Building a realistic revenue projection for your business
At times, you may find yourself in the trenches working through the day-to-day operations of your business. It can be helpful to take a step back, plan, set a vision and align on action steps. One of the ways you can do this is by building an annual revenue projection plan.
Consider these tips for how to build a realistic revenue projection for your business.
1. Review your historical data through the lens of your current environment.
Many times, when building an annual revenue projection, you start by looking at what your business did in the last year. You might decide to grow by X% and mark your costs up accordingly. It’s advisable to look at your historical data, but you may want to assess it against current economic conditions. Tune into what experts predict and say about the present and future economic outlook. If possible, look back at historical data when your company operated in a similar economic environment instead of only tracking against where you were in the last year.
2. Take the pulse of your customers, suppliers and internal leaders.
When building your revenue projection, it can be helpful to talk to the constituent groups helping you achieve your goals. For customers, you might ask them about their plans, the challenges they see and any changes they may anticipate. For suppliers, you might ask about any cost changes or potential supply chain issues. For internal leaders, you can talk to them about the conversations and efforts they are implementing. You may have more direct interaction with your sales or purchasing teams, but building a projection can give you an opportunity to check in with all leaders. You may glean insights you wouldn’t find in a newspaper or uncover through your own thought process.
3. As top-line revenue changes, so will all other parts of your financial statement.
Financial statements are long documents. Revenue may sit at the top, but there are a lot of other factors that contribute to your bottom-line profits. You may want to think about what expenses could change and why. You may look at your gross profit margins to understand if there’s an opportunity to capture more market share. Your end goal might be a revenue projection, but you’ll want to consider all the other elements of your financial statement to ensure the projection is realistic and profitable.
4. Assess your working capital needs.
If you are considering growth as part of your projection, it will be helpful to think about your on-hand working capital. Revenue growth often requires increased inventory and accounts receivable, both of which are a drain on your cash. How quickly do you need to get paid to offset the cost of growth? Do you have cash on hand? Do you have access to a line of credit, if needed? You may need capital to bridge the gap between the time you do the work and the time you get paid for it. Lack of capital can be a common reason for business failure, so take care not to grow your business faster than your capital can support.
5. Evaluate your ‘why.’
If you want to grow by X%, you may want to consider your why. What will you get out of it? Are you going to drive X% more profit? Are you going to need to work X% more to get there? Are there trade-offs? Is it worth it? Use this time to reflect on what makes sense for you, both professionally and personally.
6. Seek advice from your trusted advisors.
When planning for your business, it can be helpful to tap your team of trusted advisors for input and advice. Internally, this will likely be your CFO, if you have one. Externally, you can consult your CPA, bank and other professionals for guidance. Having a business-savvy banker who understands financial information and the key drivers of your business can help as you build and review your revenue projection. Outside input might help uncover challenges or hurdles you didn’t see coming.
Ultimately, your annual revenue projection is an opportunity for you to define what’s important to you and your business. Our business banking team is ready to serve you. Learn more about our business banking solutions.