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The Complete Guide to Building a Sales Forecast

Set your company up for predictable revenue growth with the right forecasting processes and tools.

Paul Bookstaber

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Building a sales forecast is both an art and a science. Accurate sales forecasts keep your leaders happy and your business healthy. In this guide, we’ll explain everything you need to know about sales forecasting — so you can get a clear picture of your company’s projected sales and keep everyone’s expectations on track.

We’ve organized this reference guide by the top questions sales teams have about the sales forecasting process, based on our internal conversations and more than 20 years of experience developing  sales solutions .

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What you’ll learn:

What is a sales forecast, why is sales forecasting important, who is responsible for sales forecasts, who uses sales forecasts, what are the objectives of sales forecasting, how do i design a sales forecasting plan.

• What happens to sales forecasting in unpredictable times?

How accurate are sales forecasts?

What tools do you use to forecast sales revenue and how do crm systems forecast revenue, how is forecasting better with crm vs. other methods.

If you’re a sales leader who’s already well-versed in the who and what of sales forecasts, skip to the sections on  designing a sales forecasting plan  and  tools to improve sales forecasts  for more relevant knowledge. Sales forecasting can become especially tough when we face an unexpected turn of events, so head to the section on  what happens to sales forecasts in unpredictable times  for more on that.

A sales forecast is an expression of expected sales revenue. A sales forecast estimates how much your company plans to sell within a certain time period (like quarter or year). The best sales forecasts do this with a high degree of accuracy, and they’re only as accurate as the data that fuels them.

A strong data culture is at the heart of an accurate sales forecast. This means all sales data is available to everyone at the company, and all teams do their part in keeping it updated, leaning on AI and automation to help. More on that in the section on  tools used to forecast sales revenue .

All sales forecasts answer two key questions:

• How much:  Each sales opportunity has its own projected amount it’ll bring into the business. Whether that’s $500 or $5 million, sales teams have to come up with one number representing that new business. To create the number, they take everything they know about the prospect into account.
• When:  Sales forecasts pinpoint a month, quarter, or year when the sales team expects the revenue to hit.

Coming up with those two sales projections is no easy feat. So sales teams factor in the important ingredients of who, what, where, why, and how to make their forecasts:

• Who:  Sales teams are responsible for sales forecasting.
• What:  Forecasts should be based on the exact solutions you plan to sell. In turn, that should be based on problems your prospects have voiced, which  your company can uniquely solve .
• Where:  Where is the buying decision made, and where will the actual products be used? Sales teams see better accuracy when they get closer (at least for a visit) to the center of the action.
• Why:  Why is the prospect or existing customer considering new services from your company in the first place? Is there a compelling event making them consider it now? Without a forcing function and a clear why, the deal may stall inevitably.
• How:  How does this prospect tend to make purchasing decisions? If you’re not accounting for how they do it now and how they’ve done it in the past in your forecast, it may be fuzzy math.

Forecasting lets leaders set realistic sales targets, create attainable and motivating quotas for sales reps, and gauge expected revenue, aiding in budgeting and spending decisions for the whole company. If forecasts are inaccurate, businesses may overspend (putting themselves in a risky spot), and set unreachable quotas (which is demoralizing for reps).

To understand why sales forecasting is so important to business health, think about two example scenarios: one with a car manufacturer and another with an e-commerce shop.

In the case of a car manufacturer, cars take a long time to build. The manufacturer has a complex supply chain to ensure every car part is available exactly when they need to build cars, so the number of cars available to purchase will meet demand.

When you buy something online, whether that’s from a large marketplace or a small boutique, you get a delivery estimate. If your delivery comes a day or a week after it’s promised, that’ll affect your satisfaction with the company — and decrease your willingness to want to do business with them again.

Sales forecasting is similar in both cases. Sales forecasts help the entire business plan resources to ship products, pay for marketing, hire employees, and beyond. Accurate sales forecasting yields a well-oiled machine that meets customer demand, both today and in the future. And internally on sales teams, sales revenue that delivers in its estimated time period keeps leaders and collaborators happy, just like a shipment that arrives on time.

If forecasts are off, the company faces challenges that affect everything from pricing to product delivery to the end user. Meanwhile, if forecasts are on point and  sales quotas  are met, the company can make better investments, perhaps hiring 20 new developers instead of 10, or building a much-needed new sales office in a prime new territory.

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Each organization has its own sales forecast owners. These are some of the teams who are usually responsible:

• Product leaders:  They put a stake in the ground for what products will be available to sell when.
• Sales leaders:  They promise the numbers that their teams will deliver. Depending on the seniority of the leader, how they forecast varies. For example, first-line managers forecast collections of opportunities, where third-line managers consider a wide set of numbers and traditional close rates to come up with an overall forecast.
• Sales reps:  They report their own numbers to their managers.

No matter how a company calculates its sales forecasts, the process should be transparent. And at the end of the day, sales leadership has to be responsible to call a number. Whether met, exceeded, or missed, the forecast responsibility falls on them.

Sales forecasts touch virtually all departments in a business. For example, the finance department uses sales forecasts to decide how to make annual and quarterly investments. Product leaders use them to plan demand for new products. And the HR department uses forecasts to align recruiting needs to where the business is going.

At some level, sales forecasting affects everyone in the company.

The main objective of sales forecasting is to paint an accurate picture of expected sales. Leaders are looking to these numbers when they’re building out their operational roadmap and budget. If they’re confident in the projected growth, they can get to planning.

They could decide to staff more customer service touchpoints, fund more external marketing events, or invest more in the community. They could get ahead of purchasing new equipment or upgrades that get more expensive the longer they wait. Without a sales forecast, leaders are making critical spending decisions in the dark. If sales don’t go as planned, it could lead to cutting workforce, reducing support, or halting product development.

Sales forecasting is a muscle, not an item to check off your to-do list. While you should absolutely design a framework for your sales forecasting plan each year, you should also change up your strategies from time to time so new muscles develop.

Craft a sales forecasting plan with your team by focusing on three primary activities:

• Calculating number and time  period:  Your plan should explain how you’ll calculate the estimated monetary amount and what the timeframes will be. See the section on  how a CRM can help with forecasting  later in this guide for more on the sales forecasting tools you can use to do this.
• Reviewing and revising:  You should also plan to review the forecast at key milestones and revise it if necessary. Most sales leaders track progress against their forecast daily! But you’ll also want to schedule designated check-ins throughout the quarter. Make sure you’re reviewing the latest numbers with  sales automation tools  that sync your CRM’s forecast data.
• Breaking the patterns:  Even the best sales organizations need to shake up their  sales process  once in a while. Breaking your patterns can help you find new ways of crafting even more accurate forecasting. Try skip-level forecasting, ask different questions, have executive sponsorship reviews, and take different angles of the data.

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What happens to sales forecasts in unpredictable times.

Unpredictable events have an enormous impact on your sales forecast. Extreme weather or economic crises all dramatically change your forecast. What you thought you knew about expected revenue growth can be suddenly flipped on its head.

As soon as an extraordinary event hits, sales and finance leaders at your company will quickly want to know:

• How’s our  sales pipeline  looking today?
• What are the best- and worst-case scenarios?
• How has the forecast changed from a week or a month ago?

Your forecast implicates resourcing, headcount, and more (see the section on  sales forecasting objectives ). So although things may be changing quickly, you don’t want to give up on your forecast.

Rather than attempt to recalculate your forecast based on dubious estimates or conjecture, your best bet is to  rely on a CRM solution  to get an accurate view of deal status and pipeline in real time.

During a crisis, reps need to feed their CRM with data as events unfold so leaders have clear visibility into the rapidly evolving pipe. That data enables those leaders to support their reps with corporate-level decisions about where they should be focusing their time — and craft the new forecasts. Your forecast is only as good as the data coming into it from your sales teams.

In uncertain times, quick access to sales data and the ability to pivot  sales territory  and resource deployment accordingly can make the difference between business continuity and dissolution. There’s no silver bullet to forecast perfectly in a crisis or unforeseen scenario. But vigilantly updating what’s in the pipeline and analyzing sales data more frequently than usual will help you see trends and retool your forecast accordingly.

Empathy and care are always fundamental, but this is especially true in these situations. Empathizing with your customers’ challenges and caring for your own sales reps should come before anything else. Build trust with internal and external partners. That trust will help you grow again in the future. Learn more about  maintaining customer relationships as a sales leader .

Only 45% of sales leaders are confident in their organization’s sales forecasts,  according to Gartner . While it’s natural for sales reps to bring in some intuition to their sales forecasts, that’s where room for error can creep in.

This brings us back to embracing a  strong data culture . To get a more accurate forecast, everyone in the sales cycle — from reps to managers to execs — should have a stake in making sure those numbers reflect the latest reality. Reps can keep all prospect info up to date, managers can track pipeline progress, and leaders can review how all teams are tracking toward those forecast numbers, with AI playing backup to spot any inaccuracies or chances to adjust along the way.

A  CRM  gives sales leaders a real-time view into their entire team’s forecast. The tool forecasts revenue by giving you:

• An accurate view of your entire business.  Comprehensive forecasts in a CRM come with a complete view of your pipeline.
• Tracking of your top performers.  See which reps are on track to beat their targets with up-to-the-minute leaderboards.
• Forecasting for complex sales teams.  Overlay splits allows you to credit the right amounts to sales overlays, by revenue, contract value, and more.

A forecast is based on the gross rollup of a set of opportunities. You can think of a forecast as a rollup of currency or quantity against a set of dimensions: owner, time, forecast categories, product family, and territory. You can collaborate on forecasts with all the necessary people to see how opportunities are stacking up. Drill down into opportunities by sales leader, operating unit, manager, and individuals.

We also love a CRM with  reports and dashboards . These highlight where the business challenges are, in plain and simple terms. It could be that four of five selling teams are at the right growth rate, and we just need to focus on another one. It could be that a certain product is challenged. The data opens up new doors to grow sales and see what could be working more effectively.

Another thing that’s great about a CRM is the guidance from AI. An  AI for sales  tool offers a neutral perspective on what’s actually happening in sales. For example, AI might note that an opportunity has been pushed out three quarters in a row — a finding that would’ve taken an individual reviewing the data longer to discover. Think of AI as your personal data scientist, taking your forecasting and entire sales operations to a new level.

Predictive AI tools take a look at historical sales data to give you a glimpse of what you might expect in the future. The AI will analyze factors like win rate or number of customer meetings. It takes some of the guesswork out of sales forecasting and helps you get to more accurate numbers. Try to analyze sales data for at least 12 months. Otherwise, there may not be enough data to get accurate sales predictions.

Sales forecasting is significantly more accurate when using a CRM instead of a spreadsheet. When a company is just starting out, sales teams usually rely on spreadsheets or back-of-the-napkin ways to calculate their sales forecasts. This may work for a while, but eventually, you’ll find this doesn’t scale.

The reality is, selling is more complex than ever. It involves everything from how demand generation campaigns are performing to how your phone calls to prospects are landing. The more you want to sell, the more you’ll want to  rely on a CRM .

See how Salesforce manages forecasts with confidence

The secret to an accurate forecast? Reliable, well-maintained pipelines. See how we manage both efficiently (with the help of the right technology), and use our best practices in your business.

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Paul Bookstaber is a writer at Salesforce. He has a decade of experience in content marketing in B2B tech. Before that, he published a magazine and ran a tabloid blog. Today, he splits his time between Florida and the Mountain West, and loves to hike, ski, and watch Bravo. He is in a polyamorous relationship with Luke and Roger, who are cats.

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The Importance of Revenue Forecasting in 2023

, Chief of Staff, Abacum

13 min read · Published: August 9, 2023

Table of contents

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🎯 Introduction

In today’s competitive business landscape, revenue forecasting plays a crucial role in the success and growth of any organization. By accurately predicting future revenue streams, businesses can make informed decisions, allocate resources effectively, and drive sustainable profitability.

In this article you will explore the importance of revenue forecasting, different forecasting models, a step-by-step guide to building your own model, and answers to common questions surrounding this essential business practice.

Understanding the Importance of Revenue Forecasting

Revenue forecasting plays a vital role in business planning, providing insights into future financial performance and helping organizations set realistic goals. By analyzing historical data, market trends, and other relevant factors, businesses can anticipate their revenue streams, identify potential risks, and optimize their sales strategies. Revenue forecasting serves as the foundation for financial planning, budgeting, and resource allocation, enabling companies to align their operations with their revenue targets.

One of the key reasons why revenue forecasting is crucial for businesses is that it allows them to assess their financial health and plan accordingly. By accurately predicting future revenue streams, organizations can make informed decisions about resource allocation, ensuring that they have the necessary funds to support their operations and growth initiatives. This helps businesses avoid cash flow problems and ensures that they are financially prepared for any challenges that may arise.

In addition to financial planning, revenue forecasting also plays a significant role in strategic decision-making. By understanding their expected revenue, businesses can assess the feasibility of new ventures and determine the potential return on investment. This information is invaluable when it comes to evaluating the viability of expanding into new markets, launching new products or services, or making any other strategic business decisions.

The Role of Revenue Forecasting in Business Planning

Revenue forecasting is an integral part of the business planning process. It helps organizations set achievable revenue targets and develop strategic initiatives to achieve those goals. By utilizing revenue forecasts, businesses can assess the feasibility of new ventures, make informed decisions about resource allocation, and create comprehensive financial projections for investors and stakeholders.

When it comes to setting revenue targets, organizations need to strike a balance between ambition and realism. Revenue forecasts help businesses determine what is achievable based on historical data, market trends, and other relevant factors. This ensures that the targets set are challenging yet attainable, motivating employees and driving the company towards success.

Moreover, revenue forecasting is not just limited to setting targets. It also helps businesses identify potential risks and opportunities. By analyzing historical data and market trends, organizations can identify patterns and make predictions about future revenue streams. This allows them to proactively address any potential challenges and capitalize on emerging opportunities, giving them a competitive edge in the market.

Benefits of Accurate Revenue Forecasting

An accurate revenue forecast provides numerous benefits for businesses of all sizes. By accurately predicting future revenue streams, organizations can optimize their inventory levels, streamline production processes, and adjust their pricing strategies. This ensures that businesses have the right amount of inventory to meet customer demand, minimizing excess inventory costs and avoiding stockouts.

Accurate revenue forecasting also enables businesses to make data-driven decisions about their pricing strategies. By understanding their expected revenue, organizations can assess the impact of different pricing scenarios and determine the optimal pricing strategy to maximize profitability. This helps businesses stay competitive in the market and attract customers while maintaining a healthy profit margin.

Additionally, accurate revenue forecasting allows businesses to identify potential cash flow challenges and take proactive measures to mitigate them. By understanding their expected revenue, organizations can anticipate periods of low cash flow and take steps to manage their expenses or secure additional funding. This helps businesses avoid cash flow problems and ensures that they can continue to operate smoothly even during challenging times.

Furthermore, accurate revenue forecasting enables companies to assess the impact of external factors, such as market conditions or regulatory changes, and make timely adjustments to their sales and marketing strategies. By monitoring market trends and analyzing their revenue forecasts, organizations can identify shifts in customer behavior or market dynamics and adapt their strategies accordingly. This flexibility allows businesses to stay agile and responsive in a rapidly changing business environment.

Exploring Different Revenue Forecasting Models

Various revenue forecasting models can help businesses predict sales and revenue streams more effectively. Each model offers unique insights and can be tailored to suit different industries and business needs.

Let’s explore some popular revenue forecasting models:

1. The Quota Capacity Model

The Quota Capacity Model focuses on the capacity of the sales team to achieve their sales targets. By analyzing historical sales data, individual sales quotas, and overall capacity, organizations can forecast future revenue based on their sales team’s performance. This model helps businesses understand their sales team’s capabilities, prioritize opportunities, and identify areas for improvement.

For example, a software company may use the Quota Capacity Model to assess the performance of its sales team. By analyzing past sales data, they can determine if their sales representatives are consistently meeting their quotas or if there are any patterns of underperformance. This information can help the company identify training needs, adjust sales targets, and allocate resources more effectively.

In addition, the Quota Capacity Model can also help businesses identify potential bottlenecks in their sales process. By analyzing the capacity of the sales team and comparing it to the demand for their product or service, organizations can identify if they have enough resources to meet customer demand. This can inform hiring decisions, expansion plans, and overall business strategy.

2. The ARR Snowball Model

The ARR Snowball Model is commonly used by subscription-based businesses to forecast their recurring revenue growth. It considers factors such as customer churn rate, average revenue per customer, and new customer acquisition. By tracking these metrics, businesses can project their future revenue growth and identify strategies to optimize customer retention and acquisition.

For instance, a subscription-based streaming service may use the ARR Snowball Model to forecast its revenue growth. By analyzing the churn rate (the rate at which customers cancel their subscriptions), the average revenue per customer, and the rate of acquiring new customers, the company can estimate its future revenue streams. This information can help the company develop strategies to reduce customer churn, increase average revenue per customer, and attract new customers through targeted marketing campaigns or product enhancements.

Moreover, the ARR Snowball Model can also assist businesses in identifying potential market opportunities. By analyzing customer acquisition rates and revenue growth in different market segments, organizations can identify which segments are performing well and where there is room for growth. This can guide businesses in allocating resources, targeting specific customer groups, and expanding into new markets.

3. The Sales Cycle to New Bookings Model

The Sales Cycle to New Bookings Model focuses on the sales pipeline and conversion rates at each stage of the sales cycle. By analyzing past performance and conversion rates, organizations can predict future revenue based on their sales pipeline. This model helps sales teams identify potential bottlenecks, optimize their sales processes, and improve forecasting accuracy.

For example, a manufacturing company may use the Sales Cycle to New Bookings Model to forecast its sales pipeline. By analyzing the time it takes for leads to convert into customers at each stage of the sales cycle, the company can estimate the number of new bookings they can expect in the future. This information can help the company identify potential bottlenecks in the sales process, such as long lead times or low conversion rates, and take corrective actions to improve efficiency and increase revenue.

In addition, the Sales Cycle to New Bookings Model can also provide valuable insights into customer behavior and preferences. By analyzing conversion rates and customer feedback at each stage of the sales cycle, organizations can identify patterns and trends that can inform marketing strategies, product development, and customer relationship management. This can lead to more targeted and effective sales efforts, resulting in increased revenue and customer satisfaction.

