Forecasting revenue is an important task for businesses to provide insight into what is coming in the future. It allows for a clear idea of a company's financial standing, helps identify potential risks, and set owners and management up to make adjustments to the business plan throughout the year.
Not only does it assist the business owner, but revenue forecasting also helps make the business more appealing to potential investors and makes it easier to acquire financing for growth.
Without a doubt, revenue forecasting is very important for companies, and with that, there are different methods to go about it.
The straight-line method is one of the easiest methods to implement in a business. With this method, trends and historical figures are used to predict future revenue. The rate of growth from the past figures is calculated to establish future revenue calculations. This method is used under the assumption that growth will stay consistent and steady in the future.
Moving Average Method
The moving average method can be used for periods of time, such as 3 or 6 months. The moving average method accounts for micro deviations in the given time period to create a stable line to help predict future sales. As time goes on, the oldest data drops off to predict new revenue for the upcoming period. Deciding whether to use a three-month time period or a six-month time period is dependent on whether or not you want the forecast to show the real financial picture or to smooth out recent fluctuations. That's a decision that you will have to make when the time comes.
Simple Linear Regression
Simple linear regression is commonly used to show the relationship between specific variables for forecasting purposes. An example would be comparing advertising costs and promotion costs for a business, but it can ultimately be used for many different types of variables across a business.
Multiple Linear Regression
Multiple linear regression is a similar method to simple linear regression, but it is used when multiple variables (2 or more) relationships are being analyzed to forecast revenue. This method shows the relationship between all variables at once.
Financial forecasting and revenue forecasting help increase the overall success of a company. Choosing the method in which a business forecasts its revenue is up to the business owner and management teams, but it is equally as important to revisit the revenue forecasting as the year goes on. This is key to be able to make adjustments throughout the year to maximize revenue and poise the company for growth when it comes to making important decisions.
Keep in mind that forecasting is easier with dashboards for future insights and analytics. AccountingDepartment.com provides access to customizable dashboards for its clients. This way, the total financial health of the company is highly visible.
If you're considering implementing financial forecasting or revenue forecasting for your company, turn to the experts at AccountingDepartment.com.
AccountingDepartment.com utilizes the latest in technology to put you on the right path. Plan for the future by using financial forecasting and revenue forecasting, you will not regret it!