Why You Should Avoid 2 Popular Revenue Forecasting Methods
Revenue forecasting is key to making budgeting and resource allocation decisions that put your firm in the best position for success.
But many firm leaders rely on revenue projection models that lead to inaccurate results.
Below, we’ll cover why you should avoid two popular revenue forecasting methods.
1. Broker projections
With broker projections, leaders simply ask their agents which deals they expect to close and how much revenue they expect those deals to generate.
Brokers are in a strong position to know the answers to these questions better than anyone else, but there’s one major problem — your best brokers are probably optimistic.
For the most part, this is a good thing. Your brokers need to believe they can close the deal, and they need to believe they can maximize the deal’s value for your firm.
After all, how can you expect them to go through the daily grind of prospecting and driving deals forward if they don’t expect significant rewards for their efforts?
Unfortunately, that optimism can be a problem when it comes to revenue projections.
If your revenue forecast is higher than is realistically attainable, you risk agreeing to long-term commitments or recurring expenses you can’t actually afford.
2. Historical growth rates
With historical growth rates, firms look at how their revenue has grown over the past year or several years and forecast the same growth rate for the upcoming year.
This is a step up from broker projections — it is a data-based projection, after all — but it’s still problematic.
The main issue with this method is firms rarely grow at the same rate for long periods of time.
Several factors affect how much revenue firms can generate in any given year. These factors include:
- Economic conditions
- New competitors
- Current organizational structure
- Government regulations
- Property trends
- Cap rates
- And more
The point is this: Past performance is not always indicative of future performance.
While historical growth trends are worth understanding and analyzing, they are inherently a backward-looking analysis.
And accurate revenue projections require a forward-looking analysis.