4. The Bookings, Billings, and Collections Model

The Bookings, Billings, and Collections Model provides a comprehensive view of revenue flow throughout the sales cycle. It considers factors such as bookings (orders placed), billings (invoices issued), and collections (cash collected). By tracking these metrics, businesses can anticipate their cash flow and identify potential gaps or delays in revenue collection.

For instance, a consulting firm may use the Bookings, Billings, and Collections Model to track its revenue flow. By analyzing the number of bookings (client engagements), the amount invoiced (billings), and the cash collected (collections), the firm can monitor its cash flow and identify any discrepancies or delays in payment. This information can help the firm manage its financial resources more effectively, negotiate payment terms with clients, and plan for future expenses.

Moreover, the Bookings, Billings, and Collections Model can also help businesses identify areas for process improvement. By analyzing the time it takes for bookings to turn into billings and collections, organizations can identify potential bottlenecks in their invoicing and payment processes. This can lead to streamlined operations, reduced payment delays, and improved cash flow management.

Step-by-Step Guide to Building a Revenue Forecasting Model

Building a revenue forecasting model requires careful analysis of historical data, market trends, and relevant business factors.

By following these steps, you can create an accurate revenue forecast for your organization:

Creating Assumptions for Customer Growth and Average ARR

To begin, assess your historical customer growth rate and average Annual Recurring Revenue (ARR). Utilize market research, industry benchmarks, and internal data to make informed assumptions about future customer growth and ARR. These assumptions will form the basis of your revenue forecast.

When analyzing historical customer growth, consider factors such as marketing efforts, customer acquisition strategies, and market conditions. Look for patterns and trends that can help you identify potential growth opportunities or challenges.

Additionally, when determining the average ARR, take into account pricing strategies, product enhancements, and customer feedback. Analyze how these factors have influenced the average revenue generated per customer over time.

By thoroughly understanding your customer growth and average ARR, you can make more accurate assumptions for your revenue forecast, which will ultimately help you make informed business decisions.

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Calculating Net New Bookings for Accurate Revenue Projection

Next, calculate your Net New Bookings by considering new customer acquisition and upselling opportunities. Incorporate factors such as conversion rates, pricing changes, and market trends to estimate your future bookings accurately. This step will help you project your revenue streams in a realistic and achievable manner.

When analyzing new customer acquisition, evaluate your marketing and sales strategies. Identify the channels that have been most successful in attracting new customers and assess the effectiveness of your lead generation efforts. Consider the conversion rates at each stage of the sales funnel to estimate the number of new customers you can expect in the future.

Furthermore, when evaluating upselling opportunities, analyze customer behavior and purchasing patterns. Look for cross-selling or upselling opportunities within your existing customer base and determine the potential revenue impact of these strategies.

By incorporating these factors into your revenue projection, you can gain a more comprehensive understanding of your future revenue streams and make strategic decisions to drive growth.

Modeling Renewal Bookings for Revenue Continuity

Renewal bookings are crucial for maintaining revenue continuity in subscription-based businesses. Assess your historical renewal rates, customer satisfaction levels, and contract terms to model your future renewal bookings. By factoring in potential churn and renewal rates, you can accurately forecast your revenue streams and understand the impact of customer retention on your organization.

When analyzing historical renewal rates, consider the reasons why customers choose to renew or not renew their subscriptions. Look for patterns or commonalities among customers who have renewed and those who have churned. This analysis can help you identify areas for improvement and develop strategies to increase customer retention.

Additionally, evaluate customer satisfaction levels through surveys, feedback, and support interactions. Identify areas where you can enhance the customer experience and address any pain points that may contribute to customer churn.

By modeling your renewal bookings based on these factors, you can gain insights into the future revenue continuity of your business and implement strategies to improve customer retention.

Calculating Billings and Collections for Cash Flow Analysis

Lastly, calculate your billings and collections to analyze your cash flow. Consider factors such as payment terms, invoicing accuracy, and collection efficiency to forecast your cash flow accurately. By understanding your cash flow dynamics, you can proactively address potential challenges and optimize your financial operations.

When analyzing payment terms, assess the average time it takes for customers to pay their invoices. Consider any seasonal or industry-specific factors that may affect payment timelines. This analysis will help you estimate the timing of your cash inflows and outflows.

In terms of invoicing accuracy, evaluate your billing processes to ensure that invoices are generated correctly and promptly. Identify any bottlenecks or inefficiencies that may delay the invoicing process and impact your cash flow.

Furthermore, when assessing collection efficiency, analyze your collection practices and policies. Identify any overdue accounts or potential risks of non-payment. Develop strategies to improve collection rates and minimize the impact of late payments on your cash flow.

By accurately calculating your billings and collections, you can gain a deeper understanding of your cash flow dynamics and make informed decisions to optimize your financial operations.

Taking Top-Line Planning to the Next Level

Revenue forecasting is a crucial aspect of understanding a business’s financial performance. It allows organizations to anticipate future revenue streams, identify potential challenges, and make informed decisions. However, to truly maximize the benefits of revenue forecasting, businesses can take their top-line planning to the next level by integrating it with other planning processes.

• One key area where integration can be immensely valuable is aligning revenue forecasts with operational plans. By connecting revenue projections with operational strategies, businesses can ensure that their resources and capabilities are aligned with their revenue goals. This alignment enables organizations to optimize their overall performance and drive sustainable growth.
• Another critical aspect of taking top-line planning to the next level is integrating revenue forecasting with marketing strategies. By understanding the projected revenue streams, businesses can tailor their marketing efforts to target specific customer segments, optimize pricing strategies, and identify opportunities for growth. This integration allows organizations to create a cohesive and effective marketing plan that aligns with their revenue goals.

Furthermore, integrating revenue forecasting with financial goals is essential for effective top-line planning. By aligning revenue projections with financial targets, businesses can better manage cash flows, plan investments, and make strategic financial decisions. This integration ensures that financial resources are allocated efficiently and effectively, maximizing the chances of achieving desired financial outcomes.

While integration is crucial, leveraging advanced analytics, predictive technologies, and real-time data can further enhance the accuracy and agility of revenue forecasting. Advanced analytics tools can analyze historical data, market trends, and customer behavior to generate more accurate revenue forecasts. Predictive technologies can help businesses anticipate future revenue streams based on various scenarios and assumptions. Real-time data integration allows organizations to monitor revenue performance continuously, identify deviations from forecasts, and make timely adjustments.

In conclusion, while revenue forecasting provides valuable insights into a business’s financial performance. It acts as a guide, enabling the prediction of future revenue streams, anticipating potential challenges, and supporting well-informed decision-making.

However, the true power of revenue forecasting emerges when it seamlessly integrates with other essential planning aspects. This is precisely where a solution like Abacum comes into play.

Abacum FP&A software empowers to discern what’s effective, what’s not, and how to take actionable steps to achieve desired outcomes. Connect with an Abacum FP&A consultant today to kickstart the conversation.

Answers to Common Revenue Forecasting Questions

How does excel’s suite of data analysis tools.

Excel is a widely used tool for revenue forecasting but when it comes to revenue forecasting, accuracy is key. Excel offers various data analysis tools that can help businesses make more informed projections. These tools include regression analysis, moving averages, and exponential smoothing. By leveraging these tools, businesses can analyze historical data, identify trends, and make predictions based on patterns.

In what ways can businesses leverage Excel’s formula optimization and custom formula creation capabilities?

Formula optimization is another important aspect of forecasting in Excel. By using the right formulas and functions, businesses can automate calculations and save time. Excel provides a wide range of formulas that can be used for revenue forecasting, such as SUM, AVERAGE, and IF, that can be used to perform complex calculations. Additionally, businesses can create custom formulas to suit their specific forecasting needs.

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Sales forecasting: How to create a sales forecast template (with examples)

A strong sales team is the key to success for most companies. They say a good salesperson can sell sand at the beach, but whether you’re selling products in the Caribbean or Antarctica, it all comes down to strategy. When you’re unsure if your current strategy is working, a sales forecast can help.

What is a sales forecast?

A sales forecast predicts future sales revenue using past business data. Your sales forecast can predict a number of different things, including the number of new sales for an existing product, the new customers you’ll gain, or the memberships you’ll sell in a given time period. These forecasts are then used during project planning to determine how much you should allocate towards new products and services. 

Why is sales forecasting important?

Sales forecasting helps you keep a finger on your business’s pulse. It sets the ground rules for a variety of business operations, including your sales strategy and project planning. Once you calculate your sales projections, you can use the results to assess your business health, predict cash flow, and adjust your plans accordingly.

An effective sales forecasting plan:

Predicts demand: When you have an idea of how many units you may sell, you can get a head start on production.

Helps you make smart investments: If you have future goals of expanding your business with new locations or products, knowing when you’ll have the income to do so is important. 

Contributes to goal setting: Your sales forecast can help you set goals outside of investments as well, like outshining competitors or hiring new team members.

Guides spending: Your sales forecast may be the wake-up call you need to set a budget and use cost control to reduce expenses.

Improves the sales process: You can change your current sales process based on the sales projections you’re unhappy with.

Highlights financial problems: Your sales forecast template will open your eyes to problem areas you may not have noticed otherwise. 

Helps with resource management: Do you have the resources you need to fill orders if it’s an accurate sales forecast? Your sales forecast can guide how you allocate and manage resources to hit targets.

When you have an accurate prediction of your future sales, you can use your projections to adjust your current sales process.

Sales forecasting methods

Sales forecasting is an important part of strategic business planning because it enables sales managers and teams to predict future sales and make informed decisions. But why are there multiple sales forecasting methods? Simply put, businesses vary in size, industry, and market dynamics, so no single methodology suits all.

Choosing the right sales forecasting method is more of an art than a science. It involves:

Analyzing your business size and industry

Assessing the available data and tools

Understanding your sales cycle's complexity

A few telltale signs that you've picked the correct approach include:

Improved accuracy in sales target predictions

Enhanced understanding of market trends

Better alignment with your business goals

Opportunity stage forecasting

Opportunity stage forecasting is a dynamic approach ideal for businesses using CRM systems like Salesforce. It assesses the likelihood of sales closing based on the stages of the sales pipeline. This method is particularly beneficial for sales organizations with a clearly defined sales process.

For example, a software company might use this method to forecast sales by examining the number of prospects in each stage of their funnel, from initial contact to final negotiation.

Pipeline forecasting method

The pipeline forecasting method is similar to opportunity stage forecasting but focuses more on the volume and quality of leads at each pipeline stage. It's particularly useful for businesses that rely heavily on sales forecasting tools and dashboards for decision-making.

A real estate agency could use it by examining the number of properties listed, the stage of negotiations, and the number of closings forecasted in the pipeline.

Length of sales cycle forecasting

Small businesses often prefer the length of sales cycle forecasting. It's straightforward and involves analyzing the duration of past sales cycles to predict future ones. This method is effective for businesses with consistent sales cycle lengths.

A furniture manufacturer, for instance, might use this method by analyzing the average time taken from initial customer contact to closing a sale in the past year.

Intuitive forecasting

Intuitive forecasting relies on the expertise and intuition of sales managers and their teams. It's less about spreadsheets and more about market research and understanding customer behavior. This method is often used with other, more data-driven approaches.

A boutique fashion store, for example, might use this method, relying on the owner's deep understanding of fashion trends and customer preferences.

Historical forecasting

Historical forecasting uses past performance data to predict future sales. This method is advantageous for businesses with ample historical sales data. It's less effective for new markets or rapidly changing industries.

An established book retailer could use historical data from previous years, considering seasonal trends and past marketing campaigns, to forecast next quarter's sales.

Multivariable analysis forecasting

Multivariable analysis forecasting is a more sophisticated method that's ideal for larger sales organizations. It analyzes factors like market trends, economic conditions, and marketing efforts to provide a holistic view of potential sales outcomes.

An automotive company, for example, could analyze factors like economic conditions, competitor activity, and past sales data to forecast future car sales.

How to calculate sales forecast

Sales forecasts determine how much you expect to do in sales for a given time frame. For example, let’s say you expect to sell 100 units in Q1 of fiscal year 2024. To calculate sales forecasts, you’ll use past data to predict future trends. 

When you’re first creating a forecast, it’s important to establish benchmarks that determine how much you normally sell of any given product to how many people. Compare historical sales data against sales quotas—i.e., how much you sold vs. how much you expected to sell. This type of analysis can help you set a baseline for what you expect to achieve every week, month, quarter, and so on.

For many companies, this means establishing a formula. The exact inputs will vary based on your products or services, but generally, you can use the following:

Sales forecast = Number of products you expect to sell x The value of each product

For example, if you sell SaaS products, your sales forecast might look something like this: 

SaaS FY24 Sales forecast = Number of expected subscribers x Subscription price

Ultimately, the sales forecasting process is a guess—but it’s an educated one. You’ll use the information you already have to create a data-driven forecasting model. How accurate your forecast is depends on your sales team. The sales team uses facts such as their prospects, current market conditions, and their sales pipeline. But they will also use their experience in the field to decide on final numbers for what they think will sell. Because of this, sales leaders are more likely to have better forecasting accuracy than new members of the sales team.

Sales forecast vs. sales goal

Your sales forecast is based on historical data and current market conditions. While you always hope your sales goals are attainable—and you can use data to estimate what your team is capable of—your goals might not line up directly with your forecast. This can be for a number of reasons, including wanting to create stretch goals that push your sales team beyond what they’ve done in the past or big, pie-in-the-sky goals that boost investor confidence.

How to create a sales forecast

There are different sales forecasting methods, and some are simpler than others. With the steps below, you’ll have a basic understanding of how to create a sales forecast template that you can customize to the method of your choice. 

1. Track your business data

Without details from your past sales, you won’t have anything to base your predictions on. If you don’t have past sales data, you can begin tracking sales now to create a sales forecast in the future. The data you’ll need to track includes:

Number of units sold per month

Revenue of each product by month

Number of units returned or canceled (so you can get an accurate sales calculation)

Other items you can track to make your predictions more accurate include:

Growth percentage

Number of sales representatives

Average sales cycle length

There are different ways to use these data points when forecasting sales. If you want to calculate your sales run rate, which is your projected revenue for the next year, use your revenue from the past month and multiply it by 12. Then, adjust this number based on other relevant data points, like seasonality.

Tip: The best way to track historical data is to use customer relationship management (CRM) software. When you have a CRM strategy in place, you can easily pull data into your sales forecast template and make quick projections.

2. Set your metrics

Before you perform the calculations in your sales forecast template, you need to decide what you’re measuring. The basic questions you should ask are:

What is the product or service you’re selling and forecasting for? Answering this question helps you decide what exactly you’re evaluating. For example, you can investigate future trends for a long-standing product to decide whether it’s worth continuing, or you can predict future sales for a new product. 

How far in the future do you want to make projections? You can decide to make projections for as little as six months or as much as five years in the future. The complexity of your sales forecast is up to you.

How much will you sell each product for, and how do you measure your products? Set your product’s metrics, whether they be units, hours, memberships, or something else. That way, you can calculate revenue on a price-per-unit basis.

How long is your sales cycle? Your sales cycle—also called a sales funnel—is how long it takes for you to make the average sale from beginning to end. Sales cycles are often monthly, quarterly, or yearly. Depending on the product you’re selling, your sales cycle may be unique. Steps in the sales cycle typically include:

Lead generation

Lead qualification

Initial contact

Making an offer

Negotiation

Closing the deal

Tip: You can still project customer growth versus revenue even if your company is in its early phases. If you don’t have enough historical data to use for your sales forecast template, you can use data from a company similar to yours in the market. 

3. Choose a forecasting method

While there are many forecasting methods to choose from, we’ll concentrate on two straightforward approaches to provide a clear understanding of how sales forecasting can be implemented efficiently. The top-down method starts with the total size of the market and works down, while the bottom-up method starts with your business and expands out.

Top-down method: To use the top-down method, start with the total size of the market—or total addressable market (TAM). Then, estimate how much of the market you think your business can capture. For example, if you’re in a large, oversaturated market, you may only capture 3% of the TAM. If the total addressable market is $1 billion, your projected annual sales would be $30 million. 

Bottom-up method: With the bottom-up method, you’ll estimate the total units your company will sell in a sales cycle, then multiply that number by your average cost per unit. You can expand out by adding other variables, like the number of sales reps, department expenses, or website views. The bottom-up forecasting method uses company data to project more specific results. 

You’ll need to choose one method to fill in your sales forecast template, but you can also try both methods to compare results.

Tip: The best forecasting method for you may depend on what type of business you’re running. If your company experiences little fluctuation in revenue, then the top-down forecasting method should work well. The top-down model can also work for new businesses that have little business data to work with. Bottom-up forecasting may be better for seasonal businesses or startups looking to make future budget and staffing decisions.

4. Calculate your sales forecast

You’ve already learned a basic way to calculate revenue using the top-down method. Below, you’ll see another way to estimate your projected sales revenue on an annual scale.

Divide your sales revenue for the year so far by the number of months so far to calculate your average monthly sales rate.

Multiply your average monthly sales rate by the number of months left in the year to calculate your projected sales revenue for the rest of the year.

Add your total sales revenue so far to your projected sales revenue for the rest of the year to calculate your annual sales forecast.

A more generalized way to estimate your future sales revenue for the year is to multiply your total sales revenue from the previous year.

Example: Let’s say your company sells a software application for $300 per unit and you sold 500 units from January to March. Your sales revenue so far is $150,000 ($300 per unit x 500 units sold). You’re three months into the calendar year, so your average monthly sales rate is $50,000 ($150,000 / 3 months). That means your projected sales revenue for the rest of the year is $450,000 ($50,000 x 9 months).

5. Adjust for external factors

A sales forecast predicts future revenue by making assumptions about your growth rate based on past success. But your past success is only one component of your growth rate. There are external factors outside of your control that can affect sales growth—and you should consider them if you want to make accurate projections. 

Some external factors you can adjust your calculations around include:

Inflation rate: Inflation is how much prices increase over a specific time period, and it usually fluctuates based on a country’s overall economic state. You can take your annual sales forecast and factor in inflation rate to ensure you’re not projecting a higher or lower number of sales than the economy will permit.

The competition: Is your market becoming more competitive as time goes on? For example, are you selling software during a tech boom? If so, assess whether your market share will shrink because of rising competition in the coming year(s).

