Revenue Forecasting for Growth: How to Hit Your Target

“I want to grow a bazillion dollars next year.”

My favorite flavor of pie in the sky is when a business owner throws out a random number for next year’s growth. They think that by putting pen to paper, they’re one step away from success. But there are so many questions to answer before you even get to the point where you know if that goal is realistic – and whether you can hope to maintain profitability while achieving it.

As CFOs, we hear these ambitious goals all the time. Then it’s our job to transform them into an attainable forecast. Here’s how we walk them through the forecasting process:

Start with Sales

Growth has to come from somewhere. Simple but true. So, before you commit to a growth rate, you need to look at your historical data and then gauge your ability to go out and get more work. Questions to consider as you dive into sales forecasting:

Are you looking for a single big fish?
Are you going to grow a single revenue stream, grow multiple streams and/or introduce new streams? (If you haven’t identified your profit-drivers yet, now is the time to do so!)
What percentage of future revenue do you expect to come from each stream?
Is your sales team staffed appropriately? Are there personnel or procedure changes needed?
Is your team tracking sales pipeline metrics carefully?

As you look to the future, don’t forget to look to your historical data as a guide:

Do you understand your past sales numbers?
Do you know where you sell better? From attending speaking events? Do you sell better to recurring clients? Do you sell better to certain industries?
What percentage of recurring clients come back?
What percentage of clients are “big fish”, and do you want to change that?

These questions – particularly when backed by data points – can help guide forecasting conversations, because they help single out areas of potential – but realistic – growth.

For companies with aggressive revenue growth goals, sales is the obvious place to start. But what about companies aiming for a more natural growth rate (around 20%)? That depends on what kind of company you are, in terms of what you are built to do:

Are you a recurring revenue model company? If you have a subscription-based model, you’ll have a strong base. Focus on delivering excellent service, expect a natural rate of attrition of around 5%, and then plan your sales goal accordingly.
Are you a “hunt and kill everything – and then do it all over again” company? In this case, your sales funnel and your win rate are the keys to a successful forecast.

Build Onto Your Model

Once you know the number of clients you need in the various areas of your business, you can figure out your targets.

How many sales calls do we have to have in order to get the three clients we want?
How will we generate sales calls? Does this come from a strong marketing capability creating prospects coming to us?
What's our closing ratio?
How long does it take to close a deal?
How big are the deals we are looking at? (Small deals will close faster but require a higher volume.)

Check (Or Build!) Your Cash Reserves

Growth requires cash. There's going to be a certain lag before your new efforts actually result in money coming into the bank – but how long will that lag be? Three months? Four? The higher the growth rate, the longer the lag in most cases. This is where cash flow forecasting becomes essential: You don't want to get three months in and think, “Oh, no, now where's all my money? I just invested in another marketing person. I’ve got all this spending out there. I've added a couple more team members anticipating this growth, and now it’s not happening fast enough.” That could put you in a bad situation.

When we talk to clients about cash-on-hand, we recommend 10-30% of revenue in an operating reserve. But for clients in growth mode, we like to see them at more than just 10%. That cash position, along with good billing hygiene, gives you something to lean on while you take steps towards growth – for example, to give the sales team time to build up the pipeline that supports your goals. Without that healthy cash reserve in place, we often recommend clients hit pause before attempting to grow: 15, 20 percent is a safer target, so that you don’t have to pull the plug after a few months of effort.

Remember, building a cash reserve might mean not drawing a distribution, which doesn’t feel great. But don’t think of it in terms of skipping a paycheck: It’s an investment in your company. A lot of people think of investments as stocks or mutual funds. That’s buying a piece of someone else’s company. Build up your cash reserve as part of a growth plan and it’s an investment in your company.

Evaluate Production Metrics

Once you have a sales forecast in place, you need to look at your production capacity: how many people do you need, billing how many hours at what bill rate, to handle the influx of clients? Are there write downs? Using that information we put together a simple model with a few variables that shows a calendar year across the columns and a few variables (people, hours, bill rate, write downs) to see how much work the new team can be expected to produce.

As we create this model, we want to put in a growth slope, so that there’s no expectation of doubling production from one month to the next. A company that wants to grow from 10 to 20 million dollars over 12 months needs to do an average of 1.7 million per month – but rather than expecting to go front the current $800k per month up to $1.7 in month one, a more realistic goal is to shoot for $1 million in month one and eventually increase until the year ends at around $2.6 million.

While building out production forecasts for growth, it’s important to keep an eye on billing rate: It may not be possible to keep a bill rate so high (and the write downs so low) if you’re working on aggressive growth.

Essentially there are four levers to pull when looking at production growth:

Existing people: You can get more hours out of your existing people by improving efficiencies or increasing their weekly workload (and pay!)
Hire new people. That's obviously going to help you get more hours but expect time for hiring and training plus some amount of turnover.
Average bill rate: Charge more – if the market can bear it
Write offs: Write off less – if your team does good enough work.

A growth plan will probably involve all four levers, and some of them take longer to pull than others. It may come in waves, where you start by asking your current employees to give a few more hours, then you adjust your pricing, then you bring on more members.

Check Overhead Increases

The more you grow, the greater your overhead costs. It’s inescapable. But you want to watch the rate of increase, because there’s no point in growing top-line revenue without an increase to the bottom-line.

In addition to the increased salary and benefit costs, a larger team might require a more sophisticated project management tool – or a project management team. You might have to promote your best revenue producers to managerial roles, which turns them into an overhead cost. You might need more office space or, for a remote company, you might need to invest in retreats to keep the team cohesive. You’ll likely have to spend more on sales and marketing as well.

It can feel scary to watch overhead numbers shoot upwards. That’s when industry benchmarking becomes invaluable: If your industry typically spends 10-15 percent on sales and marketing, you can look back to your own numbers and understand if you’re in the ballpark and, if not, why.

Know the Difference Between Budget and Forecast

Once you build a budget for a team to get to a certain number, that’s when the fun starts. What happens when, six months in, the numbers are low? How do you create a moving target to keep the team invested and excited?

Every month, there’s a financial statement review as well as a modification of the forecast with the actuals. That involves looking at the pipeline to see not just how things are doing this month, but several months into the future. Say month one we underperform: the question becomes, can we make up for the shortfall later in the year or do we accept it (and adjust our production goals accordingly)? If the underperformance continues, at some point it will be impossible to catch up. When you work with a forecast, however, you create a moving average which may mean recognizing you won’t hit your growth goal in the specific timeframe – but you may well meet (or exceed) it a few months later.

Check and Update Your Revenue Forecast Early and Often

When you're in a growth mode, your forecast is your new best friend. You want to be looking at it, updating it, talking about it. You want to make sure that every month you have a plan about what the next month’s going to look like. Everybody needs to know their steps to make that growth happen.

Even if you’re not growing, and you’re just trying to stay the same size, these same points hold. Yes, they’re magnified (exponentially) when you’re growing, but questions like, “Where do your sales come from? Do you have the right resources and people? Will you have enough cash next quarter?” are the fundamentals of a healthy business.

Do you need more help creating a dynamic forecast that helps you reach your business goals? Check out our virtual CFO services or book a virtual CFO consultation below.