A Proven Method For Accurately Forecasting Annual Revenue - Kimble Apps

6/27/2015
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A Proven Method For

Accurately Forecasting Annual
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Having an accurate 12 month revenue forecast is a vital component of the budgeting and
planning process in a Professional Services organisation.
Get the forecast too high and you
could end up taking on too much cost too soon.
Get the forecast too low and you wont be
able to resource up in time to take advantage of your business pipeline.
Either way you are
impacting your profitability negatively.
Unless your business pipeline has a large proportion of annuity contracts surely it is near to
impossible to get a 12 month forecast correct with any degree of confidence? Youd think
so, but that isnt the case. Over the past 15 years I have been using a simple approach which
every year has proved extremely accurate if you have at least 10 customers and prospects.
Ill be honest I dont know fully why it works, but history proves it does in practice.
I also
know that everyone who has tried it in other organisations I have spoken to has had similar
results and found it a straightforward and valuable sales planning technique.
So this is how
it works if you want to try it
Step 1 gather the initial data
Organise a session with each of your account owners to review their active accounts and
prospects.
Ask them to provide estimates of the revenue opportunity at a headline level for
each of these accounts over the next 12 months against three different estimating criterion.
The three estimates are know as low, medium and high and are derived based on the
following classification:
Low this is the business which is currently contracted at the account.

For example, if you
have a consultant on an existing engagement at $1,000 a day which has 20 days to
complete then the low number for this account would be $20,000.
Medium this is the best guess of what the account owner thinks will be revenue won at
that client over the next 12 months.
I typically set the expectation that the account owner
should imagine that if he or she is not accurate within plus or minus 10% of the medium
forecast number at the end of the 12 month period they will metaphorically lose their job.
I
frame it in this way to stress to them that I
dont want the number low-balled or over
estimated.
I say I know I am asking the impossible but need them to take this approach and
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use their best judgement I wont be setting targets based on these individual numbers
(and indeed you should not see my blog on setting incentive sales schemes).
High this is the best guess of the revenue you would win if you won every opportunity in
the account over the next 12 months and you had no resource constraints (i.e. you could
staff every project you won fully).
Note that the 3 numbers should be cumulative.
For example, a $100,000 forecast as low and
additional $200,000 forecast at the medium level and an additional $150,000 forecast as
high would be expressed as:
low
$100,000
medium
$300,000
high
$450,000
Step 2 validate the data
You should review these estimates face to face with the account owner.
Simply getting the
account owner to describe out loud their thought process in deriving the estimates has the
effect of teasing out where they have under estimated or over estimated (tends to be the
former).
If you are in a organisation where multiple people are involved closely with
business development (for example, where you have a Project Manager/ Consultant leading
an account from a delivery perspective as well as a Sales Person assigned to the account)
then try and get each person independently to come up with the estimates and then bring
them together to seek consensus.
Step 3 consolidate the data for your company
Consolidate the information from each of the account owners and you are now left with
something like the following:
Client Name
Owner
Low
Medium
High
Acme
John
$100,000
$500,000
$1,000,000
Archilles
Brian
$-
$-
$3,000,000
Brandon Plastics
Jane
$250,000
$250,000
$250,000
Chumley
Pharmaceutical
Jane
$1,000,000
$1,100,000
$1,200,000
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Detroit Cars
Jane
$200,000
$500,000
$2,000,000
Franklin Motors
Brian
$10,000
$1,000,000
$1,500,000
Mangrove Estates
John
$250,000
$250,000
$450,000
Norman
Engineering
Emma
$700,000
$1,000,000
$1,300,000
Peidmont Wines
Emma
$50,000
$100,000
$250,000
Quiver
Brian
$-
$-
$500,000
Reed Electronics
John
$450,000
$650,000
$900,000
Stream Solutions
Keith
$40,000
$100,000
$200,000
Wright Brothers
John
$30,000
$400,000
$600,000
Zelstra
John
$500,000
$1,000,000
$2,000,000
Step 4 total each of the low, medium and high numbers

The most important point about this technique to appreciate (and to ensure your account
owners appreciate too) is that it is the total for each of the low, medium and high forecasts
across your whole business that we care about and not the individual estimates.
We fully expect in a Professional Services organisation that over a 12 month period most of
these forecasts at an individual level will not be accurate.
In the example above we might
be starting the bidding process at Quiver for a highly competitive project worth $500,000
(hence forecast only as high) and we eventually end up losing it.
In all likelihood another
similar deal (or several smaller deals totalling an equivalent value) which we dont know
about today will come along that we can win.
Alternatively, we might actually win the
Quiver deal but Reed Electronics might run into financial problems and have to cancel the
$450,00o on-going project (forecast as low).
The point I am making is that during the normal
course of operation of a Professional Services business over a 12 month period the total
figures we derive will be accurate.
However, the individual items from which they were
calculated will not hold up for closer inspection.
So for the example above we get a total for low, medium and high of:
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Low
Total
$3,580,000
Medium
$6,850,000
High
$15,150,000
Step 5 calculate the forecast revenue