Market changes: The market can shift as people change their behavior. Your audience may spend an average of six hours per day on their phones in one year. In the next year, mental health awareness may cause phone usage to drop. These changes are hard to predict, so you must stay on top of market news.

Industry changes: Industry changes happen when new products and technologies come on the market and make other products obsolete. One instance of this is the invention of AI technology.

Legislation: Although not as common, changes in legislation can affect the way companies sell their products. For example, vaping was a multi-million dollar industry until laws banned the sale of vape products to people under the age of 21. 

Seasonality: Many industries experience seasonality based on how human behavior and human needs change with the seasons. For example, people spend more time inside during the winter, so they may be on their computers more. Retail stores may also experience a jump in sales around Christmas time.

Tip: You can create a comprehensive sales plan to set goals for team members. Aside from revenue targets and training milestones, consider assigning each of these external factors to your team members so they can keep track of essential information. That way, you’ll have your bases covered on anything that may affect future sales growth. 

Sales forecast template

Below you’ll see an example of a software company’s six-month sales forecast template for two products. Product one is a software application, and product two is a software accessory. 

In this sales forecast template, the company used past sales data to fill in each month. They projected their sales would increase by 10% each month because of a 5% increase in inflation and because they gained 5% more of the market. They kept their price per unit the same as the previous year.

Putting both products in the same chart can help the company see that their lower-cost product—the software accessory—brings in more revenue than their higher-cost product. The company can then use this insight to create more low-cost products in the future.

Sales forecast examples

Sales forecasting is not a one-size-fits-all process. It varies significantly across industries and business sizes. Understanding this through practical examples can help businesses identify the most suitable forecasting method for their unique needs.

Sales forecasting example 1: E-commerce

In the e-commerce sector, where trends can shift rapidly, intuitive forecasting is often useful for making quick, informed decisions.

Scenario: An e-commerce retailer specializing in fashion accessories is planning for the upcoming festive season.

Trend analysis phase: The team spends the first week analyzing customer feedback and current fashion trends on social media, using intuitive forecasting to predict which products will be popular.

Inventory planning phase: Based on these insights, the next three weeks are dedicated to selecting and ordering inventory, focusing on products predicted to be in high demand.

Sales monitoring and adjustment: As the holiday season approaches, the team closely monitors early sales data, ready to adjust their inventory and marketing strategies based on real-time sales performance.

This approach allows the e-commerce retailer to stay agile , adapting quickly to market trends and customer preferences.

Sales forecasting example 2: Software development

For a software development company, especially one working with B2B clients, opportunity stage forecasting can help predict sales and manage the sales pipeline effectively.

Scenario: A software development company is launching a new project management tool.

Lead generation and qualification phase: In the initial month, the sales team focuses on generating leads, qualifying them, and categorizing potential clients based on their progress through the sales pipeline.

Proposal and negotiation phase: For the next two months, the team works on creating tailored proposals for high-potential leads and enters negotiation stages, using opportunity stage forecasting to predict the likelihood of deal closures.

Closure and review: In the final phase, the team aims to close deals, review the accuracy of their initial forecasts, and refine their approach based on the outcomes.

Opportunity stage forecasting enables the software company to efficiently manage its sales pipeline , focusing resources on the most promising leads and improving their chances of successful deal closures.

Pair your sales forecast with a strong sales process

A sales forecast is only one part of the larger sales picture. As your team members acquire leads and close deals, you can track them through the sales pipeline. A solid sales plan is the foundation of future success.  

Related resources

How Asana uses Asana to more effectively manage goals

Beat thrash for good: 4 organizational planning challenges and solutions

How Asana uses Asana to streamline project intake processes

How to use benchmarking to set your standards for success

How to write a sales forecast for a business plan

Table of Contents

What is a sales forecast?

Why do you need a sales forecast, how do you write a sales forecast, top-down or bottom-up, writing your sales forecast, calculating a sales forecast, how can countingup help manage your forecasting.

Sales forecasts are an important part of your business plan . If done correctly, they can give accurate projections of your business’ cash flow, and let you better prepare for the year ahead. They can also make it easier to find the right investors . While it’s easier for existing businesses with plenty of data, you can still calculate a sales forecast for a new business .

In this guide, we’ll explore:

• How can you manage your forecasting?

A sales forecast is a prediction of your business’ future revenue. In order to be an accurate prediction, the forecast is based on previous sales, current economic trends, and industry performance. Having a sales forecast is a useful tool, because it gives you a better idea of how to manage your business. 

Having a sales forecast is like using the past to have a peek into the future of your company. It might not be 100% accurate, but it can help you plan any future spending, or prevent any cash flow issues from occurring. 

You can also use your sales forecast to monitor your business’ progress. For instance, if your business regularly performs better than your forecast, it could be a sign that your business is continuing to grow. On the other hand, if your actual sales are frequently less than expected, this could be a sign that your business is struggling and needs adjustment. 

It’s important to remember that any projections you make aren’t guaranteed, there can be advantages and disadvantages of financial forecasting . 

Now we’ve run through why having a sales forecast can help you run your business, let’s look at how to write one. 

While there are two types of sales forecasting (top-down and bottom-up), one is a lot more accurate for small businesses than the other. A top-down forecast looks at the market as a whole and attributes a portion of the market to your business. 

A top-down approach may work for large businesses that already own a significant chunk of the market. When forecasting for a small business, it’s easy to overestimate your market share. For example, a 1% market share may not seem like a lot, but a small restaurant owning 1% of the £89.5 billion UK market is extremely unrealistic.

The alternative to top-down is bottom-up. A bottom-up sales forecast starts with existing company data (like customer or product information) and works up to revenue. Since this starts with the company, it’s easier to 

Your sales forecast is ultimately a prediction of your revenue over a set period. It considers the amount you think you’ll sell, and the cost of those sales. We’ve included how to calculate a sales forecast below.

A sales forecast consists of three separate values: revenue, cost of goods sold, and gross profit. For estimating values in the calculations below, it’s best to use any existing business data to be as accurate as possible. 

To calculate your predicted revenue:

• Make a list of your available goods and services
• Note the price of each of your goods and services
• Estimate the expected sales of each good or service
• Multiply the price by the estimated sales to get your estimated revenue
• Add them all together to get your total revenue

For example, if your food truck business sold pizzas at £10 and burgers at £5, you would multiply these values by how much you expected to sell. For calculating a weekly sales forecast, you might estimate selling 60 pizzas and 80 burgers. Your predicted revenue for that week would be £600 for pizzas and £400 for burgers — giving £1,000 total.

In order to figure out how much profit you’ll make, you also need to calculate your costs for those predicted sales. To calculate your predicted costs:

• Figure out how much each good or service will cost per unit
• Multiply each cost by the projected sales

Using the same example as above, assume a single pizza cost £3.50 to make and a burger cost £2. Using the estimated sales, the total cost for your pizzas (3.5 x 60) would be £210, and £160 for your burgers (2 x 80). Combining these two figures gives you a total cost of £370.

The last step is to work out your gross profit , and it’s a relatively simple calculation.

• Subtract the total predicted cost from your total predicted revenue

Continuing with the example above, your revenue (£1,000) minus your costs (£370), leaves you with a projected gross profit of £630 for the week. Using this estimate, you can then plan how much working capital your business should have access to. It’s important to remember that these are only estimates, and your actual values can be higher or lower than your forecast.

If you want your forecasts to be as accurate as possible, you need to refer to all of your business’ financial data. Since collecting and collating this data can be challenging, you may want to use financial management software like the Countingup app. 

When trying to calculate your sales forecasts, having an up-to-date log of your current sales can be hugely beneficial. By combining a business current account with accounting software, Countingup is the only software that provides real-time cash flow tracking. 

The Countingup app also provides business owners with access to automatically generated profit and loss statements. These can prove invaluable when trying to stay aware of all your business’ costs.

Start your three-month free trial today. Find out more here .

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How to Create a Sales Forecast

11 min. read

Updated October 27, 2023

Business owners are often afraid to forecast sales. But, you shouldn’t be. Because you can successfully forecast your own business’s sales.

You don’t have to be an MBA or CPA. It’s not about some magic right answer that you don’t know. It’s not about training you don’t have. It doesn’t take spreadsheet modeling (much less econometric modeling) to estimate units and price per unit for future sales. You just have to know your own business. 

Forecasting isn’t about seeing into the future

Sales forecasting is much easier than you think and much more useful than you imagine.

I was a vice president of a market research firm for several years, doing expensive forecasts, and I saw many times that there’s nothing better than the educated guess of somebody who knows the business well. All those sophisticated techniques depend on data from the past — and the past, by itself, isn’t the best predictor of the future. You are.

It’s not about guessing the future correctly. We’re human; we don’t do that well. Instead, it’s about setting down assumptions, expectations, drivers, tracking, and management. It’s about doing your job, not having precognitive powers. 

• Successful forecasting is driven by regular reviews

What really matters is that you review and revise your forecast regularly. Spending should be tied to sales, so the forecast helps you budget and manage. You measure the value of a sales forecast like you do anything in business, by its measurable business results.

That also means you should not back off from forecasting because you have a new product, or new business, without past data. Lay out the sales drivers and interdependencies, to connect the dots, so that as you review plan-versus-actual results every month, you can easily make course corrections.

If you think sales forecasting is hard, try running a business without a forecast. That’s much harder.

Your sales forecast is also the backbone of your business plan . People measure a business and its growth by sales, and your sales forecast sets the standard for  expenses , profits, and growth. The sales forecast is almost always going to be the first set of numbers you’ll track for plan versus actual use, even if you do no other numbers.

If nothing else, just forecast your sales, track plan-versus-actual results, and make corrections — that process alone, just the sales forecast and tracking is in itself already business planning. To get started on building your forecast follow these steps.

And if you run a subscription-based business, we have a guide dedicated to building a sales forecast for that business model.

• Step 1: Set up your lines of sales

Most forecasts show several distinct lines of sales. Ideally, your sales lines match your accounting, but not necessarily in the same level of detail.   

For example, a restaurant ought not to forecast sales for each item on the menu. Instead, it forecasts breakfasts, lunches, dinners, and drinks, summarized. And a bookstore ought not to forecast sales by book, and not even by topic or author, but rather by lines of sales such as hardcover, softcover, magazines, and maybe categories (such as fiction, non-fiction, travel, etc.) if that works.

Always try to set your streams to match your accounting, so you can look at the difference between the forecast and actual sales later. This is excellent for real business planning. It makes the heart of the process, the regular review, and revision, much easier. The point is better management.

For instance, in a bicycle retail store business plan, the owner works with five lines of sales, as shown in the illustration here.  

In this sample case, the revenue includes new bikes, repair, clothing, accessories, and a service contract. The bookkeeping for this retail store tracks sales in those same five categories.

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• Step 2: Forecast line by line

There are many ways to forecast a line of sales.

The method for each row depends on the business model

Among the main methods are:.

• Unit sales : My personal favorite. Sales = units times price. You set an average price and forecast the units. And of course, you can change projected pricing over time. This is my favorite for most businesses because it gives you two factors to act on with course corrections: unit sales, or price.
• Service units : Even though services don’t sell physical units, most sell billable units, such as billable hours for lawyers and accountants, or trips for transportations services, engagements for consultants, and so forth.
• Recurring charges : Subscriptions. For each month or year, it has to forecast new signups, existing monthly charges, and cancellations. Estimates depend on both new signups and cancellations, which is often called “churn.”
• Revenue only : For those who prefer to forecast revenue by the stream as just the money, without the extra information of breaking it into units and prices.

Most sales forecast rows are simple math

For a business plan, I recommend you make your sales forecast a detailed look at the next 12 months and then broadly cover two years after that. Here’s how to approach each method of line-by-line forecasting.

Start with units if you can

For unit sales, start by forecasting units month by month, as shown here below for the new bike’s line of sales in the bicycle shop plan:

I recommend looking at the visual as you forecast the units because most of us can see trends easier when we look at the line, as shown in the illustration, rather than just the numbers. You can also see the numbers in the forecast near the bottom. The first year, fiscal 2021 in this forecast, is the sum of those months.

Estimate price assumptions

With a simple revenue-only assumption, you do one row of units as shown in the above illustration, and you are done. The units are dollars, or whatever other currency you are using in your forecast. In this example, the new bicycle product will be sold for an average of $550.00. 

That’s a simplifying assumption, taking the average price, not the detailed price for each brand or line. Garrett, the shop owner, uses his past results to determine his actual average price for the most recent year. Then he rounds that estimate and adds his own judgment and educated guess on how that will change. 

Multiply price times units

Multiplying units times the revenue per unit generates the sales forecast for this row. So for example the $18,150 shown for October of 2020 is the product of 33 units times $550 each. And the $21,450 shown for the next month is the product of 39 units times $550 each. 

Subscription models are more complicated

Lately, a lot of businesses offer their buyers subscriptions, such as monthly packages, traditional or online newspapers, software, and even streaming services. All of these give a business recurring revenues, which is a big advantage. 

For subscriptions, you normally estimate new subscriptions per month and canceled subscriptions per month, and leave a calculation for the actual subscriptions charged. That’s a more complicated method, which demands more details. 

For that, you can refer to detailed discussions on subscription forecasting in How to Forecast Sales for a Subscription Business .

• But how do you know what numbers to put into your sales forecast?

The math may be simple, yes, but this is predicting the future, and humans don’t do that well. So, don’t try to guess the future accurately for months in advance.

Instead, aim for making clear assumptions and understanding what drives your sales, such as web traffic and conversions, in one example, or the direct sales pipeline and leads, in another. Review results every month, and revise your forecast. Your educated guesses become more accurate over time.

Experience in the field is a huge advantage

In a normal ongoing business, the business owner has ample experience with past sales. They may not know accounting or technical forecasting, but they know their business. They are aware of changes in the market, their own business’s promotions, and other factors that business owners should know. They are comfortable making educated guesses.

If you don’t personally have the experience, try to find information and make guesses based on the experience of an employee,  your mentor , or others you’ve spoken within your field.

Use past results as a guide

Use results from the recent past if your business has them. Start a forecast by putting last year’s numbers into next year’s forecast, and then focus on what might be different this year from next.

Do you have new opportunities that will make sales grow? New marketing activities, promotions? Then increase the forecast. New competition, and new problems? Nobody wants to forecast decreasing sales, but if that’s likely, you need to deal with it by cutting costs or changing your focus.

Look for drivers

To forecast sales for a new restaurant, first, draw a map of tables and chairs and then estimate how many meals per mealtime at capacity, and in the beginning. It’s not a random number; it’s a matter of how many people come in.

To forecast sales for a new mobile app, you might get data from the Apple and Android mobile app stores about average downloads for different apps. A good web search might also reveal some anecdotal evidence, blog posts, and news stories, about the ramp-up of existing apps that were successful.

Get those numbers and think about how your case might be different. Maybe you drive downloads with a website, so you can predict traffic from past experience and then assume a percentage of web visitors who will download the app.

• Estimate direct costs

Direct costs are also called the cost of goods sold (COGS) and per-unit costs. Direct costs are important because they help calculate gross margin, which is used as a basis for comparison in financial benchmarks, and are an instant measure (sales less direct costs) of your underlying profitability.

For example, I know from benchmarks that an average sporting goods store makes a 34 percent gross margin. That means that they spend $66 on average to buy the goods they sell for $100.

Not all businesses have direct costs. Service businesses supposedly don’t have direct costs, so they have a gross margin of 100 percent. That may be true for some professionals like accountants and lawyers, but a lot of services do have direct costs. For example, taxis have gasoline and maintenance. So do airlines.

A normal sales forecast includes units, price per unit, sales, direct cost per unit, and direct costs. The math is simple, with the direct costs per unit related to total direct costs the same way price per unit relates to total sales.

Multiply the units projected for any time period by the unit direct costs, and that gives you total direct costs. And here too, assume this view is just a cut-out, it flows to the right. In this example, Garrett the shop owner projected the direct costs of new bikes based on the assumption of 49 percent of sales.

Given the unit forecast estimate, the calculation of units times direct costs produces the forecast shown in the illustration below for direct costs for that product. So therefore the projected direct costs for new bikes in October is $8,894, which is 49% of the projected sales for that month, $18,150.

• Never forecast in a vacuum

Never think of your sales forecast in a vacuum. It flows from the strategic action plans with their assumptions,  milestones , and metrics. Your marketing milestones affect your sales. Your business offering milestones affect your sales.

When you change milestones—and you will, because all business plans change—you should change your sales forecast to match.

• Timing matters

Your sales are supposed to refer to when the ownership changes hands (for products) or when the service is performed (for services). It isn’t a sale when it’s ordered, or promised, or even when it’s contracted.

With proper  accrual accounting , it is a sale even if it hasn’t been paid for. With so-called cash-based accounting, by the way, it isn’t a sale until it’s paid for. Accrual is better because it gives you a more accurate picture, unless you’re very small and do all your business, both buying and selling, with cash only.

I know that seems simple, but it’s surprising how many people decide to do something different. The penalty for doing things differently is that then you don’t match the standard, and the bankers, analysts, and investors can’t tell what you meant.

This goes for direct costs, too. The direct costs in your monthly  profit and loss statement  are supposed to be just the costs associated with that month’s sales. Please notice how, in the examples above, the direct costs for the sample bicycle store are linked to the actual unit sales.

• Live with your assumptions

Sales forecasting is not about accurately guessing the future. It’s about laying out your assumptions so you can manage changes effectively as sales and direct costs come out different from what you expected. Use this to adjust your sales forecast and improve your business by making course corrections to deal with what is working and what isn’t.

I believe that even if you do nothing else, by the time you use a sales forecast and review plan versus actual results every month, you are already managing with a business plan . You can’t review actual results without looking at what happened, why, and what to do next.

See why 1.2 million entrepreneurs have written their business plans with LivePlan

Tim Berry is the founder and chairman of Palo Alto Software , a co-founder of Borland International, and a recognized expert in business planning. He has an MBA from Stanford and degrees with honors from the University of Oregon and the University of Notre Dame. Today, Tim dedicates most of his time to blogging, teaching and evangelizing for business planning.

Table of Contents

• Forecasting isn’t about seeing into the future

Related Articles

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How to forecast personnel costs

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Balance sheet

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Break-even analysis

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Expense budget

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The Revenue Forecasting Guide and Best Forecasting Models

What is Revenue Forecasting?

