Given the inherently unpredictable nature of recurring revenue forecasting models, customer churn, and growth, a SaaS company can be an especially tricky place to navigate a recession. Fortunately, with the right finance tools and practices, your SaaS business will have a much stronger chance of surviving and thriving during tough economic periods.
As you scale from early to growth stage, finance automation that seamlessly integrates across your company is a must. But what is revenue forecasting and why is it important? Where do things generally go wrong in calculating revenue recognition? And how do you choose from a mix of revenue forecasting models? In this article, we’ll explore these questions in detail, discuss some common mistakes to avoid, and look at how successful SaaS leaders are navigating the market downturn with consistent, automated and accurate revenue forecasts.
What is revenue forecast?
A revenue forecast is what business leaders might call a “financial crystal ball,” which they can gaze into whenever they need help with strategic decision-making. It’s a vital pathway to helping company leaders to secure long-term profitability and understand their cash position.
Some SaaS leaders fall into the trap of believing that financial reporting is purely about rehashing numbers. Nothing could be further from the truth; a revenue forecast involves much more than just playing with numbers. Those numbers serve as the scaffolding on which you lay the groundwork to construct accurate revenue forecasts.
If the inputs for your revenue forecasts are inaccurate or incomplete, your entire company will pay the price. If you’re not targeting the right audience, your logo churn rate will start to increase and your ARR and MRR will start to decline.
That’s a pretty gloomy picture. So, how do you prevent it from turning into a reality? Short answer: with accurate revenue forecasts.
Accurate forecasts give your SaaS company a strategic edge. The further out in time that business leaders can reliably forecast, the clearer the picture they will have of expected revenue streams in the future.
Why is revenue forecasting important?
One of the most important aspects of revenue forecasting is that it allows you to get a panoramic view of your future finances. Revenue forecasts help you understand your cash position. This is highly beneficial because knowing your future financial prospects and understanding your current cash position impacts your team’s behavior and risk appetite in the present.
Change happens fast – embrace automated forecasting
Outdated forecasts are like an old map; so much has changed over the years that you just can’t be confident, and you’re likely to end up at a dead-end. When you’re driving through the chaotic traffic of today’s world, you need a reliable navigation system to help keep you on the right track. That’s what automated forecasting does for your SaaS business.
Market dynamics can change quickly, so you need every advantage you can get to guide your company to enhanced profitability quarter after quarter. Automated forecasting is an essential variable in that equation.
Strive for accurate, timely, and profitable forecasts
The most effective SaaS CFOs realize that automation is the only way to guarantee accurate, actionable, and reliable forecasts. With modern automated revenue forecasting tools, you can immediately see more accurate revenue forecasts that reflect deferred revenue and predicted renewals. This visibility improves your ability to manage sales resources and to optimize future revenue.
For instance, imagine that your SaaS business has been planning a marketing campaign that offers a subscription discount, with a goal to reduce logo churn numbers. To accomplish this without negatively impacting your finances, you need to know how much of a discount you can offer and for what time range.
If you have multiple pricing tiers and plan on offering discounts for each one, the odds that you’ll make a costly miscalculation only increases. For this reason, it’s important to get detailed about deferred revenue.
The do’s and don’ts of revenue forecasting
Using spreadsheets to track and forecast deferred revenue and renewals for complex software or services will create more problems than it solves. Here are three of the biggest issues with manual forecasting techniques:
1. Reduced staff productivity.
Spreadsheets that manage revenue and deferred revenue are inherently complex and difficult to maintain. These manual processes increase the chance of errors and delay period-end closings.
2. Complicated audits and increased risk of restatements.
Preparing complex revenue and deferred revenue spreadsheets for period-end auditing takes time. And, of course, like any manual process, this can increase errors, which means higher audit costs and a greater risk of restatements.
3. Decreased visibility into revenue, deferred revenue, and renewal.
Instead of one consolidated view of a company’s financial outlook, spreadsheets force finance professionals to refer to several different sources to obtain a complete view of revenue.
How to forecast deferred revenue
Adopting a modern approach to finance and accounting can upgrade your forecasting capabilities immensely. Deferred revenue waterfalls play a huge role for many subscription-based businesses. If they aren’t handled cautiously, they can significantly complicate your financial reporting and give you a false sense of your cash position. Cloud-based SaaS accounting software makes forecasting deferred revenue a breeze.
Effective, long-term revenue forecasting is indispensable for any degree of strategizing around price points. Automation can give you crystal clarity about how to maximize the profitability and attractiveness of your product or services – and show you how different price points will affect your overall finances.
That’s only the beginning of how a streamlined approach to revenue forecasting can benefit your entire company. Let’s take a closer look at moving away from instantly obsolete forecasting techniques to instantly actionable forecasts.
