Operating a professional services business without practicing revenue projection can feel like navigating in the dark. The lack of visibility makes it challenging to anticipate what lies ahead and what to plan for. For the professional services industry, where complexity and economic uncertainty are on the rise, having an accurate and up-to-date pulse on your financial health has never been more crucial.
In this article, we’ll show you how to hack revenue projection so you can see into your firm’s future without the help of a crystal ball.
What are revenue projections?
Revenue projections involve estimating the income a company expects to generate over a specific period of time, typically a fiscal year. These projections are essential for financial planning, strategic decision-making, and overall business management. For professional services firms, revenue projections help in anticipating future cash flows, setting budgets, and aligning resources — all so critical in times of economic uncertainty.
How do you calculate revenue projection?
Estimate Expected Income
To begin projecting revenue, calculate the expected income from planned operations over a specific timeframe.
To do that, you’ll need to do the calculations twice — for the worst-case scenario and best-case scenario:
- Both confirmed and potential projects will be carried out, generating profits for the company (best-case scenario).
- Only confirmed projects will be executed and will generate profits (worst-case scenario).
For example, if your company has 5 confirmed projects that will generate $500,000 income and 3 tentative projects that will generate $3oo,000, your projected revenue calculations need to include both $500,000 and $800,000.
Calculate Projected Expenses
If you already know what your income for a given period is, you now need to determine the expenses your company will be covering in that same period.
To check that, you need to add:
- Estimated costs of work, based on the project schedule or project scope.
- The costs of any planned investments.
- Project and company overheads, including bills, taxes, and non-billable departments (i.e. marketing, sales, administration).
Just like in the example we shared in the previous step, you’ll also need to repeat the calculation for the worst-case scenario (with a maximum amount of costs) and the best-case scenario (minimum costs).
Subtract Expenses From Income
Once you have both your income and expenses calculated, you can start revenue projection for different outcomes — both the good and the bad.
You can test out different combinations here, but to get a fixed range of possible profits, simply:
- Deduct maximum expenses from minimal incomes.
- Deduct minimal expenses from maximum income.
By doing so, you will be left with a range of incomes you can expect in a given period.
Revenue Projection Models
If you want to delve into the details of your revenue projections further, you can also use one of the following models to enhance your projections and make them more precise.
Historical Forecasting
Use this revenue projection model if: you want a simple yet precise look at your company’s future.
This revenue projection model focuses on gathering past data, determining trends and tendencies, and projecting them into the future to estimate the key financial performance indicators of the company for the months to come.
However, this model is only effective for companies that track their operations in detail. If you are not one of them, do not try to come up with the data out of the blue. Instead, start gathering them for future periods.
Length of Sales Cycle Forecasting
Use this revenue projection model if: you are unsure of how much time it takes for your customers to purchase from your business.
The length of sales cycle forecasting shows you exactly when you need to acquire new customers. It covers the entire sales process, from initial outreach and evaluating options to paying for the services.
This indicator is particularly important for professional services companies, as it predicts when a new project will likely provide you with additional profits, making your forecasting that much more precise.
Test Market Analysis
Use this revenue projection model if: you are wondering whether a new market can power up your sales in the coming months.
With test market analysis, you can check whether the market you are aiming for is a good choice. By testing your product or services on a small scale, you can gauge if there is a significant interest in your offer and base your investment decisions on the information. As a result, you’ll get a sample that helps estimate potential profits from new business opportunities.
KPIs for Revenue Projections
You don’t have to repeat the calculations for revenue projections every time you want to check in on the results. Instead, you can also use some simplified KPIs that are capable of giving you a general idea of your future profits.
Annual Recurring Revenue (ARR)
Annual recurring revenue, or ARR, is the best choice for professional services companies that mostly offer time and material or retainer projects. It is the total amount of contracted revenue that your company brings in each year — or, in other words, what kind of income you can expect from your regular sources.
ARR can also be used to determine trends in the company and track its growth over the years.
Average Revenue Per User (ARPU)
Average revenue per user (ARPU) or average revenue per account (ARPA) helps you determine how much profit your company generates per every customer. This information can later be used for historical comparison and establishing a benchmark for profits per all customers.
Using PSA Software for Simplified Revenue Projections
Professional Services Automation (PSA) software is a valuable tool for professional services firms, using real-time insights to enhance the precision of revenue forecasting. It supports project tracking, resource optimization, and financial reporting, empowering organizations to make informed decisions about future revenue. Advanced forecasting tools use historical data and project pipelines to anticipate challenges and opportunities. With PSA software, professional services firms can gain confidence in looking ahead and making proactive decisions.
Frequently Asked Questions About Revenue Projection
What are the methods for projecting revenue?
Forecasting methods for projecting revenue include analyzing historical data, considering market trends, evaluating sales pipelines, and utilizing financial models such as discounted cash flow analysis.
What is income projection?
Income projection is the estimation of future earnings for a business or individual, typically based on factors such as past financial performance, market trends, and anticipated changes in revenue streams.
How do you calculate revenue projection?
To calculate revenue projection, multiply the projected sales or services by the anticipated price, taking into account factors like market demand, growth rates, and any potential fluctuations in sales volume.
What is the best way to estimate revenue?
The best way to estimate revenue is by combining historical data analysis, market research, and a thorough understanding of current and potential customer behavior, allowing for a comprehensive and informed projection of future income.
