Why you need a revenue forecast in your startup
You might think that a revenue forecast is something dry and technical that only your accountant would be interested in. But, a well-researched and granular forecast can provide the business intelligence needed to drive the success of your startup.
Gary Staunton explains how a revenue forecast fits into financial management, and the ways it helps you understand the future path of your startup.
Knowing the value of revenue projections
We talk to business owners all the time about forecasts. What we find is that even quite established businesses think their forecast will be the same as last year. It will not. Each year is different, so each forecast will also be different. A forecast helps you see down the line.
At the most basic level, it helps with your cash management, by allowing you to see what revenue is coming in over the next period. It’s about looking at what’s coming in, what’s going out and spotting any cash flow gaps and deficits so you’re better informed. So, cash management is one benefit, but a good revenue forecast tells you far more than just your cash position.
Looking forwards, not backwards
As a startup, looking at your prior month’s figures is important, of course. There’s comfort in looking backwards and seeing the progress you’ve made. But your historic numbers only tell you what’s happened in the past – and that’s only half the story.
Looking forward is the hard part. With any kind of revenue forecast, the one thing you can guarantee is that your forecast will be wrong in places. It’s never an exact science – but a forecast can improve your ability to make the right decisions. Once you have a forecast, you have a starting point for predicting the path of your revenue – and that’s a crucial resource for any founder to be able to utilise.
Helping you answer the important questions
To get real value from a revenue forecast, the key is to not wait 18 months to see if you’re right with your forecasted numbers. It’s a continual process. The worst thing you can do is run a revenue forecast and believe that’s the end of the story. Revisit, review and update your forecast, so it’s an evolving document – and a tool that’s helping you answer your important startup questions. For example, you can:
- Run different kinds of forecast – you can have many different kinds of forecasts – e.g. for new products, new sales, or for bringing in increased staffing resources. By projecting your data forward for these key areas, you can see how each area is likely to pan out over time – and how it impacts on revenue.
- Look at the results of changing drivers – amending the key drivers in your business model can significantly change your potential revenue generation. What would happen if you raised your price point by 10%? What if you had a new salesperson? How would that affect sales?
- Understand the impact of reducing costs – some operating costs are beyond your control. But there are plenty of costs you do control – e.g. the number of salaries you pay, the size of the office you rent, which utilities providers you use etc. By amending your costs and flexing your forecasts, you can see what a small change does to the forecast.
Setting targets for your performance
Having clear targets helps drive performance in a startup. With accurate, granular forecasting methods, it’s much easier to track performance, review revenue generation and understand the pathway to attaining your financial and performance goals.
If you need 50% better sales to hit your revenue target, a forecast allows you to see what’s happening, how you’re tracking against your goal and if there’s a need for a new strategy. You can try out a new idea, measure it and see if it’s working – and that’s invaluable! If you were designing a new car, you’d create a computer model to test it.
Forecasting revenues is doing the same for your financial business model. You’re testing the hypothesis that your products/services are going to sell – and continually checking if you’re right.
Speeding up the reaction times of your startup
Forecasts help you see the reality of your financial, operational and strategic decisions – and react quickly. If you release a new product and don’t get the result you want, you can stop faster.
If you don’t hit the forecast numbers, you can pivot from product A, that doesn’t sell, to product B, that does. It’s what you often see on Dragon’s Den when founders come in looking for investment but currently have no sales revenue.
If you have no sales, then stop and do something else. You have to learn from the forecasts and the actuals.
Listening to what the numbers tell you
Innocent's story is a good example of the importance of listening to the numbers. At the very early stages of their startup journey, Innocent took an old ice cream van to a festival to sell their sample smoothies. They put up a sign asking people if they thought the founders should give up their jobs to make smoothies, and put a bin saying 'Yes' and a bin saying 'No" in front of the stall. Then people voted with their empties.
The founders listened to the numbers, saw that there were more positive responses than negatives and took that as a sign to continue. That was a very basic way of testing the market and gathering some initial sales data– and every startup should be doing this.
Accurately predicting revenue is hard! A forecast is based on so many variables – you don’t know who’s going to buy your product/service, or what price point will work, or if other external economic factors like Brexit are going to appear on the horizon.
It’s about knowing what you’re doing as a business, researching your market and knowing how people in that arena use a process to create revenues. For example, if you’re going to offer app-based banking services, what is Starling Bank doing right, that N26 wasn’t?
Starting with your target turnover
Knowing your target turnover is the important starting point. You need to know the revenue required to start and run the business. If your turnover must be £200K to achieve your business aims, you need to know how you’re going to create that revenue.
What percentage of the market will be required? How many sales must you make in a period? So, it’s about doing the homework and being realistic. There are two key steps to creating a revenue forecast:
- The History – this involves looking at your prior numbers and the historic actuals to understand where the business has been in the past.
- The Target – this is where we isolate where you need to get to as a business, based on the right research, market insight and business planning.
You’ll need to test different ways of getting to that revenue target. Break it down into different areas and see what works, and what doesn’t.
Flexing the forecast with different results
The mantra is ‘Start again, repeat, review’ when it comes forecasting – and you carry on until you hit something that’s working. As advisers, we have to help people see when it’s working, but also encourage them to move forward.
Forecasting is an ongoing, continual process. We re-forecast regularly and help clients make those important business decisions based on updated forecasts and projections. A forecast isn’t something you can look at in isolation. By working closely with you and your management team, we can produce forecasts that inform every part of the business and how you create those all-important startup revenues.
Talk to us about revenue forecasting You can’t carry on blindly with a plan or a product if it doesn’t generate revenue. Our job is to help you look down the road and show you the reality of the situation. Pret won’t make you a custom salad – it is pre-made salad that’s effective and scalable to sell.
That’s what generates revenue – efficiency and high volumes. And that’s what we aim to convey as advisers and startup specialists.
Talk to us about the value of revenue forecasting.