Building a Reliable Revenue Forecast
By Ali Waterman | Harkcon’s Financial Specialist
One of the most powerful tools for a finance department is a reliable forecast. The challenge is creating one that you can rely on to make decisions. Today I’m going to focus on building a revenue forecast and what it takes to make it accurate.
Identify the Revenue you need to Track
At Harkcon, we track three types of revenue; Active Contracts, Unexecuted Option Periods, and Business Development. Typically companies will focus solely on their active contracts or guaranteed revenue. Harkcon likes to also look at revenue that isn’t guaranteed. Our unexecuted option periods are follow-on work for active contracts. Since they are not active and there is a chance that they won’t be exercised, we take the revenue and put a probability of it turning into an active contract on it. This is also called our expected value of the revenue. We apply a similar concept to our business development revenue. Contracts that we are currently bidding fall into our business development revenue. We like to know what the potential revenue for Harkcon is in the future to estimate our growth. We keep the three categories of revenue separate, so we can clearly distinguish between the three categories. Identifying what types of revenue you want to track is the first step to gathering accurate data.
Compiling Revenue Data
A forecast is only as good as the data you put into it, so compiling the right data is crucial. It’s best to get the data from the people know the revenue sources the best. For active contracts and unexecuted option periods, we have the Project Managers develop a month by month revenue table at the start of the contract. We have incorporated this process into every contract in order to get the most accurate information. If the table changes over the course of the contract, they update it and send it to the finance team. For business development, we ask the capture manager provide similar information including the probability of winning the contract. Sourcing information for the people who are closes to the contracts insures the most accurate data.
Creating a Tool for Analysis
Once you have the type of revenue and data, creating a tool to analyze the information can help make better informed decisions for the company. At Harkcon, we created a pivot table so we can easily look at the data in multiple ways. It’s a clean way to run revenue scenarios across different projects and time periods. We maintain the tool by updating the data across all the contracts once a month and brief it to senior staff. The Finance shop also uses this tool to make critical decisions about the company future based on its reliable data.
When you follow these three steps you will be well on your way to building a reliable revenue forecast.
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