Forecasting Revenue Models

October 20, 2011

Q: We are horrible at budgeting. Do you have any secret formula to forecast an accurate revenue model?

A: Great question and a big concern of many integrators… I don’t have a secret formula, but what the best of our members do is work off of backlog, your pipeline and new opportunities.

Backlog is the most predictable, of course, as the order has been placed. It can be challenging to determine when the actual billing can occur. That depends on the clients, their construction schedules and so forth. A trend we are seeing is quick turnaround time for work to be completed. This messes up using backlog as the primary predictability tool. Likewise, contracts are being issued later than ever which reduces the timeframe on backlog.

The pipeline is your outstanding sales proposals that would funnel into the sales column. Now, take what your sales people think and cut it in half. Then calculate your close ratio from that smaller number. The lesson we’ve all learned on quotes we send out is that half of the jobs will never be done by anyone.

New opportunities would be those things you don’t know about until next year. Keep in mind projects come up and are expected to be completed quicker than ever. I would consider you go back estimate how many projects this past year came up since the beginning of 2011, and use a similar number for 2012. Apply your average close ratio to those. Also, remember that our economic outlook doesn’t reflect a great deal of growth in any of our market sectors.

Here’s a different twist. I’ve spoken with some companies who are using our economic and construction forecasts to link to their own sales quotas and revenue predictions. This way they have an objective outside the company perspective on growth by industry segment. Past performance is the best indicator of future results.

One last thing, if you are introducing a new product line, system type, solution or doing a geographic expansion that you have extreme confidence in for next year, attach a separate revenue figure to that. It helps to boost enthusiasm along with improving the chances for success. — CW

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