Why Revenue Forecasting Is Vital for Your Marketing Agency
Revenue forecasting is the art of predicting performance. The goal is to create data-backed predictions on how much money will flow through your marketing agency in a given time, based on committed revenue, upcoming projects, and prospective customers still in the pipeline.
These forecasts are crucial for long-term financial planning and for longer term goal-setting, including setting revenue targets, benchmarking performance, and keeping agency growth stable.
The Benefits of Revenue Forecasting
At its core, revenue forecasting has two goals:
- Creating a system for setting (and meeting) financial targets.
- Helping you identify and manage new business opportunities.
They’re broad goals, but they affect nearly every aspect of your business.
Can your current revenue sustain your growth enough to justify that small business loan? Is now the right time to launch that pay-per-click campaign? These issues are entirely dependent on how much money you have coming in from month to month. Revenue forecasting is a matter of measuring performance, sure, but it’s also a matter of arming yourself with the knowledge you need to plan for the future.
These details are usually tracked through your CRM system, though you’ll also be pulling data from your sales, marketing, and accounting platforms. The more data you have, the more accurate your forecasts will be.
The Revenue Forecast Process
While the exact revenue forecasting process may vary depending on your goals, here’s the basic outline.
Companies typically start by deciding whether they want to create time-based or object-based forecasts. Do you want to measure revenue from month-to-month? Or are you trying to measure revenue intake for a particular client?
Choose whether you want to assess a timeframe or a specific variable. Most companies find that rolling 3-month revenue forecasts give them the best insight. Beyond the 3-month mark, there’s too much volatility.
Next, get an accounting of your confirmed revenue sources for your time period. Be sure to subtract costs and operating expenses to find your gross profit. You’ll then review your sales and marketing pipelines to list out possible revenue streams that haven’t yet been committed. These are your emerging opportunities.
Setting Revenue Targets
Your goal here is to review your numbers and create a set revenue target for your timeframe. You’ll have already taken into account expenses through your gross profit calculation, but a word of warning: Your business may be subject to more seasonal volatility than you expect. It’s easy enough to anticipate fixed costs from month-to-month, but expenses in Q1 can look quite different from Q4.
Keep this in mind, and create a thorough review of all pertinent expenses for your chosen reporting period. (As you perform these assessments each year, you’ll get more insight into your company’s unique variability—meaning that your forecasting should become more accurate as you grow.)
From here, you’ll look at your committed revenue to see how close to your goal you already are. And with that knowledge, you’ll be able to calculate what percentage of new prospects you’ll need to convert to hit your target. This simple calculation is the basis of revenue forecasting. Of course, you’ll need to validate these figures in your accounting system before committing yourself to any big financial decisions.
If your bookkeeping and accounting systems are in disarray, then fixing them will be a crucial part of your journey to consistent and stable growth. After all, a solid accounting foundation allows marketing agencies, and small businesses alike, to achieve future levels of sustained profitability.
See how SmartBooks helped one marketing agency optimize business processes to improve financial results in this case study.