Revenue Planning: How Planning for Revenue Impacts a Budget's Effectiveness

Josh Tabin & Carter Freeman

Revenue Planning: How Planning for Revenue Impacts a

Budget's Effectiveness

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Today’s Panelists


Josh TabinManaging Director and

Consulting CFO, Houston

[email protected]

Carter FreemanManaging Director and Consulting CFO, Denver

[email protected]

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Today’s Moderator


Amy HardinFounder and CEO,

SELLect Sales Development

[email protected]

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Agenda

Frameworks for Revenue Planning

Applications and Examples

Revenue Planning Challenges

Q&A


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Budgeting in Context


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Poll Question 1

What do you typically use to build your revenue forecast? (Multiple responses accepted)

a) Market share targetsb) Production capacityc) Trending off historical datad) Target percent growth over prior yeare) We don’t need no stinkin’ forecast


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Revenue Planning ModelsA Comparison


Basic Frameworks for Revenue Planning

Use history-based methods to forecast your sales.

Understand the drivers of history develops accurate models that eliminate the “noise” in your historical data.

The methods for planning revenue fall into two primary categories:• “Resource” based projecting• “Market” based projecting

Leverage both models in parallel and use the lower of the two forecasts to generate the most effective revenue targets. • Revenue likely won't exceed the level justified by your

resources or the level justified by your market potential.

Resource-Based Planning

The first step in preparing a resource-based projection is to identify key resource factors that will produce or limit revenue for your business.

These factors fall into three areas:

(a) marketing factors that generate sales,(b) production factors that limit sales, and(c) working capital components that limit sales.

Limiting Marketing Factors

Depending on the nature of the business, marketing factors that generate sales might include:The number of sales calls to be made.The number of proposals to be submitted.The number of direct mail pieces to be sent.The number of telemarketing calls to be made.The number of catalogs to be mailed.The amount to be spent on advertising.The number of distributors who will stock your product.The number of people who will walk or drive past your business.The amount of merchandise you will display.The number of square feet of display space you will have.The number (and value) of clients who will move with you from your current business.

Prior Year Sales Volume

2015 2014Budget Forecast Variance % Var.

Inbound Calls 122,451 120,617 1,834 1.52%Inbound Answered Calls % 95.00% 94.50% 0.50% 0.53%Inbound Answered Calls 116,329 113,981 2,348 2.06%Inbound Web Based Inquiries 1,605 1,573 31 2.00%Inbound Calls & Inquiries 117,933 115,554 2,379 2.06%Outbound Calls 21,123 20,911 212 1.01%Total Calls & Inquiries 139,057 136,465 2,591 1.90%Total Conversion to workorder 29.60% 29.61% -0.01% -0.02%Total Dispatched calls 41,164 40,407 757 1.87%Total Conversion to invoice 55.40% 54.57% 0.82% 1.51%Total Workorders sold 22,803 22,051 752 3.41%Total Average invoice 1,187 1,129 58 5.12%Total Revenue 27,064,752 24,896,684 2,168,067 8.71%

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Poll Question 2

Who has primary responsibility for setting your revenue goals?

a) CEO or Head of Business Unitb) Head of Salesc) Head of Finance/Accountingd) Head of Operationse) None of the Above


Sales Quota

2015 QUARTERLY REVENUE BY PRACTICE AREA Net Revenue Q-1 - Forecast Q-2 - Forecast(in $ thousands) Contracted Pipe TBD Total Budget Contracted Pipe TBD Total Budget

Practice Area 1 1,206 246 - 1,452 1,452 285 892 - 1,177 1,177 Practice Area 2 87 23 - 110 110 59 93 60 212 212 Practice Area 3 50 127 - 177 177 34 201 65 300 300 Practice Area 4 186 88 - 274 274 55 111 150 316 316 Practice Area 5 160 3 - 163 163 47 94 180 320 320 Total Revenue 1,689 487 - 2,176 2,176 479 1,391 455 2,326 2,325

Net Revenue Q-3 Forecast Q-4 Forecast(in $ thousands) Contracted Pipe TBD Total Budget Contracted Pipe TBD Total Budget

Practice Area 1 168 1,156 146 1,469 1,469 96 1,061 144 1,302 1,302 Practice Area 2 45 234 210 489 489 46 263 180 489 489 Practice Area 3 35 215 89 339 339 8 235 141 384 384 Practice Area 4 13 107 280 399 399 - 102 308 410 410 Practice Area 5 24 130 180 334 334 24 130 229 383 383 Total Revenue 285 1,842 905 3,031 3,031 173 1,793 1,002 2,967 2,968

Net Revenue Total Forecast(in $ thousands) Contracted Pipe TBD Total Budget

Practice Area 1 1,754 3,356 290 5,400 5,400 Practice Area 2 237 613 450 1,300 1,300 Practice Area 3 127 778 295 1,200 1,200 Practice Area 4 254 409 738 1,400 1,400 Practice Area 5 254 357 589 1,200 1,200 Total Revenue 2,626 5,513 2,362 10,500 10,500

Limiting Production Factors

Production factors that limit sales might include:

• The number of hours you or your employees can work.• The number of units you can produce.• The number of jobs/contracts you can fulfill.• The number of service slots available (hotel beds, restaurant

tables, auto service bays, etc.)

