5 Tips for making your revenue forecast more accurate

Does the name Miltiades ring a bell?

No?

You’ve probably heard of marathons, though, those grueling 26.5-km foot races that test the endurance of even the most accomplished athletes. 

Miltiades was the inspiration for the creation of the sport. 

It was 490 BCE, and Miltiades was the general of the Greek forces and he had just accomplished what was thought impossible. Marshaling his troops, he was able to defeat the much larger and ‘technologically superior’ Persians in the Battle of Marathon. 

Legend has it that Pheidippides, a Greek herald at the battle, was sent running from Marathon to Athens to announce the victory. Thus came about the endurance sport we now know as marathon.

But what does Miltiades have to do with revenue forecasting? While what he did at the battle is legendary, it’s what he did immediately after often goes unmentioned. 

After being defeated at Marathon, the furious Darius-led Persians set sail to Athens to ransack it as it was unprotected. But little did they know that the shrewd general had predicted that and had already ordered his forces to “double-time” back to Athens. So, when Darius arrived with his troops, the same Greek force was waiting to welcome them! 

Miltiades was what you could call a “super-forecaster”--someone with the ability to make highly accurate predictions about future events based on analyzing available data. Super forecasters use various data analysis techniques to break down complex problems and make accurate predictions. They also continuously update their forecasts as new data becomes available. 

While we don’t know all the “data” Miltiades considered prior to sending his forces back to Athens, he knew exactly what the Persians would do in response to their defeat and as a result, was able to protect the city.

Likewise, using a data-driven, analytical approach in your forecasting and revenue planning, you can protect your business and grow your revenue faster and more reliably. Here are five tips for getting your revenue forecast right! 

Tip #1: If you have good data, use it

When it comes to financial forecasting, you’ll want to pull as much historical data as you can to inform your model. With revenue forecasting specifically, this data would come from source systems including your ERP, CRM, HRIS, ATS, payroll, and any spreadsheets that contain relevant information. 

With real-time and historical data, you have a solid foundation on which to build your revenue forecast. This also ensures that your forecasts are grounded in reality and have a higher chance of being as accurate. 

Choosing the right model for revenue forecasting will, in large part, depend on how much historical data you have to inform the model.  

In the early stages of your business, you probably won’t have much historical data to rely on. If you’re in the pre-revenue stage, you’ll probably find the total addressable market (TAM) method of revenue forecasting most useful. It relies on research, analyzing market, industry, and competitor benchmarking and other data to develop a revenue forecast. 

Once you’re generating revenue, generally, the more mature your company is, the more data you will have to inform your revenue forecasting. You can even go a step further and do data-driven rolling forecasts. 

Tip #2: Keep your model as simple as possible 

There’s a common saying that, “Genius is knowing when to stop.” This might well apply to revenue forecasting, too. 

In financial forecasting, there is often a tendency to create highly complex models. This is based on the belief that the more detailed the model, the more accurate it will be. Whether that’s true is debatable. 

A good rule of thumb is to do just enough, nothing more, nothing less. Based on the resources and information at hand, you have to decide on the right level of detail. 

Think of it like this: the level after which adding more detail will not significantly improve your forecast is the right level of detail.  The idea is not to aim for perfection but rather to get to a point that gives you the best possible view. Given how time-consuming forecasting can be, it’s best to always err on the side of simplicity.

Tip #3: Pick the right drivers  

A crucial step in revenue forecasting is identifying the right drivers for each revenue line. Take your time to analyze and understand your business and the factors influencing your revenue. Then, select the drivers that will provide the most accurate and meaningful insights. 

Building on Tip #2, avoid the temptation to include too many variables. This can lead to an overly complex model, which will only delay results that your business needs to inform strategy and key decisions. 

Tip #4: Track the accuracy of past forecasts

It is surprising how few organizations actually take the time to review the accuracy of their past forecasts. This isn’t because doing so is hard; it’s more because businesses (particularly SaaS businesses) usually operate in a forward-looking “go-mode.” 

Tracking past forecasts is a valuable exercise as it can help you identify areas for improvement and inform your future forecasting efforts.

From a practical perspective, it’s just a matter of keeping track on an ongoing basis of the predictions you make and what happened in terms of those predictions (i.e. tracking your variances). 

Ideally, you would track each variable in your forecast for accuracy. Then, you can reflect on what you can do to make it more accurate next time. 

There’s certainly a value in retrospection. With each lesson learned, new ideas emerge. For every variance, look for the source to determine how you can improve your accuracy for that variable.  

With each such looking-back exercise, you improve your forecasting skills, and your future predictions become progressively more reliable. 

Tip #5: Be open to changing the way you forecast

One of the hallmarks of successful super forecasters is their willingness to admit errors and change course quickly. The finance team must embrace a mindset of continuous learning and improvement and must not hesitate to adjust their forecasting based on any new evidence or mistakes. 

In an age where things are moving and changing fast, agility and openness to experimentation and learning might very well be the delta between success and failure. 

Plan faster and better with the right tools

Implementing these five tips can help you create more accurate and reliable revenue forecasts! 

To make that even easier, Drivetrain’s 200+ out-of-the-box integrations make it a breeze to get all the necessary data to create your forecast into a single platform. 

Drivetrain is a purpose-built financial planning and analysis (FP&A) platform that offers a wide range of versatile built-in financial modeling templates and scenario analysis capabilities. These features will help you get up and running fast in building a forecast that you can track in real-time and adjust quickly when needed. 

Are you ready to move out of spreadsheets and into the world of rapid, real-time revenue forecasting? If so, it's time to explore the power of Drivetrain!