How Small Business Owners Can Forecast Revenue

Planning without knowing exactly what comes next is not an uncommon ask of small business owners. With so many shifting variables, like customer demand and changing trends, you can try to do your best to make the right decisions, but uncertainty is part of running a business. That said, operating without a clear plan can make those decisions feel even riskier, especially when it comes to finances. Revenue forecasting offers a practical way to regain some control by helping you set expectations and prepare for different outcomes so that you can make more informed choices.

In this post, we help answer:

• How can small business owners forecast revenue?
• What are the different types of revenue forecasting?
• What practices should small business owners keep in mind when forecasting revenue?

What is revenue forecasting?

Revenue forecasting is a process that allows you to estimate how much money your small business will make over a specific timeframe (e.g., weekly, monthly, or annually). However, the estimation process is not a best guess, as it requires data to back it up.

The benefits of revenue forecasting include helping you feel more prepared for unexpected situations and allowing you to follow a previously established path that has historically been accurate for your small business. By forecasting revenue, you can make more informed decisions about where to allocate funds to promote your business’s growth, plan for new hires, purchase new inventory, maintain a certain number so you’re covered during downturns, and more.

Start with understanding what generates revenue for your small business

While you should have a good idea of your business offerings, listing them out  on a spreadsheet or in business software, and determining what actually makes money for your business can be an effective first step. Doing so allows you to recognize patterns, which can help you adjust your focus and prioritize your most profitable offerings.

Review your small business’s historical data

Your past performance is extremely valuable for forecasting future revenue, as the financial patterns you have already faced can help you better plan for what may come. Some aspects to consider can include, but are not limited to:

• Monthly revenue trends
• Busy and slow seasons and their impact on revenue
• The average purchase value per customer
• How many customers you have on average throughout the year

Factor seasonality fluctuations into your revenue forecast

Many small businesses experience revenue fluctuations throughout the year, such as increased sales during the holidays. If your historical data shows these trends, be sure to include them in your revenue projections, as ignoring these patterns can lead to unrealistic forecasts.

What are the different types of revenue forecasting?

Forecasting revenue for your small business will be unique to your situation and the data you have available. However, one of the primary goals is to anticipate different scenarios, so that you can develop a game plan for whatever situations arise. While it’s impossible to plan for every possibility, being prepared as much as possible is essential.

Common types of revenue forecasting that you can use (separately or in combination) include:

• Bottom-Up Forecasting: Starts with small details and builds from there. You can estimate factors such as how many customers you expect in any given period, how much they will spend, and how often they will buy, then combine those numbers to calculate your total expected revenue.
• Top-Down Forecasting: Starts with a big picture number, such as the size of your market, and then works down to estimate your business’s expected share. This method often relies on industry data and broader market trends to support the estimate.
• Quantitative Forecasting: Uses numbers and past statistics to predict future revenue.
• Qualitative Forecasting: Relies more on experience and insights rather than hard data. It may include customer feedback, expert opinions, or market observations, especially when there is not enough past data to rely on.
• Trend-Based Forecasting: Looks at past patterns, such as steady growth or decline, and assumes those trends may continue, while recognizing that market changes can impact future results.
• Time Series Forecasting: Tracks data over specific time periods (like monthly or quarterly sales) to identify patterns such as seasonality or cycles and uses them to make predictions.
• Regression Forecasting: Looks at relationships between factors like pricing, marketing spend, and economic conditions, and historical revenue to predict future sales.
• Pipeline Forecasting: Often used in service or sales-driven businesses, this method estimates revenue based on current leads or deals and how likely they are to convert into actual sales.
• Scenario Forecasting: Builds multiple versions of the future, such as best case, worst case, and most likely case, so that you can plan for different outcomes.

Practices to keep in mind when forecasting revenue

As you begin the process of forecasting your revenue, there are some factors to keep in mind, which include:

• Consider external factors: Look for market projections, economic conditions, changes in supplier costs, new trends in customer preferences, and any new competitors entering your space, as these should all become part of the scenarios that you account for.
• Review and adjust regularly: Once you complete your forecast, it is essential that you revisit it often to adjust where needed. Your business will change, and so will your industry, so taking time to review and adjust your assumptions is key.
• Use factual data wherever possible: Your forecast should be based on factual numbers related to your business. Even if you just launched your small business and can’t rely on historical data, look to industry benchmarks and other industry-related insights to ground your forecast. 

Small Business Solutions with The UPS Store

Preparing a revenue forecast shows you want to be prepared for what comes next in your small business. At The UPS Store, we recognize the importance of planning ahead, which is why we provide a variety of services that can help you feel confident about your business’s next steps. From printing and document services to shipping and mailbox rentals, we help small business owners stay organized as they juggle their responsibilities.

Visit The UPS Store near you to learn how we can help with our Small Business Solutions.