Why is revenue forecasting important, create a realistic financial plan, anticipate a ramp-up in hires, the top 4 forecasting methods, straight-line forecasting method, moving average forecasting method, simple linear regression forecasting method, multiple linear regression forecasting method, the do’s and don’ts of revenue forecasting, do use data for your assumptions, don’t try to design the “ideal” forecast, do update your forecast frequently, don’t create your forecast all by yourself.

It all boils down to your business when it comes to revenue projections. Not only the future of your company but also the precise location, industry, and services you ultimately offer customers. You must create revenue predictions to evaluate your business's status going forward to establish an accurate budget equivalent to your company's annual strategy.

Revenue forecasting is the process of estimating future revenue based on past performance and current trends. Forecasting is necessary for any business plan because it provides direction for decision-making, including budgeting and resource allocation. Without accurate revenue projections, it would be difficult to make informed decisions about where to allocate resources to achieve desired. A revenue forecast, for example, might highlight where you're going at your current rate if you want to know how much money you'll make next month, quarter, or year.

Revenue forecasting is an essential tool for all businesses, regardless of size or industry.

There are several advantages to predicting your revenue. Revenue forecasting is all about putting your company in a position to face whatever the future may bring so that you're not caught off guard and can make the most informed decisions possible to develop your business.

Here are a few major reasons to forecast revenue.

Personal and business finances are both concerned with managing your money. Personal finance involves creating a budget based on your income. You know you can't spend more than $5,000 every month if you get paid $5,000 per month from your job. You can budget for everything from food to going out and other variable expenses as long as they are within your means.

However, a company's revenue is seldom consistent each month. Your income can vary depending on how much you sell, whether or not you have churning customers—if you're a subscription firm, and market conditions. It's tough to plan for daily operations like marketing or new expenditures like recruiting employees when you're not sure how much money you'll have coming in.

Forecasting allows you to bridge the gap between your projections and reality, particularly for operating costs. Your forecast provides a prediction of how much money you'll make in the following few months or years. This will help you forecast how much money you can set aside for marketing efforts, new employees, software purchases, and other spending that fluctuates over time.

I've already gone over new employees in the previous section, but it's worth mentioning it here. Hiring is distinctive because, unlike many other costs, it usually needs to be planned several months ahead, and your revenue significantly impacts your hiring choices.

When recruiting a new employee, you need to be sure that you'll be able to afford them long-term, not just in the near term. If your revenue forecast shows growth over the next year, you may feel more confident in being able to add members to your team.

While both are true, they aren't the whole picture. If your revenue projections drop or slow down, you may need to scale back on employee growth.

Discover both concepts, their importances and limitations as well as similarities and differences

The most common techniques financial analysts use to forecast a firm's future revenues, costs, and capital expenses are straight-line, moving average, simple linear regression, and multiple linear regression. While there are many different quantitative budget forecasting tools in use today, we'll focus on the top four methods: (1) straight line, (2) moving average, (3) simple linear regression," and (4) multiple linear regression.

When the growth rate remains consistent, this approach is frequently employed to get a simple picture of constant expansion at the same rate. It only uses basic arithmetic and past statistics. Ultimately, it gives predictions for future development that may help you with financial and budget goals.

An Example of Straight-Line Financial Forecasting

The growth rate of a restaurant chain has remained stable at 5% over the past three years. The business expects its expansion rate to continue at that level for the next two years. By adding 5% to this year's growth and 5% to the following year's and recording those results as the preceding year's growth plus one, the company may make reliable predictions about how many new workers it will need to hire in each of those years and how much additional payroll money they will require.

A moving average is a form of trend analysis that compares the current performance in shorter time periods to that of previous periods. It isn't utilized over longer durations, such as years, because it creates too much lag to be helpful in trend following.

Using this technique, an average of variables with significant movement, like stock prices, and values with frequent but slower changes, such as inventory levels during peak retail seasons, can be continuously updated.

In a nutshell, this strategy is used to look for underlying patterns that can be used to evaluate common financial measures such as revenues, earnings, sales growth, and stock prices. A downtrend is indicated by a dropping moving average, and a rising moving average shows an uptrend.

An Example of Moving Average Financial Forecasting

A retailer wants to figure out how much product if any, he needs to reorder from a wholesaler. Sales are doing well overall because it is the holiday season, but he needs to know which goods are rising in popularity. He produces a moving average for the week to tell him the trend and guide his inventory buy orders rather than trying to watch irregular upticks and declines in a particular product's sales each day or over a week.

The connection between a dependent and an independent variable is utilized to draw a trend line. An analysis using linear regression connects changes in an explanatory variable on the X-axis to changes in a dependent variable on the Y-axis. The relationship between the X and Y variables generates a graph line representing a trend that often swings upward or downward or remains stable.

An Example of Simple Linear Regression Financial Forecasting

Two factors crucial to every firm's success are sales and profits. If the trend line for sales (x-axis) and profits (y-axis) rises when used with simple linear regression, then everything is fine for the firm, and margins are robust. If sales are up while profits are down, something is wrong; perhaps there are increasing supply costs or tight margins. Despite this, if sales are down but profits are up, the product's value rises. This indicates that company costs/expenses have decreased and that the linear regression model is functioning well—when profits rise, margins improve as a percentage.

This method makes a forecast using more than two distinct variables. A model of the relationship between the main explanatory variables (parameters) and the dependent response variable is essentially created using much linear regression (MLR) (outcome).

An Example of Multiple Linear Regression

A trucking company executive wants to forecast gasoline prices for the following six months. The EIA Gasoline and Diesel Fuel Update, oil futures from a futures exchange, mileage from GPS fleet routing systems, traffic patterns from smart city open data platforms, and the number of trucks the company anticipates will be on the road during the period based on delivery orders are the independent variables used for this method. This list is provided for illustration reasons only; other factors may also impact the outcome.

In each scenario, all of the variables not only affect the outcome but are also independent of it. Based on the factors, this model makes predictions about the result, in this example, the anticipated gasoline prices for the time period.

Google Sheets FORECAST Function (+ Examples)

The Google Sheets FORECAST function predicts future values based on your data. Here’s how to use the FORECAST function step-by-step, with examples.

Let's look at some best practices for creating an accurate revenue forecast. Here are some dos and don'ts for revenue forecasting.

Data has probably been a recurring pattern in this article. Many entrepreneurs make the error of basing their income predictions on their most optimistic assumptions. The issue with that is that it may cause you to grossly overstate your sales figures, which might be disastrous for your company.

Making decisions based on those projections is just slightly worse than overestimating your revenue. Data is your friend!

There is no flawless forecast. It's impossible to anticipate precisely how much revenue you'll have in three months, let alone 1-2 years from now, even if you go over every detail with a fine-tooth comb.

Anything could happen between now and three months from now. Your entire industry could be affected by the emergence of a new rival. If your product becomes popular, you can experience an increase in sales. You run the risk of having prolonged flat growth. The idea is that commerce is fluid.

Revenue projections aren't intended to be accurate future forecasts. They're designed to provide you with direction so you can decide more wisely.

It is not the best use of your time to attempt to forecast every cent you make during the upcoming quarter over days or weeks. Instead, make every effort to make your prognosis as accurate as possible and then make changes as necessary.

The revenue prediction you create at the beginning of the year shouldn't be abandoned to gather dust.

You should adjust your revenue prediction as circumstances in your company change.

For example, your original prediction may have anticipated the execution of 3–4 targeted marketing efforts throughout the year. However, after conducting two, you might alter based on the outcomes. Your revenue prediction will be affected by anything, including trying a new channel, improving the conversion of your advertising, and lowering your performance goals.

Your business model will determine how frequently you should update your revenue forecast. While a more established business might revise its projection every three months, an early-stage startup conducting extensive testing to learn the ropes might need to make revisions every month.

The most crucial thing is to avoid treating your revenue prediction as a static record. It can be a helpful tool for progress if you frequently monitor and analyze it.

Revenue forecasting includes input from several people unless you're a one-person company.

You can learn about marketing's upcoming initiatives from them to generate leads and sales. You may learn more about the funnel and sales velocity from sales. You can get advice and information from everyone active in bringing in and keeping customers. If you're not as "in the weeds" with sales and marketing on a daily basis, this can be useful.

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A Comprehensive Guide: How to Forecast Revenues for Your Business Plan

Introduction:.

Forecasting revenues is a crucial aspect of developing a business plan. Accurate revenue projections not only attract investors but also provide a roadmap for sustainable growth and financial success. This article will provide you with a step-by-step guide to help you forecast revenues effectively. By following these strategies and best practices, you can make informed decisions, set realistic goals, and build a solid foundation for your business.

I. Understand Your Market and Customers:

Before you can forecast revenues, it's essential to gain a deep understanding of your target market and customers. Conduct market research to analyze trends, demand, and competition. Identify your target audience's needs, preferences, and purchasing behavior. This information will help you estimate the potential market size and assess the revenue potential for your products or services.

II. Break Down Revenue Streams:

Next, break down your revenue streams into specific categories. For example, if you have multiple products or services, create separate revenue streams for each. Consider the pricing structure, sales volume, and average transaction value for each category. This breakdown enables you to analyze and forecast revenues with greater accuracy.

III. Utilize Historical Data:

If you have been in business for some time, historical data can serve as a valuable resource for revenue forecasting. Analyze past financial records, sales data, and customer trends. Identify patterns, seasonal variations, and growth rates. Use this information as a baseline to project future revenues, accounting for any market changes or new product launches.

IV. Determine Key Assumptions:

Forecasting revenues involves making certain assumptions about your business and the market. Identify the key factors that will impact your revenue projections, such as market growth rates, pricing changes, or shifts in consumer behavior. Document these assumptions clearly, ensuring they are realistic and supported by data and market trends.

V. Use Multiple Forecasting Methods:

To enhance the accuracy of your revenue projections, employ various forecasting methods. Here are a few commonly used techniques:

a) Top-Down Approach:

Start with the overall market size, estimate your market share, and calculate revenues based on this share.

b) Bottom-Up Approach:

Begin with individual product or service sales projections and aggregate them to obtain total revenue estimates.

c) Time-Series Analysis:

Analyze historical sales data to identify patterns, trends, and seasonality. Apply statistical methods like moving averages or exponential smoothing to project future revenues.

d) Market Research and Surveys:

Conduct market surveys or customer interviews to gather insights on demand, price sensitivity, and purchasing behavior. Use this data to estimate market size and forecast revenues.

VI. Account for External Factors:

Consider external factors that could impact your revenue forecast, such as economic conditions, industry trends, regulatory changes, or technological advancements. Conduct a thorough analysis of these factors and assess their potential influence on your business. Adjust your revenue projections accordingly to reflect any anticipated challenges or opportunities.

VII. Monitor and Review:

Once you have developed your revenue forecast, it is crucial to continuously monitor and review its accuracy. Regularly compare your projections with actual revenue performance and adjust your forecast as needed. Use key performance indicators (KPIs) to track your progress and make informed decisions to drive revenue growth.

By following the steps outlined in this guide, you can enhance the accuracy and reliability of your revenue forecast for your business plan.

Here are a few additional tips to keep in mind:

Sensitivity Analysis:

Perform a sensitivity analysis by testing your revenue projections against various scenarios. This will help you understand the potential impact of changes in key variables such as pricing, market share, or economic conditions. It provides a more comprehensive view of the range of possible outcomes.

Seek Expert Advice:

If you're unsure about certain aspects of revenue forecasting or lack expertise in financial analysis, consider consulting with us. At businessplanprovider.com , we have professionals such as accountants, financial advisors, and industry experts. Their insights and guidance can add credibility to your revenue forecast.

Regularly Update Your Forecast:

Revenue forecasting is not a one-time exercise. As your business grows and market conditions evolve, it's crucial to update your forecast regularly. Review and revise your projections quarterly or annually, taking into account any new information or changes in your business environment.

Validate with Market Feedback:

Don't rely solely on internal data or assumptions. Seek feedback from potential customers, industry experts, or mentors to validate your revenue projections. Incorporate their insights into your forecast, as they can provide valuable perspectives and highlight blind spots.

Be Realistic and Conservative:

While it's important to set ambitious goals, it's equally crucial to be realistic and conservative in your revenue forecast. Investors and stakeholders appreciate a forecast that demonstrates a clear understanding of potential challenges and uncertainties. Avoid overestimating revenues, as it may lead to unrealistic expectations and undermine your credibility.

Remember that revenue forecasting is both an art and a science. It requires a blend of data analysis, market understanding, and informed decision-making. Be prepared to adjust your forecast as new information becomes available or market dynamics change.

Conclusion:

Forecasting revenues for your business plan requires a systematic and data-driven approach. By understanding your market and customers, utilizing historical data, making key assumptions, employing multiple forecasting methods, accounting for external factors, and continuously monitoring and reviewing your forecast, you can develop realistic revenue projections. Remember, revenue forecasting is an ongoing process that should be regularly updated to align with market changes and business growth. By accurately forecasting revenues, you can make informed strategies, allocate resources effectively, and attract investors and stakeholders who are confident in the potential of your business.

A well-structured and thoughtfully prepared revenue forecast will not only guide your business planning and decision-making but also demonstrate your professionalism and strategic thinking to potential investors. By following the steps and best practices outlined in this guide, you can develop a robust revenue forecast that will support the growth and success of your business. 

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Run » finance, how to create a financial forecast for a startup business plan.

Financial forecasting allows you to measure the progress of your new business by benchmarking performance against anticipated sales and costs.

When starting a new business, a financial forecast is an important tool for recruiting investors as well as for budgeting for your first months of operating. A financial forecast is used to predict the cash flow necessary to operate the company day-to-day and cover financial liabilities.

Many lenders and investors ask for a financial forecast as part of a business plan; however, with no sales under your belt, it can be tricky to estimate how much money you will need to cover your expenses. Here’s how to begin creating a financial forecast for a new business.

[Read more: Startup 2021: Business Plan Financials ]

Start with a sales forecast

A sales forecast attempts to predict what your monthly sales will be for up to 18 months after launching your business. Creating a sales forecast without any past results is a little difficult. In this case, many entrepreneurs make their predictions using industry trends, market analysis demonstrating the population of potential customers and consumer trends. A sales forecast shows investors and lenders that you have a solid understanding of your target market and a clear vision of who will buy your product or service.

A sales forecast typically breaks down monthly sales by unit and price point. Beyond year two of being in business, the sales forecast can be shown quarterly, instead of monthly. Most financial lenders and investors like to see a three-year sales forecast as part of your startup business plan.

Lower fixed costs mean less risk, which might be theoretical in business schools but are very concrete when you have rent and payroll checks to sign.

Tim Berry, president and founder of Palo Alto Software

Create an expenses budget

An expenses budget forecasts how much you anticipate spending during the first years of operating. This includes both your overhead costs and operating expenses — any financial spending that you anticipate during the course of running your business.

Most experts recommend breaking down your expenses forecast by fixed and variable costs. Fixed costs are things such as rent and payroll, while variable costs change depending on demand and sales — advertising and promotional expenses, for instance. Breaking down costs into these two categories can help you better budget and improve your profitability.

"Lower fixed costs mean less risk, which might be theoretical in business schools but are very concrete when you have rent and payroll checks to sign," Tim Berry, president and founder of Palo Alto Software, told Inc . "Most of your variable costs are in those direct costs that belong in your sales forecast, but there are also some variable expenses, like ads and rebates and such."

Project your break-even point

Together, your expenses budget and sales forecast paints a picture of your profitability. Your break-even projection is the date at which you believe your business will become profitable — when more money is earned than spent. Very few businesses are profitable overnight or even in their first year. Most businesses take two to three years to be profitable, but others take far longer: Tesla , for instance, took 18 years to see its first full-year profit.

Lenders and investors will be interested in your break-even point as a projection of when they can begin to recoup their investment. Likewise, your CFO or operations manager can make better decisions after measuring the company’s results against its forecasts.

[Read more: ​​ Startup 2021: Writing a Business Plan? Here’s How to Do It, Step by Step ]

Develop a cash flow projection

A cash flow statement (or projection, for a new business) shows the flow of dollars moving in and out of the business. This is based on the sales forecast, your balance sheet and other assumptions you’ve used to create your expenses projection.

“If you are starting a new business and do not have these historical financial statements, you start by projecting a cash-flow statement broken down into 12 months,” wrote Inc . The cash flow statement will include projected cash flows from operating, investing and financing your business activities.

Keep in mind that most business plans involve developing specific financial documents: income statements, pro formas and a balance sheet, for instance. These documents may be required by investors or lenders; financial projections can help inform the development of those statements and guide your business as it grows.

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7 Financial Forecasting Methods to Predict Business Performance

• 21 Jun 2022

Much of accounting involves evaluating past performance. Financial results demonstrate business success to both shareholders and the public. Planning and preparing for the future, however, is just as important.

Shareholders must be reassured that a business has been, and will continue to be, successful. This requires financial forecasting.

Here's an overview of how to use pro forma statements to conduct financial forecasting, along with seven methods you can leverage to predict a business's future performance.

What Is Financial Forecasting?

Financial forecasting is predicting a company’s financial future by examining historical performance data, such as revenue, cash flow, expenses, or sales. This involves guesswork and assumptions, as many unforeseen factors can influence business performance.

Financial forecasting is important because it informs business decision-making regarding hiring, budgeting, predicting revenue, and strategic planning . It also helps you maintain a forward-focused mindset.

Each financial forecast plays a major role in determining how much attention is given to individual expense items. For example, if you forecast high-level trends for general planning purposes, you can rely more on broad assumptions than specific details. However, if your forecast is concerned with a business’s future, such as a pending merger or acquisition, it's important to be thorough and detailed.

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Forecasting with Pro Forma Statements

A common type of forecasting in financial accounting involves using pro forma statements . Pro forma statements focus on a business's future reports, which are highly dependent on assumptions made during preparation⁠, such as expected market conditions.

Because the term "pro forma" refers to projections or forecasts, pro forma statements apply to any financial document, including:

• Income statements
• Balance sheets
• Cash flow statements

These statements serve both internal and external purposes. Internally, you can use them for strategic planning. Identifying future revenues and expenses can greatly impact business decisions related to hiring and budgeting. Pro forma statements can also inform endeavors by creating multiple statements and interchanging variables to conduct side-by-side comparisons of potential outcomes.

