When we first started doing financial forecasting in my last business, there were times when the results were not ideal, and sometimes even downright scary. After a while, we began to see some patterns and were able to tell what kinds of things to be concerned about, and what was “noise”. Here are some tips as you look at your forecast. Please feel free to add your own below.
- Your revenue goes to zero (or nearly zero) in 3 months – First, ask yourself how long your contracts typically are. If they are usually 1-3 months, you’re not going to see much revenue after that. If your typical contracts are longer, you may be looking at a problem. Second, consider the likelihood of renewals. If you know that most of your customers renew, or a good portion of your projects will lead to follow on work, you may not have anything to worry about. And finally consider the health of your sales pipeline. If there are a number of good leads, at various stages in your sales funnel, that picture is likely to change in the next three months. If you feel that your revenue stream will fill in with renewals and new business, not to worry. If not, time to beef up your marketing and sales.
- One project accounts for a very large portion of your revenue – Is the project ending, or will the contract likely be renewed? Will there be follow-on work? And again, are there opportunities in your pipeline to fill the void. It’s easy to get complacent when you have one big project or client – I’ve been there. But having gone thru the end of that big project, I sure wish I had diversified more.
- One customer accounts for a very large portion of your revenue – This situation, is more of a yellow flag. It’s great to have a client that loves your services and uses them often, but what happens if there’s a change of leadership, policy, or fortunes for your whale of a client? Your fortunes can go right down with them. Ideally you’ll be filling your pipeline with other new clients to mitigate that risk. Again – diversification is key.
- Your overall revenue prediction is less then you want or need – Things to consider here are what portion of your actual revenue is likely to be shown in the model. For example, if you get a lot of walk-in or one-off business, you may not be able for forecast that accurately. It’s a good idea to look at the forecast vs. what actually happened to see patterns unique for your business. A landscaping firm that has a handful of regular contracts, but also gets calls in a particular month for service in that month, won’t necessarily see that coming. Using the forecasting and looking at your actual results will help you see what percentage of your business are long term contracts vs. ad hoc calls.
The key takeaway here is that you may see things that look scary, but they may or may not be normal situations for your particular business. Until you start looking at your forecast, you have no way of know what’s “normal” for your particular business, and no early warning signs to avert disaster. What other things are you seeing that are making you nervous? What are you afraid you might see? Comment below, or use the contact us page. I’ll address your issues in future blog posts.