Making a Revenue Projection
How to Project Income When You Depend on a Few Large Accounts
Businesses catering to a few large customers can find making realistic revenue projections difficult. Here's a method to help you predict where your business is going.
The problem with projecting revenue when your business depends on a few large accounts is predicting when you’re going to land that next new client and how much the new business will be worth.
Many times owners will wet their fingers, stick them in the wind, and pick a number at random to put on their financial forecasts. Then they whip the sales team to meet the numbers.
If this is working for you, you must have a psychic digit or a crack sales team. If it’s not, then you’ll appreciate this more reasoned approach to forecasting revenue.
The benefit of an accurate revenue projection is it helps you predict peaks and valleys in income, and let’s you make adjustments to staffing and expenses to keep up with demand or to withstand a lull.
In making a reasoned revenue projection, you’ll actually perform three separate analyses for Current Business, Sales in the Pipeline, and New Business. For each category, you’ll make an estimate of how much income you expect to realize on a month-by-month basis and enter these figures on a spreadsheet.
The final result will be a monthly revenue projection for the next so-many months. Usually twelve months is as far ahead as you can reasonably foresee, and is far enough ahead to give you a picture of what the future potentially holds.
Current Business
Projecting the revenue potential of current business is the easiest. Two subcategories of current business are Contracts in Progress and Contracts Anticipated. It’s not very difficult to spread the income from contracts in progress over the contract period and log them on your spreadsheet by month.
For anticipated contracts, you’ll need to have that periodic meeting with existing clients to ask about their ongoing needs for your products or services. It’s a reasonable discussion since continuing your high level of service requires you have advance knowledge of their needs for planning purposes.
By gaining enough detail about order size and timing, you should be able to spread projected earnings from these future contracts across the appropriate months in your revenue projection.
A critical extra step, though, is to multiply the projected income of anticipated contracts by a percentage of probability. The client may be somewhat vague about the likelihood of the future business, or their plans could change before the contract is actually signed. If you give the future business a 50% probability, you’d only show 50% of the potential income on your projection.
The concept of factoring projected sales by probability may seem odd because either you’ll get the business or you won’t; you very likely won’t get just half of it. But if you have four anticipated contracts at 50%, and two of them actually materialize, your projected sales numbers for half of four will be fairly close to the actual totals for 100% of two.
Sales in the Pipeline
The next category is Sales in the Pipeline. This represents new customers you’ve opened discussions with for new business. For these potential future sales, make your best guess at the possible value of the business under discussion and when work might start, assign a probability percentage, and then spread the factored revenue across the appropriate months.
For example, you’ve made a presentation to XYZ Company and they’ve expressed interest. As best you can tell, they may need $100,000 of product or services to be delivered over a two-month period. It will take at least three months to get to a signed contract. You give this sale a one-out-of-three chance of actually closing.
Entering this business in your spreadsheet, you’d split the income across two months, log it as starting three months from now, and reduce the potential value by 1/3.
New Business
The last category is new business, which represents income from customers you haven‘t met yet. This could be a category where you’d favor using your prognosticating digit, but there is a way to make a calculated estimate by looking at your sales history.
If your typical sales cycle is six months from initial contact to close of sale, you wouldn’t put any new business on your projection any earlier than six months from now. Analyzing your sales history to see how much business typically materializes during similar periods of the year can give you a reasonable starting estimate.
Next you’ll consider how your planned sales and marketing activities compare to past sales and marketing activities, and how the competitive landscape has changed recently. Then you’ll plug into your spreadsheet a representative sprinkling of future new contracts based on this analysis. There is no need to factor the income from these contracts, because they should represent projected closed deals.
Monthly Updates
The problem with estimates is they change. Using this method will give you the best forecast possible at one particular moment, but it will rapidly be outdated as you gain new information about current customers, potential sales, and new leads.
Updating your projection monthly will keep you abreast of sales trends and give you information you need to make business corrections before the freight train is actually on top of you.
Related Articles:
Managing Project Profitability
Recognizing Earnings Accurately
