The company’s planning system consists of many interrelated and interdependent elements. The basis of this system is revenue forecasting, which, on the one hand, contributes to the financial stability of the enterprise and the efficiency of its activities, on the other hand, serves as the foundation for all other plans, for example, the budget for sales, marketing, production, etc.
Algorithm For Preparing Revenue Forecast
The compiler must clearly follow the algorithm of action to create an objective revenue forecast.
1. Summarize and track the dynamics of sales for previous periods.
First of all, it is necessary to analyze the profit and calculate its growth rate as the ratio of the volumes of the previous period to the one under consideration.
It is also important to take into account seasonality by determining the share of each month in the total annual volume and calculating the change in the average cost.
2. Explore future business development activities that could have an impact, including:
- assortment change;
- opening of new outlets;
- development of additional channels;
- price change;
- holding sales and other demand-stimulating influences;
- marketing promotions.
3. Analyze other factors that influence, for example:
- functioning of the industry;
- economic development;
- adoption of new regulatory legal acts;
- change in the regulation procedure and others.
They can be the result of both external and internal influences.
4. Create a preliminary calculation.
This is best done on the basis of a future sales plan, the values of which must be multiplied by the future cost of production.
If the pricing policy is not predetermined, then the price level must also be calculated based on the dynamics of previous periods, taking into account supply and demand factors in the market.
At the same time, one should not forget about the elasticity coefficient, which shows the extent to which a change in demand or supply occurs with a decrease/increase in cost. It can be determined by analyzing data from past years.
5. Take into account the available resources of the company.
If it is not possible to realize the planned volume due to a lack of personnel or as a result of limited production capacities, then it is necessary either to find additional resources or to correct the document.
No matter how accurate it is, it is impossible to implement it without the use of certain means.
At this stage, it is worth making sure that the labor potential is sufficient, that the necessary storage meters are available, and that there is no shortage of money for procurement.
6. Discuss with business units.
As it was specified above, it is necessary to take into account the interests of all structural units and owners.
7. Prepare a final document, and bring it to all employees.
This is necessary to link all subsequent plans, as it serves as the foundation for their formation.
Thus, the described algorithm allows you to create a plan, taking into account the data of past years and influencing factors.
Revenue Forecasting Methods
There are a variety of methods that in practice can be used both individually and in combination. Let’s take a closer look at the most common ones.
- Accounting for balances of unsold products at the beginning and end of the period and the planned volume of production. Then the revenue is (R): R = Bb + Vo – Be, where Bb is the balance at the beginning of the period, Vo is the planned volume of output, Be is the forecast of balances at the end of the period at current prices.
- The index method is based on the calculation of the index of changes in the volume of sales (Cs), changes in the range of products (Cr), and changes in prices for goods (Cp). In accordance with it, R = Rc * Cs * Cr * Cp.
- Analysis of marginal cost and income as indicators obtained from the sale of each additional unit of output, depending on the type of competition that has formed in the industry. Under perfect competition, marginal revenue is the same for any output because the firm has no effect on value. However, with a monopoly, it will change proportionally except for the first unit.
- The direct counting method assumes that the entire volume of manufactured products is carried out on the basis of a preliminary order. It is the most reliable since the volume of production is pre-associated with demand and there is an agreement on the price. Then the revenue is the product of the ordered volume and the value of the supply contracts.
- Extrapolation by examining growth rates based on data from previous years, evaluating the factors influencing them, and asking experts about the possibility of maintaining them in the future.
The use of certain methods depends on the competence of the person making the forecast. To form a more complete picture, it is necessary to use these methods in combination. All these methods will also allow you to form an adequate demand forecast, which will form the basis for the income plan.
Companies today are using software solutions to make more informed decisions about their future business growth and strategies. Using revenue forecasting software like the Revenue Grid is a great way to do this because it allows you to see what’s going down the pipeline so you can plan accordingly.
Revenue Forecasting Errors
When forming, the following mistakes should be avoided.
- The lack of a real vision and the desire to wishful thinking is due to various psychological characteristics. Business owners, who tend to idealize, are especially prone to this.
- Ignorance of factors. It is necessary to take into account all available and possible factors as much as possible and not spare time for this. Neglect of these points leads to errors.
- Formation last. Remember that the specified document is formed first, then the rest of the elements of the company’s planning system.
Revenue is a key indicator in a business plan. For example, if you need a business plan for the production of soft toys, then the revenue forecast will help you evaluate other financial and investment indicators as well.
Based on the indicator under consideration, the entire planning system of the company is built. Following the algorithm described above and using a combination of different methods, you can build a real forecast for the company’s revenue. It will also act as a control of the functioning process and will allow timely correction of the intended course.