Bottom-up Forecasting for Pre-revenue Start-ups

Forecasting is a term used to describe the process of estimating future sales and revenue. Even before you start having regular sales activities and revenue streams, it is important to understand how to create solid revenue forecasts.  When done right, forecasting is a methodology that allows you to arrive at reasonably predictable revenue expectations.

There are three reasons why you should prepare revenue forecasts:

1. To understand and manage the company’s cash flow
2. To manage and plan marketing, sales, procurement, production and logistics capacity
3. To help develop the top line for a revenue projection—which is needed if you are raising money or are seeking other forms of external financing

Once you attain regular sales activities, prepare sales forecasts on a monthly basis for the upcoming month and include a rolling update for the next three months.  To ensure you manage your cash reserves effectively, these updates of your revenue forecast are needed, especially if you are “bootstrapping” your start-up. If something major affects your revenue expectations, even more frequent updates will be required.

To assist you in this process, we have created a series of three workbooks. To meet the diverse needs of start-ups in Ontario, the workbooks cover two different situations: pre-revenue/pre-sales (i.e., before sales activities) and early-stage sales (i.e., the onset of regular sales activities).

For the pre-revenue/pre-sales situation, we offer two workbooks:

• Bottom-up forecasting for pre-revenue start-ups: A way of calculating the potential revenue for your company for a specific period by multiplying the number of likely sales for each product or product line, the average value of sales, and when they are likely to occur.
• Top-down forecasting for pre-revenue start-ups: A way of calculating your potential revenue by starting your assessment at a macro level to find market size and potential market growth, and then estimating your own revenue as a function of your assumed market share.

For companies with early-stage sales, we have a workbook to steer you through a bottom-up approach for basic sales forecasting and help you predict sales revenue by calculating the future value of your sales opportunities.

How to use this workbook

If you have little or no experience with forecasting, this workbook will help you understand the basic approach for building a revenue forecast.

Note that most Sales Force Automation software (SFA) contains functionality for predictive analytics that can automate some of the forecasting process. Even if you have access to an SFA software package, we recommend going through this workbook, especially if you have little or no experience in revenue and sales forecasting and your company is just beginning sales activities. This is because you will not be able to benefit fully from an SFA tool until you develop a solid understanding of the variables that affect the accuracy of your forecast.

Downloads

Workbook Guide Contains instructions, examples and activities.

Tags: forecasts, sales

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