Revenue Forecasting

My manager asked if I would be against adding revenue forecasting to my current position. I of course said no, I would like to assist with that. The brief 3 minute overview I received basically said I would be analyzing/forcasting current and future revenue streams. Then his phone rang and that was the end of it. Does anyone else know more about what revenue forecasting entails?

It is not rocket science. Lets see, look at prior revenue trends in different economic cycles. Calculate organic growth rates vs total growth rates. Then use what you know about your company and whatever revenue streams you are responsible for to project out sales. So its not an exact science, and involves looking at past trends as well as predicting future conditions.

kind of reminds you of the seinfeld episode. how’s work on the penske file?

“Does anyone else know more about what revenue forecasting entails?” Probably just build a financial model that has dynamic inputs into other pro forma financials…I/S and S of CF. Revenue assumptions are from the MD&A and footnotes then you just plug in your assumptions and your model, if good, will dynamically update off the revenue streams. Usually you make a data table with 3 sets of revenue. Willy

My manager suggested that I build a macro via Access/Excel for this new responsibility. This duty used to be outsourced, but an excecutive decision is bringing it back in house. My manager is new to it likewise. Both of us are fairly knowledgable in Access (him more than I) and we plan on working on a macro by trial and error. So, in order not to spin my wheels too much; does anyone know a foundation to get started for building a macro for this specific duty?

WillyR Wrote: ------------------------------------------------------- > “Does anyone else know more about what revenue > forecasting entails?” > > Probably just build a financial model that has > dynamic inputs into other pro forma > financials…I/S and S of CF. Revenue assumptions > are from the MD&A and footnotes then you just plug > in your assumptions and your model, if good, will > dynamically update off the revenue streams. > Usually you make a data table with 3 sets of > revenue. > > Willy what does cash flow statement have to do with revenue forecasting?

Ingnore Willy’s post…you don’t need a balance sheet or cash flow statement to forecast revenue growth. Revenue growth is the first step in bulding a financial model. Afterwards you do a ‘sanity’ check on your CF and BS to ensure that the growth you predicted can actually be reasonably absorbed by your firm…moving on… Basically, in a simple sense, revenue forecasting should be as specific as possible. That is, do it by product line (or if you work in a project based business, by project) if you can. If you can’t get as specific as that, then move one step up to forecasting a divisions revenue or by geography. To make the forecasts look at the growth rate for the industry (or the GDP growth and the industry’s correlation or some metric to tie gdp into the industry)…that shoudl form your base either for a country or a geography in the country. Now look at the firm or divisions or product lines within that industry for your company. What is your market share - is it going to grow or shrink. By how much? This helps form growth rates of your product/firm relative to industry. You can add more steps than this but this should give you a starting point i hope. Best of luck.

WillyR Wrote: ------------------------------------------------------- > “Does anyone else know more about what revenue > forecasting entails?” > > Probably just build a financial model that has > dynamic inputs into other pro forma > financials…I/S and S of CF. Revenue assumptions > are from the MD&A and footnotes then you just plug > in your assumptions and your model, if good, will > dynamically update off the revenue streams. > Usually you make a data table with 3 sets of > revenue. > > Willy If you take the management’s statements from MD&A, you essentially get the bull case scenario because management tends to put their company in the best possible light…i guess it’s a starting point for building a model, but not the best way to come up with reasonable forecasts cash flow statement has nothing to do with revenue forecasting…whatever happens on the revenue line should feed into your cash flow statement but i don’t see what independent variables there are on the CF side that should drive your revenue build…

I am against forecasting revenue by slapping a growth rate on. Historical/industry growth rate should be used as sanity check for the forecast, not the driver. If it’s not overly complicated, revenue should be forecasted from the bottom-up, e.g. by making assumptions on pricing trends, demand, market share. Ofcourse, the build up for every industry is different, so decide for yourself which driver is most relevant for the company you are looking at.

i’ve never had any experience with this. But if you are trying to forecast revenues for a company other than your own, i would think that you would want to have a sense of how the company recognizes revenue. in the event that you are working in a company whose revenue recognition processes are questionable, is it really all that far fetched to take a look at the cash flow statement? i’m thinking for industries that are based on projects (construction) or i think another revenue recognition product line that could be problematic are magazine (subscriptions). I’m not really sure… just trying to apply some of the stuff on the exams to this topic. Those of you w/ experience will know if this is practical or not. Also, to numi’s point about MD&A statements being the best case scenario. I wonder if you could do some sort of statistical analysis that determines how much management over/underestimates their future performance to help determine if/how you should use the M&A statements. most probably the acadamias have done some sort of overall research, but i imagine you could derive something company-specific?

A little more background: The revenue forcasting will be for the RIA I work for. Its my understanding that the revenue forcast will vary due to market conditions. All of our accounts are based on a wrap fee and therefore current markent conditions will effect monthly and annual revenue. AUM is another driving factor since more AUM will equal greater reveune. So new/lost business would be another factor in considering future revenues.

i would still be curious if numi or strikershank would comment on my point on forecasting external company’s revenue (not to thread-jack, just a quick reply). I’m thinking that if pick out a pattern on revenue recognition via the cash flow statement (not sure if that is possible), then you could apply that timing to future projects that you know are coming up (company just won a bid for a big g’vt contract. when would you expect them to recognize that revenue based on when you expect them to have the cash in hand?). KJH- how far out are you trying to forecast? that would probably impact the strategy/parameters that you use (predicting income 10 yrs out will be different than 1 yr out). again. i’m just shooting in the dark.

"If you take the management’s statements from MD&A, you essentially get the bull case scenario because management tends to put their company in the best possible light…i guess it’s a starting point for building a model, but not the best way to come up with reasonable forecasts " That’s why I said to do a scenario analysis. Read the whole text [and spirit] of a message before you start beating off over how much you think people care about you correcting people. Willy

WillyR - I know you seem to take a beating (read: beating off) on these boards, but I believe numi is right. Scenario analysis notwithstanding (and unmentioned in your post, btw), using the management’s statements from MD&A will give you the high target range for forecasting. KJH was asking for instruction, and I believe numi’s correction was meant in a helpful tone.

Yeah I’m soo upset about that mcthorp…pfffffff…gimme a break. Willy

WillyR – as mcthorp noted above, you never mentioned anything about “scenario analysis” and i was only trying to be helpful to people who actually wanted to learn how to model. wasn’t meant as anything personal. but for what it’s worth, if you don’t want to be corrected, try not to be wrong.

I’m just in a crabby mood general numi. Oh and by the way, you smell! Willy

thanks, i appreciate the feedback