Externally, pro forma statements can demonstrate the risk of investing in a business. While this is an effective form of forecasting, investors should know that pro forma statements don't typically comply with generally accepted accounting principles (GAAP) . This is because pro forma statements don't include one-time expenses—such as equipment purchases or company relocations—which allows for greater accuracy because those expenses don't reflect a company’s ongoing operations.

7 Financial Forecasting Methods

Pro forma statements are incredibly valuable when forecasting revenue, expenses, and sales. These findings are often further supported by one of seven financial forecasting methods that determine future income and growth rates.

There are two primary categories of forecasting: quantitative and qualitative.

Quantitative Methods

When producing accurate forecasts, business leaders typically turn to quantitative forecasts , or assumptions about the future based on historical data.

1. Percent of Sales

Internal pro forma statements are often created using percent of sales forecasting . This method calculates future metrics of financial line items as a percentage of sales. For example, the cost of goods sold is likely to increase proportionally with sales; therefore, it’s logical to apply the same growth rate estimate to each.

To forecast the percent of sales, examine the percentage of each account’s historical profits related to sales. To calculate this, divide each account by its sales, assuming the numbers will remain steady. For example, if the cost of goods sold has historically been 30 percent of sales, assume that trend will continue.

2. Straight Line

The straight-line method assumes a company's historical growth rate will remain constant. Forecasting future revenue involves multiplying a company’s previous year's revenue by its growth rate. For example, if the previous year's growth rate was 12 percent, straight-line forecasting assumes it'll continue to grow by 12 percent next year.

Although straight-line forecasting is an excellent starting point, it doesn't account for market fluctuations or supply chain issues.

3. Moving Average

Moving average involves taking the average—or weighted average—of previous periods⁠ to forecast the future. This method involves more closely examining a business’s high or low demands, so it’s often beneficial for short-term forecasting. For example, you can use it to forecast next month’s sales by averaging the previous quarter.

Moving average forecasting can help estimate several metrics. While it’s most commonly applied to future stock prices, it’s also used to estimate future revenue.

To calculate a moving average, use the following formula:

A1 + A2 + A3 … / N

Formula breakdown:

A = Average for a period

N = Total number of periods

Using weighted averages to emphasize recent periods can increase the accuracy of moving average forecasts.

4. Simple Linear Regression

Simple linear regression forecasts metrics based on a relationship between two variables⁠: dependent and independent. The dependent variable represents the forecasted amount, while the independent variable is the factor that influences the dependent variable.

The equation for simple linear regression is:

Y ⁠ = Dependent variable⁠ (the forecasted number)

B = Regression line's slope

X = Independent variable

A = Y-intercept

5. Multiple Linear Regression

If two or more variables directly impact a company's performance, business leaders might turn to multiple linear regression . This allows for a more accurate forecast, as it accounts for several variables that ultimately influence performance.

To forecast using multiple linear regression, a linear relationship must exist between the dependent and independent variables. Additionally, the independent variables can’t be so closely correlated that it’s impossible to tell which impacts the dependent variable.

Qualitative Methods

When it comes to forecasting, numbers don't always tell the whole story. There are additional factors that influence performance and can't be quantified. Qualitative forecasting relies on experts’ knowledge and experience to predict performance rather than historical numerical data.

These forecasting methods are often called into question, as they're more subjective than quantitative methods. Yet, they can provide valuable insight into forecasts and account for factors that can’t be predicted using historical data.

6. Delphi Method

The Delphi method of forecasting involves consulting experts who analyze market conditions to predict a company's performance.

A facilitator reaches out to those experts with questionnaires, requesting forecasts of business performance based on their experience and knowledge. The facilitator then compiles their analyses and sends them to other experts for comments. The goal is to continue circulating them until a consensus is reached.

7. Market Research

Market research is essential for organizational planning. It helps business leaders obtain a holistic market view based on competition, fluctuating conditions, and consumer patterns. It’s also critical for startups when historical data isn’t available. New businesses can benefit from financial forecasting because it’s essential for recruiting investors and budgeting during the first few months of operation.

When conducting market research, begin with a hypothesis and determine what methods are needed. Sending out consumer surveys is an excellent way to better understand consumer behavior when you don’t have numerical data to inform decisions.

Improve Your Forecasting Skills

Financial forecasting is never a guarantee, but it’s critical for decision-making. Regardless of your business’s industry or stage, it’s important to maintain a forward-thinking mindset—learning from past patterns is an excellent way to plan for the future.

If you’re interested in further exploring financial forecasting and its role in business, consider taking an online course, such as Financial Accounting , to discover how to use it alongside other financial tools to shape your business.

Do you want to take your financial accounting skills to the next level? Consider enrolling in Financial Accounting —one of three courses comprising our Credential of Readiness (CORe) program —to learn how to use financial principles to inform business decisions. Not sure which course is right for you? Download our free flowchart .

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Best Revenue Forecasting Models: Types And Examples

by Rahul Kumar

Most revenue and sales leaders spend a lot of time asking their team questions such as - are we achieving the revenue target this quarter? Or, should we increase our sales reps to meet goals? That's important because getting to know what will happen in future helps make informed decisions. Revenue forecasting helps resolve most of the questions. There are various revenue forecast methods that provide accurate projected revenues for upcoming months and quarters. These also provide insights that help you take necessary action towards constant growth. Here's what we'll cover in this article:

• What is Revenue Forecasting?
• Importance of Revenue Forecasting Models
• 4 Revenue Forecasting Models for Accurate Predictions

Revenue Forecasting Techniques

Ai-assisted revenue forecasting.

• Team Selling and Overlay Organizations
• How Aviso Helps in Your Revenue Forecasting?

What Is Revenue Forecasting?

Let’s take a look at revenue forecasting, or the estimated projection of the amount generated by your overall business operations over a specific period of time. So, revenue forecasting is the process of computing the revenue of your business, either monthly, quarterly or annually. For example, if you want to know the revenue your business will generate in the next month, a forecasted revenue will tell you the estimated numbers. It is not a guesswork. Forecasting the revenue is based on the existing state of your business as well as your historical performance. A revenue forecast involves looking at your entire business, rather than only activities and quotas executed by your sales team. Compared to a sales forecasts , revenue forecasts tend to be more holistic. 

Importance Of Revenue Forecasting Models

• Forecast revenue is important for all businesses, as it helps strategize how quickly or how much you want to scale your business. However, it's also one of the most difficult things to estimate. Revenue forecasting models help us: View the future expansion of the business in terms of revenue and expenses.
• Make critical decisions related to the staffing and revenue operations of the business.
• Move beyond personal guesswork towards quantitative analysis to be more accurate.
• Expand the business into new markets and set revenue goals for upcoming months.

4 Revenue Forecasting Models For Accurate Predictions

Revenue forecasting models (or methods) for accurate revenue predictions can either be quantitative or qualitative. Quantitative methods rely on measurable data, while qualitative methods rely on unmeasurable data. Also, revenue forecasting models aren't foolproof as they consider historical performance while showing the road ahead. But, if done properly, forecasting is mostly reliable. Let’s understand the methods with the help of revenue forecasting examples. Below we've explained four main types of revenue forecasting methods:

Straight Line Forecast Method:

This method requires only basic mathematics and hence very easy to put in place. It provides fair estimates of what to expect in your future financial growth. It considers your historical revenue growth rate to measure future growth.

Straight Line Forecasting Method For instance, if your business grew by 10 percent in the last 3 years, then using this method you can assume a similar growth rate in the next 2-3 years.

Moving Average Forecast Method:

A moving average calculates the average performance of a metric within shorter time periods, such as days, months, and quarters. It's not used for long time frames, such as years, as it develops too much lag. This method is mostly used to estimate revenues, sales growth, profits, and other similar financial metrics.

Moving Average Forecasting Method - This method is helpful to determine underlying patterns. A growing moving average shows an upward trend, while a declining moving average signifies a downward trend.

Time Series Forecast Method:

Time Series Forecasting Method - For instance, this type of forecasting can use revenue growth from past months to update performance in the future months based on external trends.

Linear Regression Forecast Method

Linear Regression Forecasting Method- For instance, let's take sales and profits as two variables. If sales grow, then profits also increase, thus creating a linear regression depicting a positive correlation between the two variables. But if sales grow and profits reduce, it indicates challenges such as growing expenses.

Also Read: How To Accelerate Revenue Process?

Successful businesses have shown that forecast accuracy is enhanced by using certain revenue forecasting tips and techniques. Here are three fundamental techniques that can enhance your revenue forecasts.

Forecast for Each Product at the Right Level:

Most revenue forecasts consider the expected market growth rate along with current year sales. They also consider factors such as seasonality trends, number of products sold, and average selling price. But, some factors will always be more important than others, so they should be considered at a more granular level compared to others. For instance, the forecast of a fast-moving Product-A would always be different from that of a slow-moving Product-B.

Evaluate Sales Channel Productivity:

Revenue forecasts should always coordinate with your sales resources. Always check with your sales reps on how much they can achieve, and how fast they can convert leads into customers. Especially in B2B markets, sales quota planning is critical to forecast revenue. That's because factors such as the number of prospective customers in the pipeline and closing rates are important for revenue projections.

Cross Check Revenue Forecasts with Market Data:

Revenue leaders discuss a lot about how much revenue is required to cover all expenses while making significant profit. Such discussions should always be based on actual market data. Always do a top-down check of all revenue forecasts against the macro view of the market data. Most modern AI-assisted revenue forecasting tools take care of these tips and techniques for you. Below we’ll discuss what we mean by AI-assisted revenue predictions.

Revenue Forecast Formula

You can derive the forecasted revenue by multiplying your product's average selling price (for upcoming periods) with the expected number of product units sold. You can then make a decision to announce the forecasted revenue numbers during your investor conferences and financial meetings.

Increasingly we are seeing companies wanting to have both a sales forecast and a revenue forecast. This is all nice to say, but the issue remains that more than 70% of all sales forecasts are wrong. To get around the problem of reps and managers not committing to early-stage deals, machine learning (ML) and predictive revenue analytics (part of Artificial Intelligence or AI) are increasingly being used as objective solutions to faulty forecasts. Using revenue forecasting AI software to “score” deals has been around for more than three years, so there has been time to assess the impact on customers and to judge what are the more appropriate use cases. There are two major components to predictive deal scoring:

Is this a good opportunity? — Is this a good fit based on product or solution, experience in this type of account or size of deal?

Will this close within the desired time range? — A measure of deal management. Going back to the different components of the forecast process, we can use that same list of component parts of the sales forecast, but this time, we can show where AI can be used to replace judgement-driven adjustments with adjustments based on data and the historical record. Here, AI helps transform your sales forecast into one that can apply to your company as a whole.

So the revenue forecast now looks like the following: Committed deals where reps are confident to close;

• Judgement changes to forecast categories such as “commit”, “best case” or “worst case”;
• Computation of amount adjustment based on historical variation depending on proximity to the projected close date;
• Computation for “blue birds” — deals that are not currently in pipeline but will open and close within the quarter;
• Yield calculation used to compute “cats and dogs”, smaller deals that are not managed at the deal level.

These numbers should also be broken out by product, support and services if the company in question has non-recurring revenue such as implementation services included in the opportunity amount.

Team Selling And Overlay Organizations

Team selling occurs where the opportunity amount is split by percentage across several or more individuals and may add to greater than 100%. Overlay organizations are those in which product specialists also own quota for their products or services within a larger opportunity. For example, for global sales accounts, there could be several salespersons working on the account (say, in North America and EMEA). The opportunity amount is shared between these reps with potentially the share or split being greater than 100%. For a sales forecast driven by quota attainment, the shared amount is applied up until there is a common management level, at which point the forecast amount needs to be adjusted down to reflect only 100% of the amount. In this instance, the sales forecast serves a different purpose than a revenue forecast would.

How Aviso Helps in Your Revenue Forecast?

Aviso’s approach to revenue forecasting is unique and comprehensive. Our platform is super flexible and scalable to configure any complex customer hierarchies. Our AI engine’s architecture not only predicts but also enables you to generate account and owner insights along with forecast explanations. Our revenue forecasting software helps derive accurate revenue forecasts for startups, small businesses, and large companies, as well as other unique businesses operating within different SaaS industries. Learn more about Aviso AI platform or contact us today to see how we can help you and your team achieve accurate revenue forecasts.

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3 Revenue Forecasting Models for Accurate Revenue Predictions

Jerusha Songate on April 27, 2021

Table of Contents

More baremetrics articles.

Revenue forecasting models help you plan your next phase of growth. Financial models also help you plan how to pivot in response to certain scenarios, like a sudden drop-off in sales or an unexpected surge in demand.

The Baremetrics article  “The SaaS Financial Model You’ll Actually Use”  describes how to create financial models you can use to plan out your next steps—even when your total revenue falls short and things don’t go as expected.

Let’s take a deep dive into why accurate forecasting is an essential business tool, and how you can get started using it to predict future sales. We’ll review the forecasting process and three specific forecasting techniques that may offer the insight you need for revenue projections.

Ready to go to the next level with your forecasting metrics? Sign up for a free trial of Baremetrics today!

What is Revenue Forecasting?

Revenue forecasting is predicting how much revenue you expect to make over a certain period. Those periods range from a quarter (3 months) to a full year.

This process is not just a guess about how much money your business will generate, but some experts admit that, for a startup, revenue forecasting is  more of an art than a science .

Other commentators distinguish between  judgment forecasting —based on intuition and anecdotal evidence—and quantitative forecasting—based on current and historical data. Ideally, data drives your revenue forecasts.

Want to make the most out of the sales data your company collects? Sign up for a Baremetrics free trial today!

Importance of Revenue Forecasting Models

Revenue forecasting models offer a method for predicting revenue. They allow you to move beyond personal judgment—your “best guess” of the success of your sales process—toward quantitative analysis.

Of course, hard data isn’t always possible. If it’s your business’s first year, you may have to rely on intuitive forecasting. Often that comes from your salespeople’s assessment of the likelihood that leads will pan out.

Forecasting models are important because they drive decision-making in your business. They influence your decisions to hire more people, expand into new markets, and set goals for upcoming quarters.

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Three Methods of Revenue and Sales Forecasting

Here are three ways to rely on proven methods of predicting revenue, and develop a picture of your company’s success.

1. Opportunity stage forecasting

This method predicts revenue based on your current prospects. It uses historical data to add a numerical value to each prospect given their stage in the sales journey. The further they are down your sales pipeline, the greater the chances the deal will close.

As an example, assume that over the past two quarters, 60 percent of customers who reached the stage of signing up for a free trial eventually purchased a subscription.

You can use this forecasting method to predict that 60 percent of prospects currently enrolled in a free trial will subscribe. Using this figure, you can forecast your revenue.

In theory, you can predict your revenue based on any opportunity stage. But the further down in the funnel they are, the more accurate the forecast becomes. That’s because you know more about these potential clients, enough to predict future revenue.

There are potential flaws in this method. It does not consider the  age of each prospect . An older lead, or someone who lingers before reaching the stage of the free trial, is perhaps less likely to commit than one who goes through the early stages quickly. Opportunity stage forecasting treats both prospects equally.

2. Test market analysis forecasting

This method helps you to predict revenue based on the projected interest in a product. The process involves rolling out a product or service to a test market and reviewing the results. This is a particularly valuable method for startups who may not have historical data to draw from.

An example of a test market can be a rollout to a small segment of consumers or businesses. Crowdfunding campaigns, such as Kickstarter or Indiegogo, are one form of test marketing.

This method also has its drawbacks. There is no guarantee your product will perform as well in an open market as it did in your test market. Before using this method, it is wise to use additional data that considers competition in your industry and the buying habits of your target consumers.

3. Historical forecasting

This is a straightforward revenue forecasting model.  Historical forecasting  assumes that whatever has happened in the past will continue to happen.

As an example, say your revenue was $100,000 in January. Historical forecasting assumes revenue will also reach $100,000 in February and subsequent months.

There are some drawbacks to this method as well. Although it draws on historical reality, it assumes a lot about the future. First, that sales are steady and  monthly recurring revenue doesn’t contract or expand. They don’t go down or go up. Second, it does not take into account natural fluctuations, like seasonality, changes in customer demand, or growth as the result of your sales team’s efforts.

There are ways to modify this method to make it more accurate. You can look at trends over the past 6 months to a year. This should show a moving average that considers seasonal changes and  revenue growth  rate.

You can then change your sales forecast projections accordingly by starting with average sales rates that are a more accurate sales picture for your business.

The month-by-month comparison may serve as a benchmark rather than as a straightforward method that ensures forecast accuracy.

How Baremetrics Helps!

Baremetrics uses real data points from your business to help you make smart predictions.

The forecasting tool  is your go-to resource for revenue predictions you can rely on for budgeting and operational decisions.

Baremetrics analytics and insights give you access to powerful data sets about your customers that you can use to create financial models  to build your business.

To learn more about Baremetrics , sign up for a free trial today.

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What is Revenue Forecast? (Explained With Examples)

Oct 11, 2023

Revenue forecast is an essential financial management tool that helps organizations predict and plan for their future income. It provides valuable insight into a company's expected sales, enabling them to make informed decisions regarding business strategies, budgeting, and investment opportunities. In this article, we will delve deeper into the concept of revenue forecast, exploring its definition, advantages, and disadvantages, as well as present real-life examples from various contexts. By the end, you will have a comprehensive understanding of revenue forecast and its significance in different industries.

1. What is Revenue Forecast?

Revenue forecast refers to the process of estimating and projecting future sales or income for a specific period. It is a financial planning tool that assists companies in setting realistic revenue goals and devising strategies to achieve them. By predicting future revenues, organizations can make informed decisions about resource allocation, budgeting, and growth strategies. Revenue forecast plays a crucial role in the overall financial planning and decision-making processes of businesses.

1.1 - Definition of Revenue Forecast

The definition of revenue forecast is the prediction or estimation of an organization's future income or sales for a given period. It involves analyzing historical data, market trends, customer behavior, and industry factors to project future revenue generation. Revenue forecast can be done for different timeframes, such as monthly, quarterly, or annually, depending on the organization's needs and objectives.

1.2 - Advantages of Revenue Forecast

Implementing revenue forecast in a company offers several advantages. Firstly, it aids in setting achievable sales targets and goals, providing focus and direction to the organization. By having a clear revenue forecast, companies can align their strategies and resources accordingly, ensuring efficient utilization of available assets.

