How to Project Income When You Depend on a Few Large Accounts
Businesses catering to a few large customers can find making realistic revenue projections difficult. Here’s a method to help you predict where your business is going.
The problem with projecting revenue when your business depends on a few large accounts is predicting when you will land that next new client and how much the new company will be worth.
Often, owners will wet their fingers, stick them in the wind, and pick a random number to put on their financial forecasts. Then they whip the sales team to meet the numbers.
If this is working for you, you must have a psychic digit or a crack sales team. If it’s not, then you’ll appreciate this more reasoned approach to forecasting revenue.
The benefit of an accurate revenue projection is it helps you predict peaks and valleys in income and lets you make adjustments to staffing and expenses to keep up with demand or to withstand a lull.
In making a reasoned revenue projection, you’ll perform three separate analyses for Current Business, Sales in the Pipeline, and New Business. For each category, you’ll estimate how much income you expect to realize on a month-by-month basis and enter these figures on a spreadsheet.
The consequence will be a monthly income projection for the next so-many months. Usually, twelve months is as far ahead as you can reasonably foresee and is far enough to give you a picture of what the future potentially holds.
Projecting the income potential of modern business is the easiest. Two subcategories of current location are Contracts in Progress and Contracts Anticipated. It’s not very difficult to spread the income from contracts in progress over the contract period and log them on your spreadsheet by month.
For anticipated contracts, you’ll need to have that periodic meeting with existing clients to ask about their ongoing needs for your products or services. It’s a reasonable discussion since continuing your high level of service requires advanced knowledge of their needs for planning purposes.
By gaining enough detail about order size and timing, you should be able to spread projected earnings from these future contracts across the appropriate months in your revenue projection.
However, a critical extra step is to multiply the projected income of anticipated contracts by a probability percentage. The client may be somewhat vague about the future business’s likelihood, or their plans could change before the contract is signed. If you give the future business a 50% probability, you’d only show 50% of the potential income on your projection.
The concept of factoring projected sales by probability may seem odd because either you’ll get the business or you won’t; you very likely won’t get just half of it. But if you have four anticipated contracts at 50%, and two of them materialize, your projected sales numbers for half of four will be reasonably close to the actual totals for 100% of two.
Sales in the Pipeline
The next category is Sales in the Pipeline. It represents new customers you’ve opened discussions with for new business. For these potential future sales, make your best guess at the business’s possible value under discussion. When work might start, assign a probability percentage, and then spread the factored revenue across the appropriate months.
For example, you’ve made a presentation to XYZ Company, and they’ve expressed interest. As best you can tell, they may need $100,000 of product or services to be delivered over two months. It will need three months to get to a signed contract.
Entering this business in your spreadsheet, you’d split the income across two months, log it as starting three months from now, and reduce the potential value by 1/3.
The last category is a new business, which represents income from customers you haven’t met yet. It could be a category where you’d favor using your prognosticating digit, but there is a way to make a calculated estimate by looking at your sales history.
If your typical sales cycle is six months from initial contact to close of the sale, you won’t put any new business on your projection any earlier than six months from now. Analyzing your sales history to see how much business typically materializes during similar periods of the year can give you a reasonable starting estimate.
Next, you’ll consider how your planned sales and marketing activities compare to past sales and marketing activities and how the competitive landscape has changed recently. Then you’ll plug into your spreadsheet a usual sprinkling of future new contracts based on this analysis. There is no need to factor the income from these contracts because they should represent projected closed deals.
The problem with estimates is they change. Applying this method will give you the best forecast possible at one particular moment. Still, it will rapidly be outdated as you gain new information about current customers, potential sales, and new leads.
Updating your projection will keep you abreast of sales trends and give you the information you need to make business corrections before the freight train is actually on top of you.