We often talk about forecasting through the lens of a service-based business (i.e., digital agencies) because this happens to be the model we work with the most. The revenue of these companies is recurring and allows us to easily look into their future based on their current load and what’s in their pipeline.
But what if your company is project-based and, instead, relies on upfront payments from customers? How do you build an effective forecast?
For project-based companies, there are a couple of driving factors that need to be considered.
Scope. How big is your typical project? How long do they last – one month, two months, six months?
Revenue. How much do you charge for a typical project -- $10,000, $100,000, $300,000? It’s important to look at what is standard, not your smallest or largest project.
Once you have those two numbers, you can plot things out to determine how many projects you need to have in order to reach your revenue goals.
Whether your business is service-based or project-based, take a profit-first approach. You want your overall company profit to be around 15-25% of your revenue. For most companies, your salary should be north of $150K. You need to make sure your salary at least covers the risk you’re taking for running a company. You can determine how much money you would need to bring in each month in order to hit those target numbers.
There’s really only three ways to impact your revenue if your company is project-based: increasing your price, increasing your transactions per client, and increasing the number of clients. That’s why it’s crucial to manage your pipeline, or the number of new projects you expect to be coming in over the next few weeks or months. It’s really important to keep an eye on that pipeline so you know exactly where you’re headed. Ask yourself these questions when reviewing your pipeline and considering how it affects your forecast:
Does the pipeline support the revenue goals you just put together?
How successful are you at closing sales in your pipeline?
Is your closing ratio higher for existing clients than it is for new prospects?
How long does it generally take for you to close a sale from your pipeline?
These are just a few of the questions you want to continually ask. The answers to these questions should help you understand how well your pipeline is supporting your business and will help you make improvements along the way that will impact your bottom line. Now you can break that down into projects and determine how many new projects you need to close each month in order to achieve your goals. This gives you a tangible number (i.e., five projects) rather than a dollar amount that’s harder to control.
This is the key to forecasting, regardless of your business model. You need to be able to break things down to a specific (non-revenue-based) number or object that you can impact.
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