Is revenue forecasting the foggiest crystal ball of all for a new business?

Financial forecasting has been the focus of this blog all month, and this week, we will tackle what may be the trickiest forecast of all: revenue.

Compared to expense projections, revenue forecasting can be challenging, especially for start-ups.

But don’t worry. This post will clarify revenue forecasting, why you should do it, and how to do it if your business is new.

Let’s go!

What is revenue forecasting and why you should do it

First, understand revenue forecasting is not the same as cash flow forecasting.

Cash flow forecasting helps determine how much cash you’ll have access to at any given time.

And it isn’t profit forecasting. That’s forecasting how much money you end up with on the books (but not necessarily in the bank) at the end of the fiscal year.

Revenue forecasting indicates how much money you anticipate bringing into your business through sales, investments, and other income streams.

It doesn’t account for outflows like profit forecasting. Nor does it tell you if you’ll have enough cash on hand to pay the bills and take advantage of opportunities like cash flow forecasting.

Now, you may rightfully argue, isn’t knowing how much cash you’ll have on hand and how much money you’ll keep at the end of the year better to know than simply how much cash you’ll be bringing in?

Maybe in some situations, but you can’t do decent cash flow or profit forecasts without good revenue forecasts.

The three work in tandem. Missing one is like having a two-legged stool. You can sit on it, but it isn’t ideal.

So, revenue forecasts are incredibly important. They can also be incredibly difficult for businesses with much data.

Still, it can be done.

How to do a revenue forecast when you don’t have any data

Complexity and history are the two biggest issues with a decent revenue forecast.

That’s because the more untested revenue streams your business has, the more difficult it is to predict.

So, if your business is venturing into a new market or product line, you’ll probably proceed with all the confidence of a kid learning how to ride a bike.

Still, there are things that can be done to make the revenue forecast successful.

First, start with your total addressable market (TAM). For example, you want to open a specialty chocolate shop in New Orleans. The total market would be the number of chocolate eaters in the world.

Next, determine how much that market is growing (or shrinking) annually. Then, determine what percentage of the TAM you can serve. In the chocolate shop example, let’s say you’re in a tourist town and plan to ship products inside the U.S.

You could conceivably include the number of chocolate shoppers within a 50-mile radius for regular repeat customers and a small percentage of U.S. buyers.

To narrow that down, select your target market. In this case, it may be people with an income of $100,000 or more per year between the ages of 35 and 60.

From that audience, you’ll need to figure out how many can be converted into buyers and, of those buyers, how many will be repeat customers.

You’ll need to research the average amount each customer tends to spend on a visit and how often they visit the store or make a purchase online.

The total purchases times the average spent per purchase to determine revenue generated.

As your business matures, you’ll have more predictable revenue streams and more data. So, your projections should grow more accurate.

Of course, it may not get easier. New revenue streams, new markets, and new product lines introduce new layers of complexity. So, getting help gathering research statistics from your industry and a CPA can be helpful.

The Bottom Line

Financial projections are like a crystal ball, but revenue forecasting is always cloudy. Good research and help from industry and tax professionals can add clarity, so take advantage of those opportunities.

Without revenue forecasting, you’ll lose insight into the difference between success and failure. With it, you’ll have the knowledge to help you meet your goals and achieve your entrepreneurial aspirations.