Why Services Firms Get Revenue Forecasting Wrong

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A weakening economy is continuing to shake the ground beneath business leaders’ feet. This month’s Chief Executive survey reveals a drop in service firm CEOs’ confidence level associated with the future business landscape.

Revenue forecasting is coming under scrutiny as companies amend their predictions, often while simultaneously cutting jobs. Early responses to the cloudy economic climate hinge on adaptability and the power to anticipate future financial conditions to the highest possible degree. And while CEOs are painfully aware that they bear the brunt of the company’s downturns, many still struggle to make the calls that will positively impact the next quarter, let alone the next five years, because they remain at the mercy of inadequate forecasts.

The question is “Why?”

It has to do with a mix of issues:

  • False beliefs about revenue forecasting
  • Risky manual forecasting methods
  • Bad data

The dependency of business growth on accurate forecasting is uncontested. And while the “how” of forecasting may seem murky in light of the inefficiencies and failures of commonly practiced techniques, the method that works is—fortunately for all of us—straightforward.

On the agenda for this topic:

Why businesses fail at forecasting revenue

There is an idea circulating in B2B communities that forecasting revenue is part art, part science. It’s not. 

That revenue forecasting is, in fact, a science is of great advantage to you. It means there are set rules that, when obeyed, create predictable, reproducible results. All you have to do is follow a formula with the right metrics to reach reliable, fact-based conclusions, cutting down significantly on the potential for error.

Certainly, hunches and anecdotal evidence have no place in forecasting revenue. But there’s a bigger reason it happens to be a particularly frustrating area for many of the services firms we speak to. 

Astonishingly, companies with annual revenues of 75 million plus are still cobbling revenue forecasts together with numerous spreadsheets. Considering today’s advanced technological offerings, the spreadsheet method is becoming something of an anachronism that leaves data vulnerable to typos, miscalculations and good, old-fashioned human error. More to the point, there’s no guidance with spreadsheets. Businesses are pulling irrelevant data from disparate systems while ignoring data that matters.

Little wonder that actual revenues don’t square with projections. Frankensteining data together this way is a time-consuming and highly fallible process. And at their own peril, CEOs are basing leadership strategies on more fiction than fact.

The true cost of missing your revenue forecast

No company, large or small, private or publicly traded, can afford to routinely miss its forecasts.

It holds true for CEOs leading organizations of all stripes: Trying to navigate toward short- or long-term goals without a system for accurately predicting future revenue equates to, as the saying goes, the blind leading the blind. When your staff can’t provide realistic estimates, your growth goals are underdeveloped, unrealistic—dangerous, even. Worst of all, no one can see the danger coming.

Too high or too low?

The most innocuous effect of shooting too far over your company’s real income is a lack of funds to activate your initiatives, causing the company to stagnate. Services firms expanding into new markets will have no choice but to reevaluate the feasibility of their objectives, along with all prospective business and additional revenues associated with the new market rollout. But the situation can get a lot more sticky. 

If you find that you can’t afford to pull the trigger on hiring new talent as planned—what happens to your ability to resource upcoming projects? Another scenario all businesses will feel the pains of: Spending too much in early quarters before the panicky reality of the actual budget hits, necessitating drastic measures to keep the lights on.

On the other end of the spectrum, being too far under is no safety net. If you’ve failed to see a growth spike, you’ve missed opportunities to implement initiatives that could double, triple, quadruple your company’s growth. This could be a major blow to the board’s faith in your ability to steer the ship.

The most dire consequence of missing your revenue forecast is a cascade of events that potentially leads to substantial revenue loss, jeopardizing your company’s financial stability. What’s more, a bad forecast means losing the power and momentum to effect changes that could increase the company’s value. Either way, it will steer your ship into the doldrums.

How do you forecast revenue correctly?

To reach your targets and bring your growth ambitions to fruition, you need these four elements in your forecast:

  • Actual revenue
  • Planned order book
  • Unplanned order book
  • Pipeline

First, financial planners of any professional services or SaaS business should be employing standard revenue recognition, which, as you know, your accountants are well versed in. Paying attention to the point at which revenue is actually revenue is critical for accurate monthly numbers.