Secondly, revenue forecast enables better financial planning and budgeting. It helps organizations anticipate future cash flow, allowing them to manage expenses, investments, and debt more effectively. With accurate revenue forecasts, companies can make informed decisions about resource allocation and avoid potential financial pitfalls.

Additionally, revenue forecast helps identify potential revenue growth opportunities and market trends. By analyzing historical data and market factors, organizations can identify patterns and future growth areas. This insight enables them to adapt their strategies, develop new products or services, and target specific market segments for increased revenue generation.

1.3 - Disadvantages of Revenue Forecast

While revenue forecast offers numerous benefits, it also has some limitations and potential disadvantages. One notable challenge is the reliance on accurate data and assumptions. Revenue forecasts heavily depend on the quality of the input data and the validity of the underlying assumptions. Inaccurate or incomplete data can lead to unreliable forecasts, which may undermine the effectiveness of financial planning and decision-making.

Moreover, revenue forecast assumes a static environment and linear sales growth. In reality, markets are dynamic and subject to various external factors. Economic changes, shifts in consumer behavior, and competitive landscapes can significantly impact revenue projections. Organizations must continuously monitor and refine their revenue forecast to account for these dynamic factors and adjust their strategies accordingly.

However, despite these challenges, revenue forecast remains a valuable tool for businesses. It provides a structured approach to planning and decision-making, helping organizations navigate the complexities of the market and optimize their revenue generation. By leveraging accurate and comprehensive revenue forecasts, companies can position themselves for success and sustainable growth in the ever-changing business landscape.

2. Examples of Revenue Forecast

Now that we have explored the concept of revenue forecast, let's dive into real-life examples from different contexts to better understand its application.

Revenue forecast plays a crucial role in various industries and sectors, helping businesses make informed decisions about their financial planning, resource allocation, and growth strategies. Let's take a closer look at some specific examples:

2.1 - Example in a Startup Context

A startup company, looking to raise funds or attract investors, needs to present a compelling revenue forecast. By analyzing market research data, competitor analysis, and their own product/service offering, startups can estimate future sales growth. They can showcase their revenue forecast to demonstrate potential profitability and market demand, making their business more attractive to investors.

For instance, a tech startup developing a new mobile application might analyze user trends and market demand to forecast the revenue potential of their app. By considering factors such as the target market size, pricing strategy, and projected user adoption rate, they can create a revenue forecast that highlights the growth trajectory of their business.

2.2 - Example in a Consulting Context

Consulting firms often use revenue forecasts to plan their project pipeline, set revenue targets, and allocate resources. By analyzing historical project data, consulting firms can estimate future project opportunities and revenue generation. This enables them to optimize resource allocation, plan staffing requirements, and ensure a steady stream of revenue.

For example, a management consulting firm might analyze past client engagements, industry trends, and market conditions to forecast the revenue potential of future projects. By considering factors such as project duration, client demand, and pricing models, they can create a revenue forecast that guides their business decisions and resource allocation.

2.3 - Example in a Digital Marketing Agency Context

A digital marketing agency can utilize revenue forecasts to plan and execute marketing campaigns for their clients. By analyzing historical campaign performance and market trends, they can estimate the potential revenue generated from different marketing activities. This helps them allocate budget effectively, prioritize marketing strategies, and ensure their clients achieve their desired revenue goals.

For instance, a digital marketing agency working with an e-commerce client might analyze previous campaign data, customer behavior, and market insights to forecast the revenue impact of various marketing channels. By considering factors such as conversion rates, customer acquisition costs, and lifetime customer value, they can create a revenue forecast that guides their campaign planning and optimization efforts.

2.4 - Example with Analogies

To drive home the concept of revenue forecast, let's consider an analogy. Imagine you are planning a road trip. Before embarking on the journey, you would estimate the distance, approximate travel time, and potential expenses. This estimation allows you to plan your stops, budget for fuel, and ensure a smooth and enjoyable trip. Similarly, revenue forecast acts as a roadmap for businesses. It helps them estimate future income, plan their resources and investments, and navigate their path towards sustainable growth.

By incorporating revenue forecast into their financial management practices, businesses can gain a solid foundation for achieving sustainable growth and success. It enables organizations to predict and plan for future income, ensuring they make informed decisions about their financial strategies.

With a well-executed revenue forecast, businesses can confidently allocate resources, set realistic goals, and adapt their strategies based on market conditions. It provides them with a roadmap to success, allowing them to navigate potential challenges and seize opportunities for growth.

As we have seen through the examples provided, revenue forecast is a versatile tool that can be applied across various industries and contexts. Its importance cannot be overstated, as it empowers businesses to make data-driven decisions and stay ahead in today's competitive landscape.

So, whether you are a startup seeking investment, a consulting firm planning projects, or a digital marketing agency strategizing campaigns, revenue forecast is a valuable tool that can guide your path to success.

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Plan Projections

ideas to numbers .. simple financial projections

Home > Financial Projections > How to Forecast Revenue

How to Forecast Revenue

Revenue projections for your business plan.

Revenue is shown on the income statement and is the money a business gets from selling its goods and services. Forecast revenue is the starting point for using the financial projections template. Revenue is sometimes referred to as sales or turnover.

How to Start the Revenue Projection

To forecast revenue is usually the most difficult part of the business financial projections process. There are numerous ways of finding information to start your revenue projection, a few of which are listed below. Our blog post on sale projections , goes into these in more detail.

• Historical sales data.
• Information from similar businesses, trade associations, company accounts.
• Market data and statistics
• Government demographic data and average spend data
• Business capacity

Methods of Sales Forecasting

There are two main methods of forecasting sales, unit based and non unit based.

Forecast Revenue Using the Unit Sales Method

Most businesses sell a product or a service which can be broken down into the number of units sold and the selling price per unit. A revenue projection can then be obtained by using the standard units based method as follows:

If the number of products is small then the revenue forecast can be done for each product and totaled. If there are a large number of products and it’s impractical to forecast each product, try to break them down into groups and use an average selling price for the group to forecast revenue.

Forecast Revenue Using the Non Unit Based Method

If the trade of the business is such that it can’t be broken down into unit sales, then split the revenue into product lines, departments, customer groups etc. and estimate total revenue for each category.

Industry Specific Revenue Projection Template

How you forecast revenue for your business will depend on the type of industry in which it operates. We have created revenue forecasting template for a number of industries, some which are listed below

Revenue Projection Templates

• Salon Business Plan Revenue Projection
• Internet Cafe Business Plan Revenue Projection
• Hotel Revenue Projection Excel Template
• Search Engine Business Revenue Projection

More templates are available in our Business Templates Section , and more will be added in the future. If your industry is not listed contact us and let us know, and we’ll try to help.

Whichever method you use to forecast revenue, the important thing  is to get a best estimate and start the revenue projection; it can always be adjusted later as the plan takes shape.

Finally a few words of warning when you forecast revenue, avoid wishful thinking, (take 20-30% off the figure you first thought of), avoid too much detail in analyzing the types of revenue you have, and make sure the sales are within your businesses capacity.

Revenue forecasting is an art not a science, no one expects you to be able to predict the future, you are making educated guesses based on the information you have available to give a realistic estimate of what you think the forecast revenue will be.

What’s the Next Step?

The next step in producing a five year financial projection for your business plan using our financial projections template is to learn how to calculate the gross margin percentage for your products and services.

This is part of the How to Create Financial Projections Guide a series of posts on how our template is used to produce simple financial projections for a business plan.

About the Author

Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.

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Free Financial Templates for a Business Plan

By Andy Marker | July 29, 2020

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In this article, we’ve rounded up expert-tested financial templates for your business plan, all of which are free to download in Excel, Google Sheets, and PDF formats.

Included on this page, you’ll find the essential financial statement templates, including income statement templates , cash flow statement templates , and balance sheet templates . Plus, we cover the key elements of the financial section of a business plan .

Financial Plan Templates

Download and prepare these financial plan templates to include in your business plan. Use historical data and future projections to produce an overview of the financial health of your organization to support your business plan and gain buy-in from stakeholders

Business Financial Plan Template

Use this financial plan template to organize and prepare the financial section of your business plan. This customizable template has room to provide a financial overview, any important assumptions, key financial indicators and ratios, a break-even analysis, and pro forma financial statements to share key financial data with potential investors.

Download Financial Plan Template

Word | PDF | Smartsheet

Financial Plan Projections Template for Startups

This financial plan projections template comes as a set of pro forma templates designed to help startups. The template set includes a 12-month profit and loss statement, a balance sheet, and a cash flow statement for you to detail the current and projected financial position of a business.

‌ Download Startup Financial Projections Template

Excel | Smartsheet

Income Statement Templates for Business Plan

Also called profit and loss statements , these income statement templates will empower you to make critical business decisions by providing insight into your company, as well as illustrating the projected profitability associated with business activities. The numbers prepared in your income statement directly influence the cash flow and balance sheet forecasts.

Pro Forma Income Statement/Profit and Loss Sample

Use this pro forma income statement template to project income and expenses over a three-year time period. Pro forma income statements consider historical or market analysis data to calculate the estimated sales, cost of sales, profits, and more.

‌ Download Pro Forma Income Statement Sample - Excel

Small Business Profit and Loss Statement

Small businesses can use this simple profit and loss statement template to project income and expenses for a specific time period. Enter expected income, cost of goods sold, and business expenses, and the built-in formulas will automatically calculate the net income.

‌ Download Small Business Profit and Loss Template - Excel

3-Year Income Statement Template

Use this income statement template to calculate and assess the profit and loss generated by your business over three years. This template provides room to enter revenue and expenses associated with operating your business and allows you to track performance over time.

Download 3-Year Income Statement Template

For additional resources, including how to use profit and loss statements, visit “ Download Free Profit and Loss Templates .”

Cash Flow Statement Templates for Business Plan

Use these free cash flow statement templates to convey how efficiently your company manages the inflow and outflow of money. Use a cash flow statement to analyze the availability of liquid assets and your company’s ability to grow and sustain itself long term.

Simple Cash Flow Template

Use this basic cash flow template to compare your business cash flows against different time periods. Enter the beginning balance of cash on hand, and then detail itemized cash receipts, payments, costs of goods sold, and expenses. Once you enter those values, the built-in formulas will calculate total cash payments, net cash change, and the month ending cash position.

Download Simple Cash Flow Template

12-Month Cash Flow Forecast Template

Use this cash flow forecast template, also called a pro forma cash flow template, to track and compare expected and actual cash flow outcomes on a monthly and yearly basis. Enter the cash on hand at the beginning of each month, and then add the cash receipts (from customers, issuance of stock, and other operations). Finally, add the cash paid out (purchases made, wage expenses, and other cash outflow). Once you enter those values, the built-in formulas will calculate your cash position for each month with.

‌ Download 12-Month Cash Flow Forecast

3-Year Cash Flow Statement Template Set

Use this cash flow statement template set to analyze the amount of cash your company has compared to its expenses and liabilities. This template set contains a tab to create a monthly cash flow statement, a yearly cash flow statement, and a three-year cash flow statement to track cash flow for the operating, investing, and financing activities of your business.

Download 3-Year Cash Flow Statement Template

For additional information on managing your cash flow, including how to create a cash flow forecast, visit “ Free Cash Flow Statement Templates .”

Balance Sheet Templates for a Business Plan

Use these free balance sheet templates to convey the financial position of your business during a specific time period to potential investors and stakeholders.

Small Business Pro Forma Balance Sheet

Small businesses can use this pro forma balance sheet template to project account balances for assets, liabilities, and equity for a designated period. Established businesses can use this template (and its built-in formulas) to calculate key financial ratios, including working capital.

Download Pro Forma Balance Sheet Template

Monthly and Quarterly Balance Sheet Template

Use this balance sheet template to evaluate your company’s financial health on a monthly, quarterly, and annual basis. You can also use this template to project your financial position for a specified time in the future. Once you complete the balance sheet, you can compare and analyze your assets, liabilities, and equity on a quarter-over-quarter or year-over-year basis.

Download Monthly/Quarterly Balance Sheet Template - Excel

Yearly Balance Sheet Template

Use this balance sheet template to compare your company’s short and long-term assets, liabilities, and equity year-over-year. This template also provides calculations for common financial ratios with built-in formulas, so you can use it to evaluate account balances annually.

Download Yearly Balance Sheet Template - Excel

For more downloadable resources for a wide range of organizations, visit “ Free Balance Sheet Templates .”

Sales Forecast Templates for Business Plan

Sales projections are a fundamental part of a business plan, and should support all other components of your plan, including your market analysis, product offerings, and marketing plan . Use these sales forecast templates to estimate future sales, and ensure the numbers align with the sales numbers provided in your income statement.

Basic Sales Forecast Sample Template

Use this basic forecast template to project the sales of a specific product. Gather historical and industry sales data to generate monthly and yearly estimates of the number of units sold and the price per unit. Then, the pre-built formulas will calculate percentages automatically. You’ll also find details about which months provide the highest sales percentage, and the percentage change in sales month-over-month. 

Download Basic Sales Forecast Sample Template

12-Month Sales Forecast Template for Multiple Products

Use this sales forecast template to project the future sales of a business across multiple products or services over the course of a year. Enter your estimated monthly sales, and the built-in formulas will calculate annual totals. There is also space to record and track year-over-year sales, so you can pinpoint sales trends.

Download 12-Month Sales Forecasting Template for Multiple Products

3-Year Sales Forecast Template for Multiple Products

Use this sales forecast template to estimate the monthly and yearly sales for multiple products over a three-year period. Enter the monthly units sold, unit costs, and unit price. Once you enter those values, built-in formulas will automatically calculate revenue, margin per unit, and gross profit. This template also provides bar charts and line graphs to visually display sales and gross profit year over year.

Download 3-Year Sales Forecast Template - Excel

For a wider selection of resources to project your sales, visit “ Free Sales Forecasting Templates .”

Break-Even Analysis Template for Business Plan

A break-even analysis will help you ascertain the point at which a business, product, or service will become profitable. This analysis uses a calculation to pinpoint the number of service or unit sales you need to make to cover costs and make a profit.

Break-Even Analysis Template

Use this break-even analysis template to calculate the number of sales needed to become profitable. Enter the product's selling price at the top of the template, and then add the fixed and variable costs. Once you enter those values, the built-in formulas will calculate the total variable cost, the contribution margin, and break-even units and sales values.

Download Break-Even Analysis Template

For additional resources, visit, “ Free Financial Planning Templates .”

Business Budget Templates for Business Plan

These business budget templates will help you track costs (e.g., fixed and variable) and expenses (e.g., one-time and recurring) associated with starting and running a business. Having a detailed budget enables you to make sound strategic decisions, and should align with the expense values listed on your income statement.

Startup Budget Template

Use this startup budget template to track estimated and actual costs and expenses for various business categories, including administrative, marketing, labor, and other office costs. There is also room to provide funding estimates from investors, banks, and other sources to get a detailed view of the resources you need to start and operate your business.

Download Startup Budget Template

Small Business Budget Template

This business budget template is ideal for small businesses that want to record estimated revenue and expenditures on a monthly and yearly basis. This customizable template comes with a tab to list income, expenses, and a cash flow recording to track cash transactions and balances.

Download Small Business Budget Template

Professional Business Budget Template

Established organizations will appreciate this customizable business budget template, which  contains a separate tab to track projected business expenses, actual business expenses, variances, and an expense analysis. Once you enter projected and actual expenses, the built-in formulas will automatically calculate expense variances and populate the included visual charts. 

‌ Download Professional Business Budget Template

For additional resources to plan and track your business costs and expenses, visit “ Free Business Budget Templates for Any Company .”

Other Financial Templates for Business Plan

In this section, you’ll find additional financial templates that you may want to include as part of your larger business plan.

Startup Funding Requirements Template

This simple startup funding requirements template is useful for startups and small businesses that require funding to get business off the ground. The numbers generated in this template should align with those in your financial projections, and should detail the allocation of acquired capital to various startup expenses.

Download Startup Funding Requirements Template - Excel

Personnel Plan Template

Use this customizable personnel plan template to map out the current and future staff needed to get — and keep — the business running. This information belongs in the personnel section of a business plan, and details the job title, amount of pay, and hiring timeline for each position. This template calculates the monthly and yearly expenses associated with each role using built-in formulas. Additionally, you can add an organizational chart to provide a visual overview of the company’s structure. 

Download Personnel Plan Template - Excel

Elements of the Financial Section of a Business Plan

Whether your organization is a startup, a small business, or an enterprise, the financial plan is the cornerstone of any business plan. The financial section should demonstrate the feasibility and profitability of your idea and should support all other aspects of the business plan. 

Below, you’ll find a quick overview of the components of a solid financial plan.

• Financial Overview: This section provides a brief summary of the financial section, and includes key takeaways of the financial statements. If you prefer, you can also add a brief description of each statement in the respective statement’s section.
• Key Assumptions: This component details the basis for your financial projections, including tax and interest rates, economic climate, and other critical, underlying factors.
• Break-Even Analysis: This calculation helps establish the selling price of a product or service, and determines when a product or service should become profitable.
• Pro Forma Income Statement: Also known as a profit and loss statement, this section details the sales, cost of sales, profitability, and other vital financial information to stakeholders.
• Pro Forma Cash Flow Statement: This area outlines the projected cash inflows and outflows the business expects to generate from operating, financing, and investing activities during a specific timeframe.
• Pro Forma Balance Sheet: This document conveys how your business plans to manage assets, including receivables and inventory.
• Key Financial Indicators and Ratios: In this section, highlight key financial indicators and ratios extracted from financial statements that bankers, analysts, and investors can use to evaluate the financial health and position of your business.

Need help putting together the rest of your business plan? Check out our free simple business plan templates to get started. You can learn how to write a successful simple business plan  here . 

Visit this  free non-profit business plan template roundup  or download a  fill-in-the-blank business plan template  to make things easy. If you are looking for a business plan template by file type, visit our pages dedicated specifically to  Microsoft Excel ,  Microsoft Word , and  Adobe PDF  business plan templates. Read our articles offering  startup business plan templates  or  free 30-60-90-day business plan templates  to find more tailored options.

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When teams have clarity into the work getting done, there’s no telling how much more they can accomplish in the same amount of time.  Try Smartsheet for free, today.

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How to Forecast Expenses and Revenue in LivePlan

Posted september 25, 2023 by lauren mcholm.