Storage Capacity

Working Capital Limiting Factors

Working capital components that limit sales might include:

• The amount of inventory you can afford to carry.• The amount of accounts receivable you can afford to carry.• The amount of payables you can afford.

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Poll Question 3

How did you perform against last year’s revenue budget?

a) Over performed your budget by greater than 20%b) Over performed your budget by 5-20%c) Within 5%d) Under performed your budget by 5-20%e) Under performed your budget by greater than 20%f) Not applicable


Market Share Planning

The basic idea of share based projections is easy, though the implementation often is difficult:

1. First, estimate total market size;2. Estimate the amount of the total market that is relevant for

your company;3. Within the relevant market, estimate the share of market that

you will capture.4. Multiply the size of the relevant market by the estimate

market share to get a sales projection.

Market Share Example

MARKET & PENETRATION Estimated AnnualMarket Penetration

Size Rate

Total Potential Market 11,000,00050% purchasing products, 75% would use Ring 37.5%Addressable Market 4,125,000Annual Growth Rate 11.00%Monthly Growth Rate 0.92%Addressable Market 2014 4,125,000Addressable Market 2015 4,602,340Addressable Market 2016 5,134,918 0.30%Addressable Market 2017 5,729,124 2.00%Addressable Market 2018 6,392,092 5.00%Addressable Market 2019 7,131,777 7.00%

Application of Resource- and Market-Based Models

Resource-based projections and market share-based projections often differ widely. This is normal and to be expected.

Resource-based figure = number that your resources will support Market-based figure = sales potential of the market

Use the lower of these two numbers as your sales projection. • You won't outsell your potential, and you won't outsell your resources.

Application of Resource- and Market-Based Models

Small, entrepreneurial ventures often focus on a resource-based approach• Limited by its resources rather than its potential.

After you have prepared a resource based projection, you can estimate the market size and divide your sales projection into the market size to determine the implied market share. Ask yourself whether this share seems plausible given what you know about the competition and market. If the implied market share seems plausible, proceed with the resource-based projection. If not, adjust the projection as necessary.

Large companies often focus on a market-based approach• Afford the specialized research necessary for good market share

estimates.• Limited more by market potential than by the firm's resources.

Analog-Based Projections

An alternative approach to sales forecasting for a new business is to compare the business with an analogous business model.

Advantage: Go "straight to the bottom line." • Applies directly to the total sales of the business• Avoids the possibility of making a series of mistakes (regarding

productivity rates, amounts of resources, market size and market share).

• Ideal for "cookie cutter" businesses such as retail shops, restaurants and franchise operations.

Disadvantage: Failure to consider differences between the analog and the planned business.

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Poll Question 4

Who do you typically share your revenue forecast with?(Multiple responses accepted)

a) Ownersb) Investorsc) Bankersd) All employeese) Select employees only


Revenue Planning Considerations

Historical data not sufficient to trend

Poor linkage to KPIs

Market size validation

Politics and internal discussions

Seasonality

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Seasonality


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Challenge for Recurring Revenue Business Rule of 78

Forecasting methodologies:• Annualized run rate of 12x the average monthly billing, plus new revenue

acquired over the period.

• ($10 average / month = $120 annualized). Because the new revenue acquired is unknown, this tends to be conservative.

• Rule of 78 is a quick calculation to estimate the total value of recurring revenue over the next 12 months, and is calculated as the value of the first month’s service x 78 ($10 forecasted for first month = $780 Rule of 78).

• Assumes the same amount will be billed and added to the run rate every month for a full year. Does not consider seasonality, market fluctuations, customer loss, etc.


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Rule of 78


Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total

Target $10 $10 $10 $10 $10 $10 $10 $10 $10 $10 $10 $10

Jan $10 $10 $10 $10 $10 $10 $10 $10 $10 $10 $10 $10 $120

Feb $0 $10 $10 $10 $10 $10 $10 $10 $10 $10 $10 $10 $110

Mar $0 $0 $10 $10 $10 $10 $10 $10 $10 $10 $10 $10 $100

Apr $0 $0 $0 $10 $10 $10 $10 $10 $10 $10 $10 $10 $90

May $0 $0 $0 $0 $10 $10 $10 $10 $10 $10 $10 $10 $80

Jun $0 $0 $0 $0 $0 $10 $10 $10 $10 $10 $10 $10 $70

Jul $0 $0 $0 $0 $0 $0 $10 $10 $10 $10 $10 $10 $60

Aug $0 $0 $0 $0 $0 $0 $0 $10 $10 $10 $10 $10 $50

Sep $0 $0 $0 $0 $0 $0 $0 $0 $10 $10 $10 $10 $40

Oct $0 $0 $0 $0 $0 $0 $0 $0 $0 $10 $10 $10 $30

Nov $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $10 $10 $20

Dec $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $10 $10

Annual Forecast Total Billing $780

78 x monthly run rate of $10

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Summary

Almost all budgeting and forecasting begins with revenue planning. It sets the parameters for cost of revenues and overhead.

The amount of revenue growth a business expects can materially affect the cost structure and capital requirements of the business.

In the next webinar of the budgeting series, we will focus on the cost equation of supporting your revenue projections.


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Q&A


Thank youWe will be following up with you by email shortly to provide

more details on receiving CPE credit.

Happy revenue planning!

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