Every business needs to think about revenue in some way or another to survive. Knowing how much revenue is being earned may come easier for some operations more than for others. For those businesses which are subscription-based or contract-based, gathering that information is more of a challenge.
This process of knowing how much revenue is coming into your business is the art of revenue recognition which, if you’re reading this, you know has a lot of moving parts. Ensuring your revenue recognition process is accurate, standardized and compliant with the latest accounting rules goes a long way toward a successful and accurate forecasting strategy.
For any SaaS business, revenue recognition can become a bit sticky due to the variety of subscription options typically made available. For example, some customers might choose to pay an annual free upfront in order to earn discounted pricing on a monthly subscription service, while others prefer to pay each month. That revenue received from the customers with the upfront payments cannot be reported until the services paid for have been rendered. Similarly, expenses associated with those accounts receivable – say, contractor salaries or advertising – will need to be pro-rated to be reported in the same month the revenue is recognized.
This deferred revenue – or the remainder of the revenue in our example of a customer who paid a 12-month contract upfront – gets reflected as a balance sheet liability. The amount of revenue in the deferred category will vary depending on the business choice to drive more annual contracts or monthly renewals.
It should not come as much of a surprise that creating dependable forecasts to predict future performance would be incredibly useful. This ability helps financial leaders make smarter decisions, prepare in advance for potential issues and swiftly adjust when called upon to maximize revenue.
So what are the different ways to forecast revenue?
There are a few methods to consider:
- Account and pipeline level planning
- Market and seasonal trends
- Top-Down and Bottom-Up approaches
- Statistical approaches, such as exponential smoothing and linear regression
Some factors to consider in determining which of these methods would offer up the most accurate cash flow prediction include stage-of-life for the business, any outside factors such as seasonality and potential new sales or marketing initiatives.
Here are another few tips to consider to help improve forecasting accuracy:
- Be sure your foundational data is accurate – seems like a no-brainer, but you’d be surprised
- Utilize available historical data – as the saying goes, the past can be a good indicator of the future, and your historical data can be the best tool in your toolbox
- Pay attention to the competition – as if this wasn’t already being done, but in this instance, it is to help know the activities of the competition as it could impact future demand
- Segmentize forecasting – assuming the basic forecasting is under control, a deeper understanding of a business comes from analyzing forecast by segments, such as forecast by distribution channel, forecast by origin and forecast per business type
- Regularly revisit forecasts – these valuable indicators should be reviewed on a regular basis and used to help inform every key business decision made
If we consider all that goes into a business’ revenue management strategy as many pieces of a jigsaw puzzle, think of accurate forecasting as finishing the borders – its that important. Hopefully, the tips provided can be put to use for better forecasting and revenue management alike.
Contact us today to learn other ways RecVue’s order-to-cash solutions can help your revenue team decipher the unpredictability of the future.