Forecasting revenue and expenses is the start of your business roadmap. One that helps you set sales targets, reduce spending, and uncover strategies to improve profitability. 

This article covers creating both forecasts in four simple steps using LivePlan.  

If you’re not a current LivePlan subscriber —you’ll still come away with critical insight into building useful revenue and expense forecasts.

Key Takeaways

• Review your business model, past financial statements, and industry benchmarks before forecasting.
• Keep your revenue streams simple.
• Start with fixed expenses.
• Tie variable expenses to your revenue.
• Go with your best estimates.

3 things to consider before forecasting

To make forecasting quick and easy, do these three things before diving into the numbers.

Revisit your business model

Revenue and expenses are tied to customer demand. You’re predicting how well you’ll be able to sell to your customers and how that will impact money flowing in and out of your business.

Hopefully, you’ve done the market research necessary to understand your target market. 

Because you need to understand:

• How and where your customers like to make purchases
• How much they’re willing to spend
• How they like to pay
• If they’re willing to make repeat or complementary purchases, etc.

Look at your business model. 

• Does it support the needs of your customers? 
• Are your core business drivers (the things that you sell) what your customers want? 
• Are there missing revenue streams that would lead to greater sales?

Tip: Make this review process faster with the LivePlan Pitch . It guides you in outlining your business model as bulleted lists or single sentences. 

Revenue = sales buckets

As you answer these questions—start creating strategic sales “buckets.” These may be single units, recurring revenue, additional fees, asset sales, etc. 

Your goal is not to create an overly detailed and complex list of every potential revenue source. 

Your goal is to establish “buckets” that minimize how much you’re forecasting. You want revenue streams that are easy to track and analyze. That way you’ll know how well you are meeting strategic sales targets. 

Tip: If you’re unsure which revenue streams make sense for your business—try the Suggested Revenue Streams feature to generate a list of viable options.

Pull up past financial statements

Successful forecasting is just as much about looking to the past as it is about considering the future. 

If you’re an up-and-running business—pull out your past financial statements. If you have a current budget , even better! It will come in very handy as you categorize expenses. 

Your past financial performance then becomes your starting point. 

• It outlines what your business has done previously.
• Helps set realistic expectations. 
• Makes it easier to identify changes that lead to growth.

Tip: Using QuickBooks or Xero? Skip manual data entry and import your data directly into LivePlan. Plus, with the Live Forecast feature your forecasts will update with the push of a button.   

Review industry benchmarks

If you’re just starting—you likely have no financial data to use. 

That doesn’t mean you’re stuck guessing. Just use the financial performance of similar businesses . You can start by reviewing sources such as Reuters and the US Census Bureau. 

And if you’re a LivePlan user, you don’t have to hunt for this information. You have access to industry benchmarks in app—making comparisons to your forecast and accounting data quick and easy. 

Tip: Revisit industry benchmarks regularly. You’ll better understand how your business compares to the competition and what market shifts or trends could impact your business.

How to forecast revenue and expenses in LivePlan

That bit of upfront work, which can all be done in LivePlan, is about to pay off. 

You’re ready to create a revenue and expense forecast—quickly and efficiently. 

1. Name your revenue streams

Remember those “sales buckets”? Let’s add them in. But don’t overcomplicate it.

Start with the bucket that contains your main product/service. Name your revenue stream and walk through the steps outlined below and in LivePlan. Then go onto the next bucket you identified.

You’ll become more familiar with the process—making forecasting the rest much easier.  

Tip: If you haven’t solidified your revenue streams you can always:

• Look back at your previous financial statements.
• Use LivePlan Assistant to generate possible revenue streams.

2. Choose the type of revenue

The type of revenue you bring in will impact how you forecast.

There are four common options:

• Unit sales: Sales of products as individual units or set quantities.
• Billable hours: Services priced on an hourly basis.
• Recurring revenue: Charges that occur on an ongoing basis (typically monthly, quarterly, or annually). 
• Revenue only: Open-ended revenue expressed as a raw number, and typically associated with one-off or uncommon transactions.

What you choose depends on your business model. 

For example, if you’re selling a subscription, you’ll opt for recurring revenue to track ongoing sales. If you’re selling individual products in-store or online—unit sales are the right choice.

When working in LivePlan, you’ll select from those four revenue options. 

The app will then walk you through adding:

• When this revenue starts.
• How much you expect to sell in each period.
• What your price for each product/service is.
• Your expected churn rate (specific to recurring revenue).

3. Create initial estimates

It’s easy to get hung up on this step. 

Even if you are not a numbers person, you can do this correctly by going with your best estimates .

This is where industry benchmarks and previous financial statements come in handy. They are your baseline. You just make adjustments from there.

And LivePlan makes this simple. You can:

• Run with a constant amount for the entire year. 
• Vary amounts for each month and fine-tune your projections.

If you’re unsure which method to use, look ahead. Where do you want sales to be in 3 months, 6 months, 1 year? 

Then answer the following:

• What increase in sales/customers do I need to reach this goal?
• Is the market large enough for me to reach it?
• What percent of the market do I think I can reasonably pick up?
• Are there seasonal factors that will affect sales?
• Will my pricing impact my ability to sell?

Those are just a few questions to consider. Answering them while creating your forecast will help you fine-tune projections month-to-month.

Tip: With LivePlan, you can enter each monthly total, use an annual percentage change, or drag and drop each month with the performance graph.    

4. Now for expenses

When adding expenses, start with your current budget (if you have one). If you’re unsure of what your expenses are—use LivePlan Assistant to generate recommendations .

Once you have your list of expenses, adding them to LivePlan is very straightforward. 

• Create a name.
• A dollar amount ($)
• % of overall revenue
• % of specific revenue streams
• Determine if the cost is constant, varies over time, or is a one-time expense.
• Add how much it costs.
• Categorize it as rent/lease, marketing, or other expenses.

Tips when entering expenses

Your expense forecast should help you set spending limits. We recommend the following to make this possible. 

• Start with fixed expenses: 

These are often the largest and most essential expenses (like rent). They’re also the easiest for you to forecast confidently.  

• Add variable expenses as % of revenue:  

To get the most value from an expense forecast, you should tie variable expenses to revenue whenever possible. 

This allows you to set limits that are reasonable, even when your sales fluctuate. And makes adjustments much simpler. 

• Address Direct Costs and Personnel separately: You are currently forecasting operational expenses—what it takes to run your business. You should forecast direct costs (costs directly tied to the production of goods/services) and personnel separately. 

LivePlan already separates these expenses for you to help you easily calculate additional targets like your margins and headcount. 

Need better business insights?

Remember, these are estimates . Your best guesses based on research, experience, and goals. They may end up being wrong, and that’s ok. 

If they’re helping guide your decisions and getting you more familiar with your business—then you’re forecasting correctly . And over time, you will get better at predicting performance. 

It just takes practice. Plus, having a tool that makes creating and reviewing your forecast easier doesn’t hurt either.

LivePlan guides you through adding assets, dividends, taxes, financing, and collection/payment terms—alongside your revenue and expenses. Providing you with a complete picture of your projected cash and profitability. Sign up today and easily build a useful and complete forecast. No accounting experience required.

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The Philippines economy in 2024: Stronger for longer?

The Philippines ended 2023 on a high note, being the fastest growing economy across Southeast Asia with a growth rate of 5.6 percent—just shy of the government's target of 6.0 to 7.0 percent. 1 “National accounts,” Philippine Statistics Authority, January 31, 2024; "Philippine economic updates,” Bangko Sentral ng Pilipinas, November 16, 2023. Should projections hold, the Philippines is expected to, once again, show significant growth in 2024, demonstrating its resilience despite various global economic pressures (Exhibit 1). 2 “Economic forecast 2024,” International Monetary Fund, November 1, 2023; McKinsey analysis.

The growth in the Philippine economy in 2023 was driven by a resumption in commercial activities, public infrastructure spending, and growth in digital financial services. Most sectors grew, with transportation and storage (13 percent), construction (9 percent), and financial services (9 percent), performing the best (Exhibit 2). 3 “National accounts,” Philippine Statistics Authority, January 31, 2024. While the country's trade deficit narrowed in 2023, it remains elevated at $52 billion due to slowing global demand and geopolitical uncertainties. 4 “Highlights of the Philippine export and import statistics,” Philippine Statistics Authority, January 28, 2024. Looking ahead to 2024, the current economic forecast for the Philippines projects a GDP growth of between 5 and 6 percent.

Inflation rates are expected to temper between 3.2 and 3.6 percent in 2024 after ending 2023 at 6.0 percent, above the 2.0 to 4.0 percent target range set by the government. 5 “Nomura downgrades Philippine 2024 growth forecast,” Nomura, September 11, 2023; “IMF raises Philippine growth rate forecast,” International Monetary Fund, July 16, 2023.

For the purposes of this article, most of the statistics used for our analysis have come from a common thread of sources. These include the Central Bank of the Philippines (Bangko Sentral ng Pilipinas); the Department of Energy Philippines; the IT and Business Process Association of the Philippines (IBPAP); and the Philippines Statistics Authority.

The state of the Philippine economy across seven major sectors and themes

In the article, we explore the 2024 outlook for seven key sectors and themes, what may affect each of them in the coming year, and what could potentially unlock continued growth.

Financial services

The recovery of the financial services sector appears on track as year-on-year growth rates stabilize. 6 Philippines Statistics Authority, November 2023; McKinsey in partnership with Oxford Economics, November 2023. In 2024, this sector will likely continue to grow, though at a slower pace of about 5 percent.

Financial inclusion and digitalization are contributing to growth in this sector in 2024, even if new challenges emerge. Various factors are expected to impact this sector:

• Inclusive finance: Bangko Sentral ng Pilipinas continues to invest in financial inclusion initiatives. For example, basic deposit accounts (BDAs) reached $22 million in 2023 and banking penetration improved, with the proportion of adults with formal bank accounts increasing from 29 percent in 2019 to 56 percent in 2021. 7 “Financial inclusion dashboard: First quarter 2023,” Bangko Sentral ng Pilipinas, February 6, 2024.
• Digital adoption: Digital channels are expected to continue to grow, with data showing that 60 percent of adults who have a mobile phone and internet access have done a digital financial transaction. 8 “Financial inclusion dashboard: First quarter 2023,” Bangko Sentral ng Pilipinas, February 6, 2024. Businesses in this sector, however, will need to remain vigilant in navigating cybersecurity and fraud risks.
• Unsecured lending growth: Growth in unsecured lending is expected to continue, but at a slower pace than the past two to three years. For example, unsecured retail lending for the banking system alone grew by 27 percent annually from 2020 to 2022. 9 “Loan accounts: As of first quarter 2023,” Bangko Sentral ng Pilipinas, February 6, 2024; "Global banking pools,” McKinsey, November 2023. Businesses in this field are, however, expected to recalibrate their risk profiling models as segments with high nonperforming loans emerge.
• High interest rates: Key interest rates are expected to decline in the second half of 2024, creating more accommodating borrowing conditions that could boost wholesale and corporate loans.

Supportive frameworks have a pivotal role to play in unlocking growth in this sector to meet the ever-increasing demand from the financially underserved. For example, financial literacy programs and easier-to-access accounts—such as BDAs—are some measures that can help widen market access to financial services. Continued efforts are being made to build an open finance framework that could serve the needs of the unbanked population, as well as a unified credit scoring mechanism to increase the ability of historically under-financed segments, such as small and medium-sized enterprises (SMEs), to access formal credit. 10 “BSP launches credit scoring model,” Bangko Sentral ng Pilipinas, April 26, 2023.

Energy and Power

The outlook for the energy sector seems positive, with the potential to grow by 7 percent in 2024 as the country focuses on renewable energy generation. 11 McKinsey analysis based on input from industry experts. Currently, stakeholders are focused on increasing energy security, particularly on importing liquefied natural gas (LNG) to meet power plants’ requirements as production in one of the country’s main sources of natural gas, the Malampaya gas field, declines. 12 Myrna M. Velasco, “Malampaya gas field prod’n declines steeply in 2021,” Manila Bulletin , July 9, 2022. High global inflation and the fact that the Philippines is a net fuel importer are impacting electricity prices and the build-out of planned renewable energy projects. Recent regulatory moves to remove foreign ownership limits on exploration, development, and utilization of renewable energy resources could possibly accelerate growth in the country’s energy and power sector. 13 “RA 11659,” Department of Energy Philippines, June 8, 2023.

Gas, renewables, and transmission are potential growth drivers for the sector. Upgrading power grids so that they become more flexible and better able to cope with the intermittent electricity supply that comes with renewables will be critical as the sector pivots toward renewable energy. A recent coal moratorium may position natural gas as a transition fuel—this could stimulate exploration and production investments for new, indigenous natural gas fields, gas pipeline infrastructure, and LNG import terminal projects. 14 Philippine energy plan 2020–2040, Department of Energy Philippines, June 10, 2022; Power development plan 2020–2040 , Department of Energy Philippines, 2021. The increasing momentum of green energy auctions could facilitate the development of renewables at scale, as the country targets 35 percent share of renewables by 2030. 15 Power development plan 2020–2040 , 2022.

Growth in the healthcare industry may slow to 2.8 percent in 2024, while pharmaceuticals manufacturing is expected to rebound with 5.2 percent growth in 2024. 16 McKinsey analysis in partnership with Oxford Economics.

Healthcare demand could grow, although the quality of care may be strained as the health worker shortage is projected to increase over the next five years. 17 McKinsey analysis. The supply-and-demand gap in nursing alone is forecast to reach a shortage of approximately 90,000 nurses by 2028. 18 McKinsey analysis. Another compounding factor straining healthcare is the higher than anticipated benefit utilization and rising healthcare costs, which, while helping to meet people's healthcare budgets, may continue to drive down profitability for health insurers.

Meanwhile, pharmaceutical companies are feeling varying effects of people becoming increasingly health conscious. Consumers are using more over the counter (OTC) medication and placing more beneficial value on organic health products, such as vitamins and supplements made from natural ingredients, which could impact demand for prescription drugs. 19 “Consumer health in the Philippines 2023,” Euromonitor, October 2023.

Businesses operating in this field may end up benefiting from universal healthcare policies. If initiatives are implemented that integrate healthcare systems, rationalize copayments, attract and retain talent, and incentivize investments, they could potentially help to strengthen healthcare provision and quality.

Businesses may also need to navigate an increasingly complex landscape of diverse health needs, digitization, and price controls. Digital and data transformations are being seen to facilitate improvements in healthcare delivery and access, with leading digital health apps getting more than one million downloads. 20 Google Play Store, September 27, 2023. Digitization may create an opportunity to develop healthcare ecosystems that unify touchpoints along the patient journey and provide offline-to-online care, as well as potentially realizing cost efficiencies.

Consumer and retail

Growth in the retail and wholesale trade and consumer goods sectors is projected to remain stable in 2024, at 4 percent and 5 percent, respectively.

Inflation, however, continues to put consumers under pressure. While inflation rates may fall—predicted to reach 4 percent in 2024—commodity prices may still remain elevated in the near term, a top concern for Filipinos. 21 “IMF raises Philippine growth forecast,” July 26, 2023; “Nomura downgrades Philippines 2024 growth forecast,” September 11, 2023. In response to challenging economic conditions, 92 percent of consumers have changed their shopping behaviors, and approximately 50 percent indicate that they are switching brands or retail providers in seek of promotions and better prices. 22 “Philippines consumer pulse survey, 2023,” McKinsey, November 2023.

Online shopping has become entrenched in Filipino consumers, as they find that they get access to a wider range of products, can compare prices more easily, and can shop with more convenience. For example, a McKinsey Philippines consumer sentiment survey in 2023 found that 80 percent of respondents, on average, use online and omnichannel to purchase footwear, toys, baby supplies, apparel, and accessories. To capture the opportunity that this shift in Filipino consumer preferences brings and to unlock growth in this sector, retail organizations could turn to omnichannel strategies to seamlessly integrate online and offline channels. Businesses may need to explore investments that increase resilience across the supply chain, alongside researching and developing new products that serve emerging consumer preferences, such as that for natural ingredients and sustainable sources.

Manufacturing

Manufacturing is a key contributor to the Philippine economy, contributing approximately 19 percent of GDP in 2022, employing about 7 percent of the country’s labor force, and growing in line with GDP at approximately 6 percent between 2023 and 2024. 23 McKinsey analysis based on input from industry experts.

Some changes could be seen in 2024 that might affect the sector moving forward. The focus toward building resilient supply chains and increasing self-sufficiency is growing. The Philippines also is likely to benefit from increasing regional trade, as well as the emerging trend of nearshoring or onshoring as countries seek to make their supply chains more resilient. With semiconductors driving approximately 45 percent of Philippine exports, the transfer of knowledge and technology, as well as the development of STEM capabilities, could help attract investments into the sector and increase the relevance of the country as a manufacturing hub. 24 McKinsey analysis based on input from industry experts.

To secure growth, public and private sector support could bolster investments in R&D and upskill the labor force. In addition, strategies to attract investment may be integral to the further development of supply chain infrastructure and manufacturing bases. Government programs to enable digital transformation and R&D, along with a strategic approach to upskilling the labor force, could help boost industry innovation in line with Industry 4.0 demand. 25 Industry 4.0 is also referred to as the Fourth Industrial Revolution. Priority products to which manufacturing industries could pivot include more complex, higher value chain electronic components in the semiconductor segment; generic OTC drugs and nature-based pharmaceuticals in the pharmaceutical sector; and, for green industries, products such as EVs, batteries, solar panels, and biomass production.

Information technology business process outsourcing

The information technology business process outsourcing (IT-BPO) sector is on track to reach its long-term targets, with $38 billion in forecast revenues in 2024. 26 Khriscielle Yalao, “WHF flexibility key to achieving growth targets—IBPAP,” Manila Bulletin , January 23, 2024. Emerging innovations in service delivery and work models are being observed, which could drive further growth in the sector.

The industry continues to outperform headcount and revenue targets, shaping its position as a country leader for employment and services. 27 McKinsey analysis based in input from industry experts. Demand from global companies for offshoring is expected to increase, due to cost containment strategies and preference for Philippine IT-BPO providers. New work setups continue to emerge, ranging from remote-first to office-first, which could translate to potential net benefits. These include a 10 to 30 percent increase in employee retention; a three- to four-hour reduction in commute times; an increase in enabled talent of 350,000; and a potential reduction in greenhouse gas emissions of 1.4 to 1.5 million tons of CO 2 per year. 28 McKinsey analysis based in input from industry experts. It is becoming increasingly more important that the IT-BPO sector adapts to new technologies as businesses begin to harness automation and generative AI (gen AI) to unlock productivity.