How to move your revenue forecasts from instantly obsolete to instantly actionable
Are you still manually gathering information from different systems across your organization and managing complex formulas in Excel to track revenue, deferred revenue, and ARR? Today’s business leaders expect instant answers, ideally with a monthly rolling forecast cadence. You won’t get there driving “instantly obsolete” spreadsheets and emails.
An automated billing system is the new way to travel. Modern billing solutions eliminate your reliance on slow, manual spreadsheets and replace them with a real-time engine of financial truth for “instantly actionable” and accurate monthly forecasting. Automation reduces the effort of manual, repetitive tasks that need to be performed frequently; and, as a result, reduces the risk of human error, which invariably helps to increase productivity and efficiency.
5 types of revenue forecasting models
If your company still relies on manual revenue forecasting models, there’s no better time than right now to correct that mistake. Building a revenue forecast always runs more smoothly when you automate the process – and in a recession, that matters hugely.
There are tried-and-true methods to forecast revenue up to 80% faster. Let’s take a gander at five of the most effective billing and revenue forecasting models for subscription-based businesses.
Multivariable analysis forecasting
Strategically, multivariable analysis forecasting is one of the most accurate models. This is because it accounts for multiple important pieces of sales data, such as:
- Average sales cycle length
- Likelihood of each sale closing based on lead type
- Past performance of your sales reps
Forecasting can be tricky in the recurring revenue space, especially when the broader market starts losing momentum. The typical SaaS company deals with many moving pieces where cash flow is concerned.
Multivariable analysis forecasting is an advanced revenue forecasting method. It can help you dramatically limit uncertainties around your company’s capital. However, it also might be beyond your current abilities if your department uses manual accounting software.
Forecast revenue based on historical
As the name implies, this forecasting model implies the use of your revenue figures from prior months, quarters, or years to predict your future revenue. In a nutshell, this is how to forecast revenue using historical data.
Once you have your historical data, you add an assumed growth rate. With this model, most businesses assume around 5% as an annual rate, but your assumed rate may be higher or lower depending on your growth stage.
While this model is not typically as accurate as multivariable analysis forecasting, the key benefit is its simplicity. For instance, say your SaaS business earned $115,000 in sales last year. To forecast revenue based on historical data, all you need to do is factor in your 5% assumed growth rate to arrive at an annual revenue projection of $120,750.
Again, though, it’s important to think of this as the “10,000-foot view” revenue forecasting model. It’s great for a quick snapshot, but you’ll probably want to follow up with more detailed revenue forecasting models, especially when you need to navigate around a recession.
Opportunity stage forecasting
Opportunity stage forecasting leverages the fact that leads are more likely to turn into customers as they move further down your sales pipeline.
This forecasting model is helpful in your toolkit if your product or service involves a lengthy buying cycle. To use it, simply comb through your past sales data and determine the average closing percentage at each opportunity stage.
Opportunity stage forecasting can be lengthy if performed manually, but automated accounting software can make it a breeze. This forecasting model is especially effective in helping companies navigate a recession, because:
- It offers insight into which funnel stage converts most effectively, showing your sales and marketing teams where to double down.
- Board members will appreciate the added layer of clarity that this type of revenue forecasting can provide.
Now let’s move on to our next two revenue forecasting models.
Length of sales cycle forecasting
This type of forecasting model is based on the reality that different types of prospects take different amounts of time to travel through your sales cycle.
Length of sales cycle forecasting has two primary benefits. These are:
- It gives you an idea of the likely timespan of each deal based on the sales cycle stage that each prospect is in.
- Once you have this information, you can use it to determine the probable quarterly or annual sales figures for your sales staff.
When you need to navigate a recession, this technique is especially useful for your annual and quarterly financial planning and analysis (FP&A). Automating your FP&A will give you and your team a much faster, clearer picture of how your revenue pipeline will look in the near future.
Lead driven forecasting
This revenue forecasting model assumes that various types of leads will behave differently in a sales situation. Leads from different sources will convert at different rates and spend different amounts of money with you over time.
Because they tend to get multiple kinds of leads, SaaS companies can benefit greatly from this type of revenue forecasting. Automated subscription accounting software for SaaS can make this model much easier, since lead driven forecasting uses many data points at once: the lead source, closing percentage based on lead, and average monthly and annual sales volume for each converted lead type.
Knowing how many leads you have at any given time and the revenue you’re likely to draw from them is extremely useful.
Navigate the recession with automated forecasting
Remember that in this guide we aren’t necessarily advocating for one revenue forecasting model over another. Balance is key. When you need to navigate a recession, using a mix – or even all – of the models outlined above can help your accounting department gain clarity and direction even in troubled markets.
Keep in mind that automated, cloud-based accounting software will substantially increase the length and accuracy of your forecasts. To guarantee that you’ll have a competitive edge in 2023 and to learn even more about ways to build your B2B billing strategy.
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