How Revenue Forecasting Gives Businesses a Competitive Edge
When discussing ways to boost business growth, it is these methods that find their way into the conversation:
But somehow, no one ever thinks of accounting as a solid, factual way to quantify how a company is performing and how it will succeed in the future.
Accounting, specifically revenue forecasting, empowers companies to make decisions based on actual data. It enables companies to know their financial position, mark risks and opportunities, note trends per season, and adjust quarterly plans accordingly.
Here are four kinds of revenue forecasting and how they give businesses an edge to be ahead of the curve.
1. Straight-Line Forecasting
This type of forecasting is the most straightforward for companies to implement. Straight-line accounting looks at past performances via income to predict future revenue. This is how businesses can report on their annual growth rate and predict maintaining or surpassing those numbers.
It is important to note that straight-line forecasting simply looks at the revenue amounts per year, then calculates the percentage of growth or decrease between them to determine the following annual result.
Straight-line forecasting from previous financial trends allows companies to reflect on their best practices and decide whether to modify, continue, or stop them to achieve the same results or aim for more.
2. Moving Average Forecasting
Moving average accounting is a more short-term approach covering three or five months’ worth of accounting using certain formulas. These formulas utilise an A-chart to compare the differences of actual revenue versus predicted revenue. Depending on the timeline you use (three or five months), analysts can point out increases, decreases, or fluctuations in expenses that need to be rectified.
While short-term, the moving average does go into a little more detail since it covers roughly a quarterly average of your revenue. It can be very valuable, especially if your business prefers making slight adjustments every so often.
3. Simple Linear Regression Forecasting
This revenue accounting application is very similar to straight-line forecasting in that it predicts future performance based on past data. While straight-line forecasting uses pure numbers and calculations to determine the annual growth rate, the difference is that simple linear regression predicts single variables in a company’s budget that impact their overall revenue stream with charts.
These charts show the increase and decrease of costs over time (five years or ten years) to predict how this will impact future expenditures. This type of forecasting can help departments and companies account for why a particular expense (like marketing) was steep in one year and why it wasn’t the year after (previous marketing efforts carried over or cost-cutting).
4. Multiple Linear Regression Forecasting
This is much like simple linear regression, except that it shows all or more of the expenditures to track each one and see how they are performing compared to one another. This allows management to allocate funds to the correct variables for minimised costs and maximum impact.
Accounting data is dependable for forecasting when planning your business’s potential success. Based on actual trends and performances, you can make sound decisions and guarantee a promising future for your company and employees.
Unleash the power of accounting in your business with the experts from New Wave Accounting. We’re a firm of some of the best accountants on the Gold Coast that provide end-to-end accounting and bookkeeping services to scale and help businesses grow. Get in touch with us now!