A Proven Method for Accurately Forecasting Annual Revenue _ Kimble Apps

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A Proven Method ForAccurately Forecasting AnnualRevenue

Having an accurate 12 month revenue forecast is a vital component of the budgeting andplanning process in a Professional Services organisation. Get the forecast too high and youcould end up taking on too much cost too soon. Get the forecast too low and you wont beable to resource up in time to take advantage of your business pipeline. Either way you areimpacting your profitability negatively.

Unless your business pipeline has a large proportion of annuity contracts surely it is near toimpossible to get a 12 month forecast correct with any degree of confidence? Youd thinkso, but that isnt the case. Over the past 15 years I have been using a simple approach whichevery year has proved extremely accurate if you have at least 10 customers and prospects.Ill be honest I dont know fully why it works, but history proves it does in practice. I alsoknow that everyone who has tried it in other organisations I have spoken to has had similarresults and found it a straightforward and valuable sales planning technique. So this is howit works if you want to try it

Step 1 gather the initial data

Organise a session with each of your account owners to review their active accounts andprospects. Ask them to provide estimates of the revenue opportunity at a headline level foreach of these accounts over the next 12 months against three different estimating criterion.The three estimates are know as low, medium and high and are derived based on thefollowing classification:

Low this is the business which is currently contracted at the account. For example, if youhave a consultant on an existing engagement at $1,000 a day which has 20 days tocomplete then the low number for this account would be $20,000.

Medium this is the best guess of what the account owner thinks will be revenue won atthat client over the next 12 months. I typically set the expectation that the account ownershould imagine that if he or she is not accurate within plus or minus 10% of the mediumforecast number at the end of the 12 month period they will metaphorically lose their job. Iframe it in this way to stress to them that Idont want the number low-balled or overestimated. I say I know I am asking the impossible but need them to take this approach and

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use their best judgement I wont be setting targets based on these individual numbers(and indeed you should not see my blog on setting incentive sales schemes).

High this is the best guess of the revenue you would win if you won every opportunity inthe account over the next 12 months and you had no resource constraints (i.e. you couldstaff every project you won fully).

Note that the 3 numbers should be cumulative. For example, a $100,000 forecast as low andadditional $200,000 forecast at the medium level and an additional $150,000 forecast ashigh would be expressed as:

low $100,000medium $300,000high $450,000

Step 2 validate the data

You should review these estimates face to face with the account owner. Simply getting theaccount owner to describe out loud their thought process in deriving the estimates has theeffect of teasing out where they have under estimated or over estimated (tends to be theformer). If you are in a organisation where multiple people are involved closely withbusiness development (for example, where you have a Project Manager/ Consultant leadingan account from a delivery perspective as well as a Sales Person assigned to the account)then try and get each person independently to come up with the estimates and then bringthem together to seek consensus.

Step 3 consolidate the data for your company

Consolidate the information from each of the account owners and you are now left withsomething like the following:

Client Name Owner Low Medium High

Acme John $100,000 $500,000 $1,000,000

Archilles Brian $- $- $3,000,000

Brandon Plastics Jane $250,000 $250,000 $250,000

ChumleyPharmaceutical

Jane $1,000,000 $1,100,000 $1,200,000



Detroit Cars Jane $200,000 $500,000 $2,000,000

Franklin Motors Brian $10,000 $1,000,000 $1,500,000

Mangrove Estates John $250,000 $250,000 $450,000

NormanEngineering

Emma $700,000 $1,000,000 $1,300,000

Peidmont Wines Emma $50,000 $100,000 $250,000

Quiver Brian $- $- $500,000

Reed Electronics John $450,000 $650,000 $900,000

Stream Solutions Keith $40,000 $100,000 $200,000

Wright Brothers John $30,000 $400,000 $600,000

Zelstra John $500,000 $1,000,000 $2,000,000

Step 4 total each of the low, medium and high numbers

The most important point about this technique to appreciate (and to ensure your accountowners appreciate too) is that it is the total for each of the low, medium and high forecastsacross your whole business that we care about and not the individual estimates.

We fully expect in a Professional Services organisation that over a 12 month period most ofthese forecasts at an individual level will not be accurate. In the example above we mightbe starting the bidding process at Quiver for a highly competitive project worth $500,000(hence forecast only as high) and we eventually end up losing it. In all likelihood anothersimilar deal (or several smaller deals totalling an equivalent value) which we dont knowabout today will come along that we can win. Alternatively, we might actually win theQuiver deal but Reed Electronics might run into financial problems and have to cancel the$450,00o on-going project (forecast as low). The point I am making is that during the normalcourse of operation of a Professional Services business over a 12 month period the totalfigures we derive will be accurate. However, the individual items from which they werecalculated will not hold up for closer inspection.