This is the course your team should implement: Combine revenues of performed, planned and unplanned contracted work with pipeline projects you’ve sent proposals for and which you have a decent likelihood of contracting. The most realistic revenue forecast will only include pipeline projects that meet or exceed a 50 percent probability threshold. Any lower and you’re taking big chances using pie-in-the-sky data that could skew results toward higher, albeit false, revenue projections.

If you were to put this into a revenue forecast formula, it would look like this:

Actual work performed + planned contracted work + unplanned contracted work + pipeline with 50% probability min. = revenue forecast

Of course, fastidious revenue forecasting does require correct action in response to observed numbers. While actual revenue and projects you’ve already planned and resourced are dependable forecasting units, the unplanned order book is a bit less secure as project management hasn’t actually planned and budgeted it yet. So, good managers will start planning as much of the unplanned order book as possible to approach the month’s target value and beyond.

Get these steps down and forecasting becomes the scientific process it’s meant to be.

Revenue forecasting tools

As with resource forecasting, some revenue forecasting tools are more useful than others. It really depends on what these tools measure. If they’re not measuring the above formula components, they’re not very useful to you. Similarly, if they’re not integrating the information together for you automatically, they’re making you do quite a bit of unnecessary leg work.

A revenue forecast template lays out the parameters of your forecast while the project manager plugs in the numbers. What you want to consider, however, is the likelihood of errors—your PM making a typo or a formula breaking. No cautious CEO would make decisions based on dubious data, but not every organization is aware of the exact risk level.

Digital transformation is a priority among 87 percent of business leaders, a Gartner survey found. With the vast majority of businesses looking to accelerate digitization and automation, it’s clear that tools that facilitate the process are becoming unavoidable rather than optional. 

Revenue forecasting tools that automate forecasting deliver instantaneous results that are on the mark. There’s software available today that merges analysis with opportunity and project management to orchestrate an automatic transition from project sales, to project planning, to financial analysis. The flow is seamless and the forecasting data is produced in real time, affording your organization greater agility when external circumstances influence your pipeline. No laborious reforecasting required.

What is the best revenue forecasting software?

Leading a services business can at times feel frustratingly hands-off when you aren’t seeing behind the scenes. And yet the last thing you want to do is micromanage every process and operation you expect to leave in your teams’ capable hands.

The solution is software that you and your teams have mutual confidence in. It makes sales and service processes transparent and eliminates mistake-riddled spreadsheets. 

Ideally, the software you choose will accomplish the following:

  • Replace forecasting by manual data entry with automated forecasting
  • Provide detailed revenue forecasts in a visual format that can be digested instantly
  • Connect sales and project delivery in a unified system
  • Automatically respond to and reforecast opportunity and project changes
  • Create visibility into every stage of forecasting for project managers and senior executives

Here’s what the workflow would look like: 

  1. Sales teams enter opportunities at the proposal stage into the software
  2. Once won, opportunities become projects at the click of a button and are automatically entered into the unplanned order book
  3. Project managers see which projects need planning to reach targets in the revenue forecast chart
  4. As projects are planned, they’re automatically shifted to the planned order book and the revenue forecast chart is updated
  5. As timesheets are submitted, the planned order book automatically moves into actual revenue
  6. The CEO and FP&A teams review the revenue forecast and make adjustments to plans that will determine the future of the entire organization

This is how it’s done in VOGSY. The workflow is a logical result of the merging of customer relationship management (CRM), project management and reporting capabilities in a software solution. More to the point, it’s a process that leverages automation to remove guesswork, questionable data and hours upon hours of forecasting development. 

The bottom line

The fact is that most companies cannot easily obtain a reliable revenue forecast because their teams are working with a flawed spreadsheet system. The best forecasting software—really, the only forecasting software—to produce fast, easy and reliable revenue predictions is a holistic platform that integrates and automates the progress of opportunities to projects as well as the forecast itself. 

Because it guards against forecasting errors that could compromise your organization’s ability to grow, thrive and indeed survive, modern forecasting software is also part and parcel of risk management. In a world where new risks are always popping up, the tools that produce the speed and agility to respond faster will determine who comes out on top.

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