Why Your Growth-Stage Company Should Embrace Revenue Forecasting Models

One of the most important responsibilities of financial operations teams at growth-stage companies is to manage financial health while planning for future profitability. To manage these two sides of the same coin, your team will need to do more than set goals and create budgets. The approach we recommend involves a thorough understanding of your company’s revenue potential—and to get it, you need revenue forecasting models.

Properly prepared revenue forecasting models can provide practical, useful insights and support better business decisions. You’ll also gain a clearer view of the big picture as it concerns your company’s financial future.

Let’s explore the advantages of conducting regular revenue forecasts and learn how to address some common forecasting challenges.

Revenue forecasting models are, at their core, financial tools for your growth-stage company. They’re designed to predict future revenue based on factors like past financial performance, market conditions, and your industry.

Most companies choose to anticipate revenue over a given period of time, whether it’s quarterly, yearly, or timed to align with product launches or a specific campaign. Once completed, these models go on to play an important role in the process of financial planning for your growth-stage company. With the insights they offer, your team can make more informed decisions around hiring, operations, investments, and expansions into new markets.

For growing companies, finalized revenue forecasting models can offer a useful framework for building an operating budget, which provides a detailed overview of potential revenue and expenses that your company requires in order to reach its financial goals. Revenue forecasting models, when done right, can be a map that keeps your company on course as it grows.

Revenue forecasting models might just seem like useful documentation. However, they aren’t the kind of files you’ll put away and only check in on when the next quarter rolls around. As a tool, they can actually drive growth for companies aiming to scale: Companies with accurate forecasts are 7-10% more likely to experience year-over-year sales growth and are twice as likely to be best-in-class within their sector.

Models provide clarity that your company needs around your future financial demands, which helps your team manage resources more efficiently. With estimates about how much revenue you’ll generate in the future, your team can decide the best timing to take advantage of expansion opportunities, maximize marketing budgets, and dedicate funds to talent acquisition.

Accurate revenue forecasting models also offer protection. They can prevent your team from overspending by tempering your expectations for future revenue. If your team wants to move forward with foresight and build a strong foundation for growth, revenue forecasting is an important first step.

As your organization progressed to the growth stage, you probably noticed that raising capital is a top priority—one that comes with its fair share of challenges. Prospective lenders typically want to see evidence that your company is on track and poised for future growth. Revenue forecasting models become particularly useful for securing capital by proving your company’s financial strengths. When you support your financial reporting with accurate, data-backed projections, you’ll boost credibility with lenders.

Many lenders are sensitive to changes in market conditions, and want to see revenue forecasting models that account for them. This portrays a more accurate view of your company’s growth potential, and it demonstrates your team’s layered understanding of the factors at play—which may make your company more attractive as a borrower.

Even if your company has a strong foundation and a positive financial outlook, risks are unavoidable. Fortunately, a primary benefit of having revenue forecasting models is their ability to identify potential financial risks early. Forecasting helps your company envision the outcome of scenarios such as market downturns, drops in consumer demand, and supply chain disruptions.

Our advice? Incorporate a range of scenarios—what you expect along with best and worst case scenarios—into your revenue forecasting models. That way, you can make strategic decisions with a solid appreciation of the financial risks associated with each path.

As your company grows and scales, it’s easy to focus on the next goal instead of recognizing which past goals have already been achieved. While revenue forecasting models are meant to map out future financial performance, they also serve as useful records for performance tracking. Growth-stage companies can assess performance across teams and compare projections with actual business milestones. Regularly comparing actual revenue with forecasts helps your financial operations team see precisely where your business is succeeding or struggling.

One way to incorporate them is to make revenue forecasting models part of your team’s key performance indicators (KPIs). This will help maintain a culture of accountability and help you progress in sync with your financial goals.

At the end of the day, growth-stage companies need capital. And to get it, they nurture relationships with lenders and investors by sharing clear and credible financial information. It’s important to focus on transparency and professionalism, and forecasts give an honest perspective on where the company is headed and what resources it needs to reach its financial goals. Transparency built on a combination of real numbers and visionary goals helps you develop trust with external partners.

Lenders, for example, often request financial projections as part of the process of evaluating your funding application. A well-crafted revenue forecasting model can help you meet this requirement and also offers the benefit of positioning your company as organized and future-oriented.

Despite its many benefits, some companies make mistakes when it comes to revenue forecasting. Here are a few common issues to avoid:

Revenue forecasting models are incredibly valuable tools for growth-stage companies, both for keeping up with goals and for raising capital. With insights into future revenue, your team can manage resources better and encourage stronger relationships through clear communication with lenders. Once you’re prepared to incorporate revenue forecasting models into your regular financing planning, you stand to improve risk management, accountability, and decision-making.

Ready to plan a clear financial future for your company? Get in touch with 5th Line today to learn how we can help you refine your revenue forecasting models and work toward sustainable growth.