Accurate financial planning has always been crucial for sustainable growth, but with tech plagued with instability, the need to plan and build sales teams in an effective and sustainable way has become more important than ever.
The big challenge is getting planning right in a world where it's been wrong for the last few years, with missed targets and slashed headcounts, something isn't working.
So where is it going wrong?
The answer is in using Sales Forecasting methodologies to plan.
Sales forecasting and revenue projection are two key elements of financial planning that help businesses anticipate future revenue and make informed decisions about resource allocation, budgeting, and growth strategies, but they're both very different to each other in terms of the data points used and how they can be applied in a reliable manner.
While sales forecasting focuses on short-term predictions based on historical data and current pipeline, revenue projection takes a long-term view and considers factors like industry trends, economic conditions, and strategic goals. Let's break down the differences between sales forecasting and revenue projection, and why using revenue projection for planning should be a critical priority for businesses aiming for sustainable growth.
Sales Forecasting: Estimating Short-Term Revenue
Sales forecasting is a well-established practice that involves predicting future sales based on historical data, estimations around how current pipeline and opportunities will convert, and the insights of the sales team. Typically used to estimate the amount of revenue a business will generate in the near future, sales forecasting is essential for planning inventory, staffing, and marketing needs.
The kicker is that it relies entirely on open pipeline - Where an average sales cycle lasts 100 days, the view into the future is limited (on average) 100 days.
In short, everything beyond that 100 day mark does not yet exist in your pipeline, and so there will be no data to pain a longer term picture into the future.
One example of this would be to utilise an approach such as trend analysis on the forecast to see beyond. You might predict $50K in revenue each month, based on current pipeline. But what happens if you've just canned your entire sales and marketing team?
What if there's physically no-one there to generate and close revenue?
Your trend analysis is going to miss out this incredibly vital part of the picture, which is why sales forecasting has limitations when it comes to long-term growth and strategic decision-making.
Revenue Projection: Predicting Long-Term Revenue Trends
Revenue projection, on the other hand, takes a more comprehensive and strategic approach to predicting future revenue. It considers long-term trends, market conditions, and factors beyond the sales team's input.
Revenue projection takes into account variables like hiring and capacity plans, industry trends, historic data points of closed deals, and economic conditions. Unlike sales forecasting, revenue projection filters out opinions and uncertainties, focusing only on events that have reached an outcome. It provides a more stable and accurate understanding of revenue trends for critical areas like planning and decision-making.
Key Differences Between Sales Forecasting and Revenue Projection
To understand the importance of revenue projection, let's take a closer look at the key differences between sales forecasting and revenue projection:
Scope and Timeframe: Sales forecasting is more focused on short-term predictions, typically covering a few months to a year. In contrast, revenue projection takes a longer-term view, considering trends and projections over multiple years.
Data and Inputs: Sales forecasting heavily relies on the input of the sales team and current pipeline data. Revenue projection, on the other hand, utilizes fixed, naturally clean data, filtering out opinions and uncertainties.
Complexity and Variables: Sales forecasting tends to be less complex than revenue projection as it involves fewer variables and factors. Revenue projection takes into account a wider range of variables, including industry trends, economic conditions, and strategic goals.
Accuracy and Stability: Sales forecasting may be easier to calculate accurately due to its simpler nature, but it can be influenced by biases and uncertainties. Revenue projection, with its focus on historical data and outcomes, provides a more stable and accurate method for building sales hiring and capacity plans.
Applicability: Sales forecasting is well-suited for managing the sales pipeline and short-term revenue goals. Revenue projection, on the other hand, is a more comprehensive approach that helps businesses plan for longer-term growth and make strategic decisions.
The Importance of Revenue Projection for Sustainable Growth
While sales forecasting is an essential tool for short-term revenue planning, revenue projection plays a critical role in ensuring sustainable growth and long-term success. Here are some key reasons why businesses should prioritize revenue projection:
1. Accurate Financial Planning
Revenue projection provides a more accurate understanding of future revenue trends, allowing businesses to plan their financial resources more effectively. focussing only on data points across capacities and cemented KPI's, it's easier to understand the impact of trends vs. and strategic goals. With this businesses can make informed decisions about budgeting, resource allocation, and investment opportunities. Accurate financial planning helps businesses avoid overestimating or underestimating revenue, leading to more sustainable growth.
2. Anticipate Future Trends
Revenue projection allows businesses to anticipate future trends and plan accordingly. By analyzing historical data and market conditions, businesses can identify potential gaps in their plans or get ahead of future issues, proactively approaching planning in a way that helps businesses stay ahead of the competition and adapt to changing market dynamics.
3. Strategic Decision-Making
Revenue projection provides a comprehensive view of the business's financial health and direction. It enables businesses to make strategic decisions based on long-term goals and market insights. Whether it's sustaining current levels, achieving growth, or optimizing revenue engines, revenue projection guides businesses towards the most effective strategies for sustainable growth.
4. Identify Risks and Opportunities
By analyzing historical data and market conditions, revenue projection helps businesses identify potential risks and opportunities. Revenue gaps, market fluctuations, or emerging trends aren't simply seen, but can be tested with varying magnitudes to paint a picture of every market scenario. With this knowledge, businesses can take proactive measures to mitigate risks and capitalize on new opportunities.
5. Continuous Monitoring and Adaptation
Revenue projection is not a one-time exercise; it requires continuous monitoring and adaptation. By regularly reviewing and updating revenue projections, businesses can track their progress, identify any deviations from the projected revenue, and take corrective actions if needed. This iterative approach ensures that businesses stay on track towards their long-term growth goals.
Conclusion
Following a few tough years, it's never been more important to get planning right. Accurate financial planning is crucial for sustainable growth, and hitting top-line growth ambitions.
Whilst sales forecasting provides valuable insights for short-term revenue planning, revenue projection takes a more comprehensive and strategic approach to predict long-term revenue trends. By considering historical data, industry trends, and strategic goals, businesses can make informed decisions about resource allocation, budgeting, and growth strategies.
Revenue projection allows businesses to anticipate future trends, make strategic decisions, and identify risks and opportunities. By prioritizing revenue projection, businesses can foster sustainable growth, adapt to market dynamics, and achieve long-term success, and should be the adopted approach for businesses that want to get their revenue planning right.
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