Revenue projection and calculation: formulas & models
The unknown, darkness and uncertainty. That’s how running a business looks like without revenue projections - you simply do not know what awaits you around the corner. Now, predicting the future is even more important, as the IT market is getting more complicated by the minute - and here’s how to do that without a crystal ball.
What are revenue projections?
Revenue projections are the estimates of your incomes, expenses and profits for a period of choice in the future. In other words, if you want to predict your profits and revenue growth in the future, this is the process for you.
How to calculate revenue projections?
Estimate the sales
To start to calculate revenue projections, you first need to calculate the predicted income from the operations you intend to execute during a chosen period of time. In other words, you need a sales forecats and revenue data.
To do that, you need to take two scenarios into consideration:
- both confirmed and tentative projects are going to be executed bringing profits to the company, causing a revenue growth,
- only confirmed projects will be executed and will generate profits, while the tentative ones will not be acquired, making the revenue forecast much more negative.
In other words, you need to do the calculations twice - for the best and the worst possible scenario. You can also create sales forecast for other scenarios to forecast sales even more accurately.
Revenue forecasting - example
For example, if your company has 5 confirmed, planned projects that will generate $500 000 income, and 3 tentative projects that may cost the customer $300 000, your company will earn between $500 000 and $300 000 in cash, depending on the successful acquisition of new projects.
How to improve accuracy of projected revenue?
When creating revenue projections, you can use advanced tools, such as Primetric, to mark tentative projects and set the chance of their acquisition being successful to further improve your forecasts.
The tool specializes in projecting revenue using the information on a possible future revenue, as well as historical data - if necessary. As a result, the program can forecast revenue and business growth with no burdensome calculations - just software and artificial intelligence.
Calculate projected expenses
If you already know what your income for a given period is, now you need to move on to the next step of revenue process and determine the expenses your company will need to cover at the same time.
To check that, you need to add:
- estimated costs of work for a given period of time, based on the project schedule, historical data, or project scope,
- costs of planned investments,
- project and company overheads, including bills, taxes, non-billable departments (i.e. marketing, sales, administration),
Just like in the example from the previous step, you also need to repeat the calculation for the worst case scenario (with a maximum amount of costs), as well as the best case scenario (minimum costs).
Subtract expenses from income
Once you have both the income and the expenses, you can start revenue projections for different scenarios - both the good and the bad.
You can test out different combinations here, but to get a fixed range of possible profits, simply:
- deduct maximum expenses from minimal incomes,
- deduct minimal expenses from maximum income.
By doing so, you will be left with a range of incomes you can expect in a given period.
Revenue projection models
But what if the basic process is not enough?
If you want to delve into the details of your financial records, improve your net income and stay on top of corporate finance, you can also use one of the following models to enhance your projections and make them more precise. These are some of the best forecasting methods for professional services!
If you want a simple, yet precise answer on your company’s future, historical forecasting is for you.
This accurate revenue projections model focuses on gathering historical data on sales revenue and revenue growth, determining trends and tendencies in revenue stream, and projecting them into the future to estimate the key financial performance indicators and growth rates of the company for the months to come. In other words, it can tell you how much revenue you can expect in the future, and how sales revenue generated in the past can impact your revenue growth rate - all while avoiding inaccurate sales forecasts.
However, this model can only forecast revenue accurately in the companies that already track their operations in detail. If you are not one of them, do not try to come up with the data out of the blue; instead, start gathering them for future periods and calculate revenue using different methods for now.
Length of Sales Cycle Forecasting
If you are not sure how much time it takes for your customers to purchase from your business, this is a revenue projection model for you.
Length of sales cycle forecasting shows you exactly the time you need to acquire new customers. It covers the entire sales process, from contacting the provider and evaluating options, to paying for the services.
For IT companies, this indicator is particularly important, as it predicts when a new project is likely to provide you with additional profits, making your forecast much more precise. It can also help you monitor industry growth and give some valuable to sales leaders, as well as the whole sales team.
Test Market Analysis
Are you wondering whether a new market can power up your sales in the future periods? You can check that, too.
With test market analysis, you can check whether the market you are aiming for is really a good choice. By testing your product or services on a small scale, you can verify whether there is a significant interest in your offer and base your investment decisions on the information. As a result, you will get a sample that can be used to estimate the profits from new business opportunities.
Key KPIs for revenue projections
Of course, you do not have to repeat the calculations for revenue projections every time you want to check the results again. You can also use some simplified KPIs capable of giving you a general idea of your profits in the future. Here are the best of them.
Annual Recurring Revenue (ARR)
Annual recurring revenue, or ARR, is the best choice for IT companies that mostly offer Time and Material or retainer projects. It is the total amount of contracted revenue that your company brings in each year - or, in other words, what kind of income you can expect from your regular sources.
Average Revenue Per User (ARPU)
Average revenue per user (ARPU) or average revenue per account (ARPA) helps you determine how much profit your company generates per every customer. This information can later be used for historical comparison, but also from establishing a benchmark for profits per all of your customers.
Is there a revenue projection software that can help me?
Of course there is!
Incorrect revenue forecasts may impede business growth - that is why it is essential for executive leadership to use some reliable software for the purpose.
If you know the wages, project schedules and company overheads, Primetric can automate the revenue projection for you.
Using the data and both plans and drafts, the system can generate a comprehensive report showing both current finances (based on the tracked time), as well as projected costs. It can also provide you with a number of KPIs necessary for evaluating the financial performance of the company both now and in the future.
Do you want to get even better at managing finances?
Great - go straight to our blog and read more about:
- minimizing the costs of employee bench,
- calculating team utilization,
- billable and non-billable hours,
- project financial analysis,
- improving the profitability of an IT company,