The final step is to calculate the 12 month forecast.
The total revenue number that you will
actually achieve over the following 12 months is a figure 30% of the way between the
medium total and the hight total.
The formula for annual forecast revenue is: ((highmedium) * 30%)+ medium.
So in the example above the low/ medium/ high derived 12 month revenue forecast would
be: $9,340,000.
Does it really work?
The simple answer is yes.
Indeed, the more accounts you have the more accurate the
forecast proves to be.
This makes it an extremely valuable technique in the budget planning
process.
In reality however successful your business is then you can never achieve the high
forecast as you will never be able to resource people quickly enough to fulfil the projects
you win.
So the revenue you achieve ends up being 30% above the medium number.
Im
not sure scientifically why it ends up being 30%, but Im just happy that it always does!
If you want to measure trends in what you are closing and extrapolate the results to produce
more detailed forceasts then try looking at my blog on measuring the health of sales
operations.
How can I use this information in the planning process?
In the budgeting and planning process then this low/ medium/ high derived forecast
number can be used to cross reference (or validate) against the bottom up forecast derived
from headcount.
In a simple example we might say that we employ 50 consultants and we
plan to recruit 2 additional consultants a month at an average day rate of $800 with an
average of 14 billable days a month.
Wed end the year at 74 consultants and our bottom
up forecast would be $9,027,200.
If we had the derived low/ medium/ high revenue forecast as shown in our example of
$9,340,000 then Id be comfortable that we have got the budget set correctly.
If we had less
consultants initially or planned to recruit at a slower rate then our bottom up forecast
would be significantly lower than this, in which case we are unlikely to have enough
resources to win the business forecast with this technique.
Alternatively, if we have a
significantly higher headcount driven forecast than our low/ medium/ high derived forecast
then we will have too much cost built into the business and we need to re-plan.
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What else can I use the information for?

I have also used this information to organise my sales team and focus my sales strategy.
In
the example Ive been using Id group together the accounts under each account owner then
analyse the data.
Client Name
Owner
Low
Medium
High
Archilles
Brian
$-
$-
$3,000,000
Franklin Motors
Brian
$10,000
$1,000,000
$1,500,000
Quiver
Brian
$-
$-
$500,000
Norman
Engineering
Emma
$700,000
$1,000,000
$1,300,000
Peidmont Wines
Emma
$50,000
$100,000
$250,000
Brandon Plastics
Jane
$250,000
$250,000
$250,000
Chumley
Pharmaceutical
Jane
$1,000,000
$1,100,000
$1,200,000
Detroit Cars
Jane
$200,000
$500,000
$2,000,000
Acme
John
$100,000
$500,000
$1,000,000
Mangrove Estates
John
$250,000
$250,000
$450,000
Reed Electronics
John
$450,000
$650,000
$900,000
Wright Brothers
John
$30,000
$400,000
$600,000
Zelstra
John
$500,000
$1,000,000
$2,000,000
Stream Solutions
Keith
$40,000
$100,000
$200,000
For example, typically I dont like a business development person to be allocated too many
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accounts which only have speculative opportunities this would be indicated by a large
difference between low and high numbers.
Additionally, if there is little or no difference
between the low, medium and high numbers then the account is better managed by a
delivery focused person than a business development/ salesperson.
In the above example
there seems little point in having Emma working on business development at Brandon
Plastics as there is no upside and it would be better managed by a Project Manager or Lead
Consultant with some sort of profitability target.
Another thing you can do is have more than 10 accounts allocated to an individual business
development/ salesperson then you can start to use the derived low/ medium/ high
forecast total across their accounts to verify sales targets.
In Kimble we allow you to record and analyse this information.
Id be really interested what
your experiences of trying this approach are.
byMarkRobinsonon28thApril2011inManagingProfessionalServicesFirms
About Mark Robinson

Mark has over 25 years experience in the IT industry and is a serial
entrepreneur. He started his career in management consulting before
working for Oracle Corporation where he was able to witness first hand their
rise from start-up to software giant. He started his first IT Consultancy Company, Fulcrum
Solutions, in 1997 with no external investment, and in just under 3 years it had reached 200
staff with offices in Edinburgh, Manchester, London and New York.
It was acquired by
Whittman Hart for cash and stock valued at $35m in November 1999. Following the
successful sale of Fulcrum, he co-founded IT consultancy Edenbrook, this time with external
investment.
At the time of its acquisition in 2009 by Hitachi, Edenbrook had reached over
400 people based in the UK and India. In Kimble Mark is responsible for business
development, channel management and Market analysis.
View all posts by Mark Robinson
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A Proven Method For

Low this is the business which is currently contracted at the account.

Step 4 total each of the low, medium and high numbers

Step 5 calculate the forecast revenue

What else can I use the information for?

About Mark Robinson

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than gathering data.

than gathering data.

than gathering data.

than gathering data.

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