Why Services Firms Fail at Revenue Forecasting

Can you accurately predict how much revenue you’ll make in the coming months or years?

Accurate revenue estimation is the cornerstone of every professional service business and assists in formulating current and future business planning, success, and growth strategies. Leaders must be aware of the data related to profits, cash flow, etc., they will make the current and the following years. And the game of inflows is more complex as they are dependent on projects being done, contracts, billing cycles, and other fuzzy stuff making revenue forecasting a big challenge.

Also, for professional service firms, which do not have a platform in place and use excel spreadsheets, etc., aligning revenue and costs across multiple projects, resources, customers, and operations can be challenging. Using spreadsheets for forecasting is inefficient and ineffective, in addition to having other disadvantages:

• High-priced: An expensive resource will be required to prepare forecasts manually as the main product of the will be they and their skills. The cash outflow will be mainly their salaries among other expenses.
• Sluggish: It can take from a few hours to days to prepare these forecasts.
• Old, Siloed, and Granulated Data: The data will be outdated and fragmented into little parts by the time it is tracked as there are systems in place that will give you real-time updates.

Revenue forecasting is crucial as it helps:

• Strategize and plan your future better and decide whether you should scale up and expand your business in terms of expenses, revenue, market, employees or launch a new marketing campaign
• In futureproofing delays and making crucial decisions about the employees, projects, and operations in scenarios where you expect a slowdown
• In making hiring decisions by providing insights on whether you should hire new employees and their impact on your bottom line
• In managing the cash flows by avoiding any missed payments, accumulating late fees, and maintaining good credit to help fortify your business in the future.
• Keep track of cash inflows and payment deadlines so that you can schedule your cash outflows to benefit how you work.

A precise and realistic revenue forecast is incontestably vital to the health and longevity of a service business. However, even though the techniques used in forecasting are very simple and straightforward, most companies still fail at accurately predicting the revenue.

Why Service Firms Fail at Forecasting Revenue

Businesses usually make predictions only based on the actual revenue earned in the past. Revenue forecasting, however, requires you to follow some additional guidelines that will give you accurate and authentic forecasts when followed. Let’s find out why service firms fail at accurately forecasting revenue:

Inefficient forecasting and bids

If you don’t understand your customers, it will be harder for you to produce or predict any product that will suit their needs at any given time. All this can lead to missing your sales targets, generating revenue, etc.

Over or underestimating the needs or resources to meet market demand will negatively impact your company’s reputation, drive your customers elsewhere and lead to incorrect predictions.

Insufficient Data on Projects/Operations

It is nearly impossible to predict anything accurately when you have no or significantly less information available at your disposal. It’s similar to shooting an arrow in the dark.

While working on any project, you should ensure that the completeness and quality of data are reviewed at every step. You must have visibility into the workflow and processes to have an overarching, real-time, and actionable plan on how the business will operate on a daily basis and grow in the future.

Projects Delays

Delay and cost overrun can become part of any project even though your organization is well in project management. These project delays and cost overruns can be just because of a minor requirement change, but they can cost the projects and company a lot.

Every day that you are late in delivering the project will add to the cost of the project and the resources involved in the project. Also, if your project is late, you may cause delays in other projects by tying up resources that can be utilized on other projects. All this will lead to forecasting failures as you will never know when a project is really getting over.

Manual Entries, Delays, Missed Invoices, and Payments

Manual data entry can lead to excessive errors, e.g., adding an extra 0 to a figure will erroneously increase its value tenfold. The risk here is that mistakes like these are inevitable and hard to identify, and the data inaccuracies will result in substantial revenue leakages due to this human error. If you don’t have an automated, unified tracking system in place, you may lose track of the billing cycle and miss invoicing the client when it’s due. And there will be no client who will come forward and say, “Hey, you forgot to send in the invoice.”

You should ensure that your team is correctly entering the data. In addition, you should have a system in place which will verify the data, give you predictions based on the performance and help you eliminate or identify such errors.

Lack of Granular Tracking of Tasks and Work

Your employees spend considerable time in meetings, replying to emails, attending seminars or training, etc., but these are not accounted for anywhere. Not tracking these tasks can lead to incorrect scope measurement and cause you to forecast revenue, project timelines, and client bills far less than what it usually takes. A wrong forecast will also result in hiring more or fewer employees than is actually required for your workforce leading to resource idleness or scarcity. In any case, it will not be an ideal situation for your business.

Not tracking or taking the 100% utilization of your resources into account will definitely impact your revenue forecasting. Time spent on any projects and activities is the most critical metric for the estimation. Without knowing the complete picture, it will lead to revenue and project forecasting failure.

Operational and Bulky Financial Data Issues

If the operational data needed to create the reports and analyze problems in operation is not in a proper format, it can lead to business failure. Your company will never report on the key metrics as they will not have the appropriate information at their disposal to predict anything.

Also, when closing a project or deal, you won’t get critical information quickly enough to support your decisions.

So, How Can You Accurately Forecast Revenue

Revenue forecasting isn’t meant to be a one-time affair. It is a continuous process that will need to be updated frequently as per your business needs and the data availability. If you want more exact calculations, then you should have the following data:

Historical Information Data

You know that allocating the right resources to the right projects at the right time can be tricky, especially when you need to forecast the future. However, with the help of the right tools, you can analyze historical data related to resources and projects captured in a similar past project to forecast the scope and plan the tasks/project correctly.

With the historical data, you can more assertively forecast resource needs for future projects and even for your entire company. You can then create plans for upcoming projects to identify and define everything related to a project more accurately, further resulting in accurate revenue forecasts.

Real-time Project Insights

Having real-time data ensures that your revenue forecasting is based on the latest data available. Whether you just started working on a new project or client, it can impact your bottom line. So, you must consider the real-time resource and time availability before committing to a deadline.

Resource Utilization

Your revenue is directly tied to your resources. If you have abundant resources available, it means that you’re not utilizing them to their full capacity. Tracking your resource utilization will help you in managing your resources efficiently and predict accurate revenue forecasts.

Past Project Profits and Losses

Humans learn from past mistakes, a previously completed project can help you plan future projects. You need to have a historical view and have all the necessary details to forecast accurately, learn from previous projects, and figure out what has been successful and what changes can help you in the future.

Data Accuracy

Incorrect or incomplete data is not helpful to predict anything useful for your business. Any mistakes in capturing data will cause your forecasts to shift significantly, which, in turn, may cause you to miss deadlines or undercharge clients.

While revenue forecasting may seem cumbersome, an automated self-driving PSA can help simplify this complicated process. With real-time data and in-built dashboard capability, teams can address operational data issues and increase visibility to the data. Moreover, you can easily pull, analyze, and access data anywhere, any time. Advanced analytics programs can also be run to solidify the data further to empower teams and deliver critical insights to leaders who need it to make essential business decisions.

Polaris, a self-driving professional services automation software (PSA) and the first of its kind, can deliver better results with fewer hassles. Its underlying artificial intelligence capabilities provide advanced analytics, resource management, project management, financial modeling, and increased business visibility. It can further support proactive revenue forecasting and planning and accurately account for every bit of work. In addition to increasing accuracy in revenue planning, Polaris can also help firms adapt and overcome the new challenges they face.

With Polaris, you not only get a single source of truth for your data, but it also helps you to grow your professional services business by providing insights into the future. To learn more, deep dive into the world’s first self-driving PSA today.