoming months or year. Quantitative forecasting uses a more scientific process, involving data from previous cycles from your business or other businesses, using that information to predict future trends in a mathematical fashion.

So, which is better? The truth of the matter is that they’re not mutually exclusive. You can use some elements of both in your forecasting, especially if your business has been running for several years. It’s easy enough to use the previous years as a source for your quantitative forecast, while considering any changes that happened last year which might have an effect on your numbers.

Consider separating your various income sources into different categories, in order to get a better idea of how much each sector of the business costs and how much it earns. You’ll be able to see what has the greatest (and least) effect on your overall revenue stream, allowing for a more accurate forecast.

No matter what method you choose, remember that a revenue forecast should not be set in stone. In fact, it’s best if you review it and update it on a regular basis, perhaps as often as once a month. If you’re not taking a hard look at your forecast at least once a quarter, it’s not doing you as much good as it could.

A Look at Qualitative Forecasting

Numbers are not the focus of judgment forecasting. It’s largely about experience and opinions – both of which are qualities that work very well for anyone involved in sales. Selling something to a client can involve numbers, of course, but a lot of it is behavioral. More than that, it’s the fulfillment of a need. These are things that can’t be mathematically computed. A change in your forecast may assume that a given client has a greater or lesser need than the period before, not because of the computation, but because you feel that may be the case.

There aren’t always numbers to be had. You may lack past data, because your company is new, or because your client base is still developing. While you can look at companies in similar positions and markets, your unique circumstances will still require you to make a subjective judgment on what your performance, and hence your revenue, will be for the coming quarter.

Those who utilize judgment forecast must always be aware of how their intuition can sometimes give false impressions, however. A big jump in sales does not necessarily mean that’s the new status quo. Always take all the available information into account, even (or especially) the information that contradicts your own expectations.

A Look at Quantitative Forecasting

Quantitative forecasting, when used on its own, is all about the numbers. Opinions or experience have nothing at all to do with it, whether they come from salespersons, executives, shareholders, or customers. By looking at data of past performances, it’s sometimes quite a bit easier to see trends that would have otherwise been missed, and to determine of that trend will continue in the future, allowing you to plan accordingly.

The complete objectivity of this method makes it a lot less likely for someone to look at a downturn (or upturn) in certain revenue streams as merely a blip or a short-term factor, when it’s been clearly going on for months or longer. Especially in the case of low sales, it may prompt the creation of a worst-case scenario, which could save a business that suddenly finds itself at the mercy of a depressed market.

Pure numbers aren’t everything, and they don’t take into account things that matter, like customer enthusiasm, or sudden personal trends that turn into fads – or end fads.

No Need to Choose

Again, the two methods are not mutually exclusive. In fact, the two views can prompt different projections, which can be to your advantage. Just as it’s always a good idea to plan for the worst case, it doesn’t hurt to make some projections that go big – assuming the best possible outcome for the coming year. New businesses especially will quickly learn how to make more accurate predictions by seeing where to expect more and where to expect a more moderate source of revenue.

About Author

George is one of the founders of True Sky. His motivation for creating True Sky is to help CFOs get timely and more accurate data from their budgets.

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