Step-by-Step Approach to Building a Revenue Plan
Do you have an organized approach to forecast your revenue? Have you looked at your revenue projections for the next year? Do you know how to do this?
The very first step in building a financial model for your business, or any organization for that matter, is to have a revenue plan. Where is your income coming from? Why should you do this?
Below are 5 reasons this is important:
- Gaining a better understanding of your revenue potential builds excitement.
- Measurable Goals are more likely to be accomplished.
- Revenue is the key to forecasting your profit, and ultimately, cash flow.
- Revenue builds momentum which breeds success.
- A revenue plan helps you focus and prioritize on all your opportunities.
So now that you are convinced, here are the steps to accomplish this:
1. Understand Your Existing Revenue
- You will need spreadsheet software such as Microsoft Excel, Google Sheets, or Numbers to do this.
- List all your clients, products/services, and future months in different columns.
- Forecast your projected revenue based on what is currently contracted by month for at least 12 months or the end of the next fiscal year.
- Assume business-as-usual to forecast beyond the contract term.
- Total all the months and full 12 months for each row.
- See an example below.
- For physical products, list the average quantity, price and sales in different rows to calculate potential sales. Trend quantity, price, and sales based on the last few months or last year at the same time if you are in a seasonal industry.
2. New Revenue Opportunities from Existing Clients
It is very important to consider all revenue opportunities from existing clients. They are the quickest way to grow your revenue plan. I remember when working at a digital marketing agency that the revenue growth from existing clients year-over-year was over 50% many years. Some clients go away, but the ones that stick with you will grow if you are adding the value that is necessary to keep them with you for the long-term. Create a chart like the first one above, but add a column for probability and another for annual revenue. See below for an example. Also, add any new services that are being launched.
So how do you decide on the probability of closing new revenue from existing clients? I would use 25%, 50%, 75% and 90% probability to decide.
- 25% is for opportunities that you just started discussing.
- 50% is for revenue from services you have pitched where there is significant interest.
- 75% if there is a verbal commitment but the timing may still be unclear.
- 90% if you have sent a contract and are awaiting signature.
You may not need all these categories if you are smaller, but review all possibilities on a regular basis. When you approach your clients with other services and products, it shows that you desire to add value to their business which is valuable in and of itself.
This approach can be used for products rather than services. You may adjust quantities or price also if that is a possibility.
3. New Revenue from Prospects
We should all be looking for revenue from prospects if we desire to grow. Once you start having a conversation in which there is realistic interest, you should add this prospect to the new revenue report. Some people call this a pipeline. Once again you are going to assess the probability for close as I listed above.
For those who sell tangible products, you have to consider variables such as quantity, price, and of course, product margin. You may have many customers, so it isn't feasible to list all of them. You might group them by region or target market. At least have a category for new customers and assign a probability for all products.
In summary, forecasting revenue is essential for the success of your business. First, understand how your existing clients, services, and products are trending for the next 12 months. Second, consider all ways you can add more value to your existing clients through new services and products and forecast that revenue by probability. Finally, list out all of your prospects and assign a probability based on where they are in the sales cycle.
Once you have completed your existing revenue and new revenue forecasts, you can look more closely at expenses and profit. We will be talking about this more next week.