So for the example above we get a total for low, medium and high of:



Low Medium High

Total $3,580,000 $6,850,000 $15,150,000

Step 5 calculate the forecast revenue

The final step is to calculate the 12 month forecast. The total revenue number that you willactually achieve over the following 12 months is a figure 30% of the way between themedium total and the hight total. The formula for annual forecast revenue is: ((high-medium) * 30%)+ medium.

So in the example above the low/ medium/ high derived 12 month revenue forecast wouldbe: $9,340,000.

Does it really work?

The simple answer is yes. Indeed, the more accounts you have the more accurate theforecast proves to be. This makes it an extremely valuable technique in the budget planningprocess. In reality however successful your business is then you can never achieve the highforecast as you will never be able to resource people quickly enough to fulfil the projectsyou win. So the revenue you achieve ends up being 30% above the medium number. Imnot sure scientifically why it ends up being 30%, but Im just happy that it always does!

If you want to measure trends in what you are closing and extrapolate the results to producemore detailed forceasts then try looking at my blog on measuring the health of salesoperations.

How can I use this information in the planning process?

In the budgeting and planning process then this low/ medium/ high derived forecastnumber can be used to cross reference (or validate) against the bottom up forecast derivedfrom headcount. In a simple example we might say that we employ 50 consultants and weplan to recruit 2 additional consultants a month at an average day rate of $800 with anaverage of 14 billable days a month. Wed end the year at 74 consultants and our bottomup forecast would be $9,027,200.

If we had the derived low/ medium/ high revenue forecast as shown in our example of$9,340,000 then Id be comfortable that we have got the budget set correctly. If we had lessconsultants initially or planned to recruit at a slower rate then our bottom up forecastwould be significantly lower than this, in which case we are unlikely to have enoughresources to win the business forecast with this technique. Alternatively, if we have asignificantly higher headcount driven forecast than our low/ medium/ high derived forecastthen we will have too much cost built into the business and we need to re-plan.



What else can I use the information for?

I have also used this information to organise my sales team and focus my sales strategy. Inthe example Ive been using Id group together the accounts under each account owner thenanalyse the data.

Client Name Owner Low Medium High

Archilles Brian $- $- $3,000,000

Franklin Motors Brian $10,000 $1,000,000 $1,500,000

Quiver Brian $- $- $500,000

NormanEngineering

Emma $700,000 $1,000,000 $1,300,000

Peidmont Wines Emma $50,000 $100,000 $250,000

Brandon Plastics Jane $250,000 $250,000 $250,000

ChumleyPharmaceutical

Jane $1,000,000 $1,100,000 $1,200,000

Detroit Cars Jane $200,000 $500,000 $2,000,000

Acme John $100,000 $500,000 $1,000,000

Mangrove Estates John $250,000 $250,000 $450,000

Reed Electronics John $450,000 $650,000 $900,000

Wright Brothers John $30,000 $400,000 $600,000

Zelstra John $500,000 $1,000,000 $2,000,000

Stream Solutions Keith $40,000 $100,000 $200,000

For example, typically I dont like a business development person to be allocated too many



Join us for webinar on July 15th entitled Teach your consultants to act like ExecutivesDownload Looking Forward Catalysts for growth in Professional Services white paper

accounts which only have speculative opportunities this would be indicated by a largedifference between low and high numbers. Additionally, if there is little or no differencebetween the low, medium and high numbers then the account is better managed by adelivery focused person than a business development/ salesperson. In the above examplethere seems little point in having Emma working on business development at BrandonPlastics as there is no upside and it would be better managed by a Project Manager or LeadConsultant with some sort of profitability target.

Another thing you can do is have more than 10 accounts allocated to an individual businessdevelopment/ salesperson then you can start to use the derived low/ medium/ highforecast total across their accounts to verify sales targets.

In Kimble we allow you to record and analyse this information. Id be really interested whatyour experiences of trying this approach are.

byMarkRobinsonon28thApril2011inManagingProfessionalServicesFirms

About Mark RobinsonMark has over 25 years experience in the IT industry and is a serialentrepreneur. He started his career in management consulting beforeworking for Oracle Corporation where he was able to witness first hand their

rise from start-up to software giant. He started his first IT Consultancy Company, FulcrumSolutions, in 1997 with no external investment, and in just under 3 years it had reached 200staff with offices in Edinburgh, Manchester, London and New York. It was acquired byWhittman Hart for cash and stock valued at $35m in November 1999. Following thesuccessful sale of Fulcrum, he co-founded IT consultancy Edenbrook, this time with externalinvestment. At the time of its acquisition in 2009 by Hitachi, Edenbrook had reached over400 people based in the UK and India. In Kimble Mark is responsible for businessdevelopment, channel management and Market analysis.View all posts by Mark Robinson

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A Proven Method for Accurately Forecasting Annual Revenue _ Kimble Apps