It’s getting to be that time of year when you’ll start thinking about and planning for 2019. And one of the first questions you’ll have to answer for your firm is, “What’s our revenue goal for next year?”
Traditionally – and unfortunately – this is answered in one of two ways:
- The Owner/President has a number in mind and says, “I want to see a 30% increase in revenue next year.” And that’s that. Ugh!
- The Owner/President doesn’t have a clue. She looks up to the sky, lets out a heavy sigh and says, “Uhhh… how’s $1.5 million sound for next year?” Double ugh!
In both cases, the “goal” that’s been set has no basis in reality. It’s based on gut feel or some silly guess or simply because that’s what the boss wants. But there is a better way… two of them, in fact:
#1 – Expected Revenue
With this model, you’ll use your firm’s historical revenue data to predict what the expected revenue will be next year, assuming no significant changes (we’ll come back to this in a minute).
To simplify the explanation… imagine your firm has experienced 5% growth every year for the past 5 years. All things being equal, you’d expect 5% growth again next year. Simple.
But we all know that annual revenues are little more fickle than that… so we turn to your data. More specifically, your revenue data plus Excel.
Graph your annual revenue totals for the past several years. Then Excel can apply a ‘trend line’ to it and show you where your revenue is expected to be next year. It looks like this…
The other factor here, however – and this will require some educated guesses – is what if there are some significant changes looming next year? For example, what if you decide to hire a full-time sales rep… or launch a new service line… or (worse) learn that your largest client is going to go through some lay-offs next year? No, you can’t be sure how these will impact your revenue, but you can make some assumptions and layer those on top of the foundation you laid with your revenue charting.
#2 – Account-by-Account (ABA)
Assuming you have a finite and reasonable number of ‘current clients,’ this ABA method takes you through your current business at a level of detail you might not have ever done before.
It works like this… you and your client team sit down and discuss each client individually, sharing with each other everything you know about them. In the end, you complete a simple profile sheet for each one. Here’s an example:
Client name: Wilson Pet Foods
2018 Revenue: $40,000
Current Status: We’ve done an annual brand tracker for them for the past 4 years and they are very happy with our work. We’ll be doing it again next year.
2019 Projected Revenue: $75,000
Rationale: In addition to the tracker… with their good brand name among pet owners, they are thinking about getting into the pet toy business and have asked us to do some exploratory work for them in Q2.
When all profiles are completed, you add up the 2019 Projected Revenues to establish your baseline for next year. The ABA method is based on current clients only… not on acquiring any new ones. Be sure to also spend some time thinking through and planning for the additional revenue from any new business development efforts… and add that to your ABA baseline.
Yes, this method will take a little longer. And yes, it requires a depth of knowledge of your clients and having good relationships with them. But the ABA approach not only helps with revenue projections, it also helps with project planning, as you anticipate what’s coming next year.
Key Accounts: If you don’t want to go through this exercise for all of your clients, consider, at least, doing it for your top 5-10 clients… and really spend some time with it. Consider it your ‘Key Accounts Program.’ Not all clients are equal… larger ones are more important. So, consider outlining a customized plan for each of your Key Accounts to ensure that you keep and grow them in 2019.
Revenue forecasting is simple… but it isn’t easy! You’re trying to predict the future. But if you approach it using data and information as your foundation – rather than guesses and gut feel – you’ll not only end up with a better revenue forecast… but that will help you with your marketing, operational and financial planning to support it.
Good luck in 2019!
This blog post originally appeared on the Insights Association website: https://www.insightsassociation.org/article/revenue-forecasting-2019%E2%80%A6it-doesn%E2%80%99t-need-be-guessing-game