When creating a budget, start by projecting revenue. This will help you determine the top limit of how much you’ll be able to invest in each of your departments. If you anticipate low revenue, that means you’ll have less money to allocate to each department. If you expect high revenue, you’ll be able to invest more in your infrastructure. Either way—high or low—projecting revenue gives you a sense for what you’ll have available to invest, and that’s why it’s essential that when you put your budget together, you start your budgeting process here.
Strive for accuracy
It might be tempting to overestimate revenue, in order to justify expenses that you think could accelerate revenue. It might also be tempting to play it safe and underestimate revenue, in order to save your pennies. But the best course of action is to make your revenue projection as accurate as possible.
Overestimating—and subsequently overspending—can quickly lead to a cash flow problem if new revenue doesn’t materialize or doesn’t convert into cash quickly enough. Underestimating—and subsequently underinvesting—can also lead to cash flow problems: starving your business can leave you unable to meet customers’ demands, which puts you in a position of having to spend hastily to serve your customers. These last-minute, unexpected decisions tend to be far more expensive and can create the very cash flow problem you were trying to avoid.
How to project revenue
In order to precisely project revenue, we recommend you take a bottom-up approach, and get as granular as possible in understanding your revenue. Start by dividing your revenue forecast into two categories: Existing Clients and Prospective Clients. With Existing Clients, the goal is to conduct a yes/no analysis for each client: will you renew them or not? If the answer is yes, you need to identify which month they will renew, for how many months, and at what monthly price point.
Projecting revenue from new business: Named New Clients
Prospective Clients is broken down further into two parts: Named New Clients and Blue Sky. Named New Clients are deals that are currently in your pipeline; these are companies you are having deep conversations with. Like with Existing Clients, you will conduct the same yes/no analysis for each Named New Client: will you win them, in which month, for how long, and at what monthly price point?
Projecting revenue from new business: Blue Sky Clients
Blue Sky, on the other hand, are clients currently unidentified. They’re not in your pipeline, and you don’t know where they will come from. Still, they represent the remaining revenue you are looking to capture in order to achieve your revenue goal. To complete the Blue Sky revenue projections, you’ll need to look at your win rate and the average length of your sales cycle to realistically determine how many new clients you can win per month. If you don’t have historical sales data, you will need to come up with logical assumptions to estimate your blue sky revenue.
Example of revenue projection from Existing, Named New, and Blue Sky Clients
Using the abovetable as an example with Existing Clients, Client C was up for renewal in October, and we are estimating that they will not renew their contract. Client D is up for renewal in August, and we are projecting that they will increase their spend from $15k to $20k per month. Client E is also up for renewal in August, but we are planning that they will decrease their monthly spend with us from $10k to $7.5k per month.
It is important to project revenue by month in order to be consistent with your accounting. For example, with Client F we are expecting $60k in total revenue for a project that would start in April and end in June. The process of projecting “Named New Clients” is the exact same process.
For blue sky prospects it’s a slightly different process. If you look at the “blue sky table” above in this example, we are projecting that we will win a client in July at an average order value of $5k per month and that we will keep that client for every month for the remainder of the year. We are also projecting that we will win a new client in August, September, October, November, and December with the same average order value and assume that we will keep those clients for the entire year. This means that we will want to ensure that our sales and marketing infrastructure is set up properly in order to win one new client per month starting in July.
Once you have finished projecting every single client throughout all three categories, you will be able to identify the total amount of revenue you project from existing and future clients for a given year. This will, in turn, allow you to tune up your budget and refine your overall growth strategy.
So let’s get growing.