Revenue Projection

What is revenue projection?

Revenue projections, or revenue forecasts, are estimations of the revenue a company will earn over time. This may be connected to a specific project or tied to the business’s overall revenue goals.

Revenue projections are typically used for budgeting to help companies establish financial goals for the future. These can range from quarterly or monthly projections to much longer-term projections, like three to five-year estimates.

For businesses with numerous assets, future revenue projection is essential to predict income or expenses associated with these assets. Investment portfolio management software is typically used to track these investments and gives portfolio managers insight that can inform when to sell assets to avoid losses.

Types of revenue projection

There are many ways to project revenue within a business. The four most common models used for revenue estimates are:

• Pipeline forecasting. This type of revenue projection focuses primarily on future sales based on the likelihood of those sales taking place. While there are pros to this approach, it can be difficult to predict when revenue will come in. Optimism in these forecasting models can lead to inflated projections, which can have negative consequences within the business if revenue goals aren’t reached.
• Backlog forecasting. Similar to pipeline forecasting, the model is based on future income. But instead of anticipated income, this model uses estimates for confirmed sales that haven’t yet been paid. As a result, backlog projections are often more accurate than pipeline forecasting.
• Historical data forecasting. This is the most accurate model for revenue projection. It considers all relevant market factors, along with work in the backlog and pipeline, making estimations much easier. However, it also involves the most work, as continual market analysis is needed to remain accurate. It also doesn’t allow for growth as much as other forecasting methods.
• Bottom-up forecasting. Resource-driven forecasting uses data from both predicted and in-progress work, looking at how resources are currently being allocated and basing revenue projections on this. While this is beneficial, this forecasting requires effective resource management to be accurate.

Calculating revenue projection

Both past and future influences must be considered when making revenue projections. That’s why it’s important to include metrics such as:

• Monthly recurring revenue (MRR). The amount of money the company makes each month is an important measure of sustainability and growth. This information shows whether a company is growing or declining over time, which is essential for calculating future revenue prospects.
• Average revenue per user (ARPU). Understanding how the average customer spend changes over time is also important to know. ARPU data should be compared to broader market data to determine whether trends are industry-wide or specific to the business. This helps companies adjust their spend and marketing strategies as part of their revenue projections.
• Customer churn. The churn rate is how many customers leave the business in a set amount of time. Comparing this to active customers to give an overall churn percentage gives businesses an idea of how many customers may be lost in the future, which can be built into revenue goals.

Benefits of revenue projection

Knowing how much revenue a company will bring in during a set period is almost impossible to determine. But using accurate forecasting models, revenue projections can be made to help businesses:

• Effectively manage cash flow. With accurate revenue projections, businesses can better monitor existing income and outgoings to ensure that all payments are made on time to both vendors and employees. If loans are needed, these projections are also essential for satisfying credit checks with lenders.
• Budget management for future projects. Being prepared for any new projects increases the chances of success. When future work is accurately budgeted based on revenue projections, resources are better allocated, and a greater return on investment (ROI) can be realized.
• Build investor interest. Particularly in favorable market conditions, revenue projections can pique an investor’s interest in a business. Clear estimates based on accurate forecasting can result in significant financial investment into a company, which often means more projects can be accomplished to meet those anticipated revenue goals.

Best practices for revenue projection

Before working on any model for revenue projection, it’s critical that companies implement best practices such as:

• Deciding on a timeline. For the most accurate revenue projections, it’s essential that the timeline of the projection aligns with the forecasting data being used. Information from the last two years of sales to project the next five years of revenue may be less accurate than forecasting the next two years.
• Estimating expenses. Any factors that could impact revenue must be accounted for in projections. Typically, these will be expenses or outgoings the business has. This could be resources, materials, or labor costs such as hiring new team members or outsourcing work. 
• Forecasting sales figures. The sales estimates made for each product or service in the business will ultimately decide, when combined with expenses, what the revenue projection looks like.
• Testing different forecasts. It’s always best to combine several different revenue projections using one or two forecasting models. The closer these numbers are, the more accurate they will likely be. Testing different models also means that contingency plans can be established for scenarios where those revenue projections aren’t met.

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