Talent and technology are clear areas where growth in this sector can be unlocked. The growing complexity of offshoring requirements necessitates building a proper talent hub to help bridge employee gaps and better match local talent to employers’ needs. Businesses in the industry could explore developing facilities and digital infrastructure to enable industry expansion outside the metros, especially in future “digital cities” nationwide. Introducing new service areas could capture latent demand from existing clients with evolving needs as well as unserved clients. BPO centers could explore the potential of offering higher-value services by cultivating technology-focused capabilities, such as using gen AI to unlock revenue, deliver sales excellence, and reduce general administrative costs.

Sustainability

The Philippines is considered to be the fourth most vulnerable country to climate change in the world as, due to its geographic location, the country has a higher risk of exposure to natural disasters, such as rising sea levels. 29 “The Philippines has been ranked the fourth most vulnerable country to climate change,” Global Climate Risk Index, January 2021. Approximately $3.2 billion, on average, in economic loss could occur annually because of natural disasters over the next five decades, translating to up to 7 to 8 percent of the country’s nominal GDP. 30 “The Philippines has been ranked the fourth most vulnerable country to climate change,” Global Climate Risk Index, January 2021.

The Philippines could capitalize on five green growth opportunities to operate in global value chains and catalyze growth for the nation:

• Renewable energy: The country could aim to generate 50 percent of its energy from renewables by 2040, building on its high renewable energy potential and the declining cost of producing renewable energy.
• Solar photovoltaic (PV) manufacturing: More than a twofold increase in annual output from 2023 to 2030 could be achieved, enabled by lower production costs.
• Battery production: The Philippines could aim for a $1.5 billion domestic market by 2030, capitalizing on its vast nickel reserves (the second largest globally). 31 “MineSpans,” McKinsey, November 2023.
• Electric mobility: Electric vehicles could account for 15 percent of the country’s vehicle sales by 2030 (from less than 1 percent currently), driven by incentives, local distribution, and charging infrastructure. 32 McKinsey analysis based on input from industry experts.
• Nature-based solutions: The country’s largely untapped total abatement potential could reach up to 200 to 300 metric tons of CO 2 , enabled by its biodiversity and strong demand.

The Philippine economy: Three scenarios for growth

Having grown faster than other economies in Southeast Asia in 2023 to end the year with 5.6 percent growth, the Philippines can expect a similarly healthy growth outlook for 2024. Based on our analysis, there are three potential scenarios for the country’s growth. 33 McKinsey analysis in partnership with Oxford Economics.

Slower growth: The first scenario projects GDP growth of 4.8 percent if there are challenging conditions—such as declining trade and accelerated inflation—which could keep key policy rates high at about 6.5 percent and dampen private consumption, leading to slower long-term growth.

Soft landing: The second scenario projects GDP growth of 5.2 percent if inflation moderates and global conditions turn out to be largely favorable due to a stable investment environment and regional trade demand.

Accelerated growth: In the third scenario, GDP growth is projected to reach 6.1 percent if inflation slows and public policies accommodate aspects such as loosening key policy rates and offering incentive programs to boost productivity.

Focusing on factors that could unlock growth in its seven critical sectors and themes, while adapting to the macro-economic scenario that plays out, would allow the Philippines to materialize its growth potential in 2024 and take steps towards achieving longer-term, sustainable economic growth.

Jon Canto is a partner in McKinsey’s Manila office, where Frauke Renz is an associate partner, and Vicah Villanueva is a consultant.

The authors wish to thank Charlene Chua, Charlie del Rosario, Ryan delos Reyes, Debadrita Dhara, Evelyn C. Fong, Krzysztof Kwiatkowski, Frances Lee, Aaron Ong, and Liane Tan for their contributions to this article.

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Chipmaker Micron's Shares Surge as AI Boom Drives Strong Forecast

Chipmaker Micron's Shares Surge as AI Boom Drives Strong Forecast

FILE PHOTO: A smartphone with a displayed Micron logo is placed on a computer motherboard in this illustration taken March 6, 2023. REUTERS/Dado Ruvic/Illustration/File Photo

By Arsheeya Bajwa and Harshita Mary Varghese

(Reuters) -Memory chip maker Micron Technology tapped a surge in artificial intelligence adoption to forecast third-quarter revenue above estimates on Wednesday and post a surprise quarterly profit.

Its shares shot up more than 16% in extended trading, adding to a rise of more than 60% over the last 12 months. Micron's stock was last at about $110, and a close at that level on Thursday would be its highest ever.

The strong report and forecast underscore surging demand for high-end memory chips and other advanced semiconductors as big tech companies race to incorporate generative AI.

Micron's high bandwidth memory (HBM) chips, which are used in the development of complex AI applications, were sold out for 2024 and a majority of 2025 supply had already been allocated, CEO Sanjay Mehrotra said.

AI chip front-runner Nvidia has also tapped Micron for the latest HBM 3E chips in its next-generation H200 graphics processing units (GPUs). South Korean competitor SK Hynix has been the sole supplier of HBM chips to Nvidia so far.

Micron's chief business officer, Sumit Sadana, also told Reuters that the company had signed up new customers for its HBM products that it is yet to announce.

The adjusted per-share profit reported on Wednesday was Micron's first after five straight quarters of losses, according to LSEG.

Analysts expect its share of the high-margin HBM market to grow throughout the year.

Micron offers flash memory chips that serve the data storage market and dynamic random access memory (DRAM) made for data centers, personal computers, smartphones and other computing devices.

"The impressive earnings and forecast from Micron suggest that GenAI momentum is spurring an important growth era for DRAM and, most importantly, HBM suppliers," said Bob O' Donnell, chief analyst at Technalysis Research.

The company's results, reported ahead of other chipmakers, are watched as a gauge of demand for various types of chips and end-markets. Its upbeat forecast sent shares of peer Western Digital up 4.6% in extended trade.

HBM revenues are expected to add to Micron's gross margins in the third quarter, Mehrotra said, reiterating that the company was on track to generate several hundred million dollars of revenue from the advanced chips in fiscal 2024, a small but growing fraction of its total sales.

Micron expects adjusted gross margin for the third quarter to be 26.5%, plus or minus 1.5%, compared with market estimates of 20.8%.

It forecast revenue of $6.60 billion, plus or minus $200 million, for the current quarter, largely above estimates of $6.03 billion, according to LSEG data.

The company posted adjusted profit of 42 cents per share for the second quarter, compared with estimates for a loss of 25 cents.

Mehrotra also said Micron's bit supply growth in fiscal 2024 remains below its demand growth for both DRAM and NAND.

Pricing across all memory and storage end markets is improving as well, Mehrotra said, adding that the company expects DRAM and NAND pricing levels to increase further throughout 2024.

Memory chip pricing is on the rebound after hitting some of its lowest levels in years as a pandemic-led buying spree ultimately resulted in a supply glut.

Micron reported second-quarter revenue of $5.82 billion, compared with estimates of $5.35 billion.

(Reporting by Arsheeya Bajwa and Harshita Mary Varghese in Bengaluru; Editing by Devika Syamnath)

Copyright 2024 Thomson Reuters .

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Revenue-Raising Proposals in President Biden’s Fiscal Year 2025 Budget Plan

Steve Wamhoff Federal Policy Director

President Biden’s most recent budget plan includes proposals that would raise more than $5 trillion from high-income individuals and corporations over a decade.

Like the budget plan he submitted to Congress last year, it would partly reverse the Trump tax cuts for corporations and high-income individuals, clamp down on corporate tax avoidance, and require the wealthiest individuals to pay taxes on their capital gains income just as they are required to for other types of income, among other reforms.

Two significant new proposals in Biden’s budget this year are an increase in the corporate minimum tax that was enacted as part of the Inflation Reduction Act and a provision to improve the existing $1 million cap on corporate tax deductions for compensation.

Of the more than $5 trillion that would be raised by these proposals over a decade, about $1 trillion would go to targeted tax breaks, including expansions of the Child Tax Credit , Earned Income Tax Credit, and health insurance premium tax credits.

This report describes the most significant revenue-raising proposals in the President’s budget.

Highlights in Revenue-Raising Proposals Including in President Biden’s Fiscal Year 2025 Budget Plan

Source: Institute on Taxation and Economic Policy, March 2024

Partly Reversing the Trump Corporate Tax Cuts

Raise corporate tax rate from 21 percent to 28 percent 10-year revenue impact: $1.4 trillion.

The President’s budget would partly reverse the cut in the corporate income tax rate that was signed into law by former President Trump as part of the Tax Cuts and Jobs Act (TCJA). President Biden’s plan would raise the corporate income tax rate from 21 percent to 28 percent, still lower than the 35 percent rate that applied to most corporate profits before TCJA came into effect. As explained below, the arguments in favor of a lower corporate tax rate were always weak and based on misunderstandings of how corporations respond to tax changes.

Corporate tax cuts did not make American companies more competitive.

• Drafters and supporters of TCJA claimed that the rate cut would make the United States more globally competitive. But it is not the case that the pre-TCJA corporate tax code made the United States less competitive than other countries or the that the rate cut made the U.S. more so.
• The United States accounts for just over 4 percent of the world’s population and a quarter of global GDP, but American corporations account for 50 percent of the market value and a third of the sales of the Forbes Global 2000, which is an annual list that measures the largest businesses in the world based on sales, profits, assets, and market value. These figures were essentially the same in 2017, before the TCJA was enacted and  in the years that followed . American corporations had a huge advantage and that has not changed.

Corporate tax cuts benefit shareholders, who are mostly wealthy Americans and foreign investors.

• Congress’s official revenue-estimator, the Joint Committee on Taxation, has concluded that  most of the benefits  from corporate tax cuts flow to the owners of corporate stocks and other business assets, who are mostly wealthy. Recent research has concluded that a great deal of the benefits also flow to foreign investors, who own an estimated  40 percent  of the shares of American corporations. Altogether, the  richest 1 percent of Americans and foreign investors  received most of the benefits of the corporate tax cuts enacted under former President Trump.

Corporations used their tax cuts to enrich shareholders with stock buybacks, not to invest and create jobs.

• In the first four years after these corporate tax cuts went into effect, the largest American corporations collectively spent more on enriching their shareholders through  stock buybacks  ($2.72 trillion) than on investments in plants, equipment, or software that might have created new jobs and grown the economy ($2.65 trillion).

Corporations would not lobby for corporate tax cuts if they thought their shareholders were not the beneficiaries.

• Corporations are created to build wealth for their shareholders, and the CEO and management of a corporation ultimately serve the shareholders. And corporate executives themselves usually own a lot of stock in the company they work for. Given how much corporations  lobby for corporate tax breaks , it is quite clear that the corporate executives themselves believe that the benefits go to the stock owners.

Increase the IRA’s Minimum Corporate Tax Rate from 15 Percent to 21 Percent 10-Year Revenue Impact: $137 billion

The corporate minimum tax, which was enacted as part of the Inflation Reduction Act (IRA) and which went into effect in 2023, requires the largest corporations to pay federal tax of at least 15 percent of the profits they report to their shareholders. President Biden proposes to increase the corporate minimum tax rate to 21 percent.

The IRA’s minimum tax was enacted as a backstop to the regular federal corporate income tax which has a statutory rate of 21 percent but allows most corporations to effectively pay much less than that because of its many special breaks and loopholes.

A recent study from ITEP finds that in the first five years since the corporate income tax rate was set at 21 percent, the Fortune 500 companies and S&P 500 companies that were consistently profitable during that period effectively paid a rate of just 14.1 percent.

The ITEP study also identifies 55 corporations that paid effective rates of less than 5 percent (including several that paid nothing) over the five-year period despite reporting profits to investors and the public each year.

The IRA’s minimum tax, which went into effect in 2023 (after the period covered by ITEP’s study), will mitigate at least some of this tax avoidance for the very largest companies. This minimum tax applies to corporations that report annual profits averaging more than $1 billion over the previous three years. One study found that 78 companies would have been affected by the provision if it had been in effect in 2021.

President Biden proposes to increase the rate of this minimum tax from 15 to 21 percent, which is consistent with his other proposals. The President proposes to also raise the main statutory corporate tax rate from 21 to 28 percent and to enact a 21 percent minimum tax on offshore profits of corporations to crack down on their use of offshore tax havens, as described further on.

Preventing Tax Avoidance on Corporate Transfers of Income to Executives and Shareholders

Tighten the $1 million limit on deductions for compensation 10-year revenue impact: $272 billion.

The President proposes to strengthen the tax code’s section 162(m), which limits deductions that corporations take for compensation to $1 million in certain situations.

Until recently, section 162(m) had an exception for performance-based pay (like stock options) and only applied to the top five executives in any given company. The Tax Cuts and Jobs Act (TCJA) removed the exception for performance-based pay (but grandfathered in existing stock options). And the American Recovery Plan Act (ARPA) generally expanded the number of employees covered from 5 to 10. But any employees beyond that are not covered. Nor are any employees of privately held companies because section 162(m) applies only to publicly traded companies.

The President’s proposal would expand the $1 million cap on deductions for compensation to apply to any employees of a corporation, whether it is privately held or publicly traded.

Increase Stock Buyback Excise Tax from 1 Percent to 4 Percent 10-Year Revenue Impact: $166 billion

President Biden and Congress enacted a 1 percent excise tax on stock buybacks as part of the Inflation Reduction Act. The initial evidence suggests the tax has had little or no effect on corporations’ decisions to repurchase their own stocks, which means the tax could potentially collect more revenue at a higher rate. It also appears that the tax is not high enough to eliminate the tax advantage for stock buybacks over other methods that corporations use to send profits to shareholders. For these reasons, the President proposes to increase the stock buyback excise tax that is in effect now under the IRA from 1 percent to 4 percent.

While corporate dividends paid to shareholders are subject to the personal income tax in the year they are distributed, stock buybacks effectively give the same financial benefit to shareholders by boosting stock values but can remain untaxed for years or in some cases forever. The stock buyback tax can reduce that disparity, but its current rate of 1 percent is not high enough to eliminate it.

See ITEP’s more detailed explanation of the  stock buyback proposal .

This proposal is expanded slightly in this year’s budget to apply also to “controlled foreign corporations,” which are often offshore subsidiaries of U.S. corporations.

End Abuses of Tax-Free Spin-Offs 10-Year Revenue Impact: $44 billion

The President proposes to block corporations from avoiding taxes by hiding payments to shareholders or unloading of debts in arrangements that appear to be corporate spin-offs.

When a corporation transfers assets to shareholders, the tax code usually requires the company to pay tax on any gain on the assets, just as if the company had sold them. Similarly, if a corporation’s debt is forgiven, this debt forgiveness is taxable income for the company.

The tax code allows exceptions when a corporation splits part of itself off into a new company. For example, if a corporation decides to spin off its widget operations into a new company, it might distribute certain assets (a widget factory and its machinery) to a newly created company in return for stock in the new company, which it then distributes to its shareholders. In theory, the point of the arrangement was to reorganize the business, not pay shareholders, so the tax code does not tax gains on assets in this situation the way it would if they were sold.

However, when anything other than stock is received in return for the transfer of assets to the spun off company, the situation becomes more complicated and the opportunity for abuse is much greater. The President’s proposal would tighten the existing rules so that the corporation distributing its assets to a newly created company may have to pay tax on capital gains in some situations. It would also create rules to ensure that the newly created company is not simply overloaded with debt but is in fact a financially viable business.

Stopping Offshore Corporate Tax Avoidance

Revise global minimum tax rules 10-year revenue impact: $374 billion.

American corporations often use accounting gimmicks to disguise profits earned in the United States (or in a country with a comparable tax system) as profits earned in offshore tax havens , which are countries with no corporate tax or only a weak one. This proposal would greatly reduce the tax breaks that corporations can acquire through these schemes.

Enacting these reforms would bring the United States into compliance with the international agreement that the Biden administration negotiated with the Organization for Cooperation and Development (OECD) and most of the world’s governments to create a  global minimum tax . Here are some of the most important parts of this proposal:

Reducing the gap between effective tax rates for offshore profits and domestic profits.

• When corporations are allowed to pay less on offshore profits than on domestic profits, this encourages accounting schemes that make more profits appear to be earned in low-tax countries.
• The current rules enacted as part of the Trump tax law create this result, allowing American corporations to pay an effective tax rate on offshore profits (10.5 percent) that is half the effective rate they pay on domestic profits (21 percent). The President proposes to reduce this gap by allowing an effective rate for offshore profits that is three-fourths of the domestic rate (21 percent for offshore profits compared to the 28 percent rate he proposes for domestic profits).
• This would be more than sufficient to implement the  global minimum tax  that the Biden administration negotiated with the international community, which requires participating countries to ensure that their corporations pay an effective tax rate of at least 15 percent on their offshore profits.

Applying the minimum tax per country to prevent corporations from using high taxes paid in one country to offset very low taxes paid in another country.

• To the extent that the current rules require corporations to pay a minimum tax on their offshore profits, the minimum tax is calculated on worldwide basis rather than a per-country basis, which makes it easier for multinational companies to avoid it.
• For example, a company could have profits in Country A where it pays an effective tax rate of just 5 percent but still be able to avoid the worldwide minimum tax if it pays an effective rate of 25 percent on profits in Country B. Its overall effective tax rate calculated on its offshore profits could be more than the minimum rate required.
• The President’s proposal would calculate the minimum tax separately for each country where the corporation reports that it earns profits.

Eliminating the exemption for certain offshore profits

• Under current law, some offshore profits of American corporations are not taxed at all because they fall within an exclusion (equal to a 10 percent return on tangible offshore investments like plants and equipment). The drafters believed that a 10 percent or less return on investments and personnel is likely to be real profits generated from real business and not the result of accounting gimmicks that merely shift numbers around to make profits to appear to be earned in low-tax countries.
• Of course, the 10 percent threshold is arbitrary. Even worse, it could encourage companies to actually move investment and jobs offshore to claim the exemption for more of the profits they already report to earn offshore.
• The President proposes to eliminate this exemption.

Undertaxed Profits Rule (UTPR) 10-Year Revenue Impact: $136 billion

As already explained, the Biden administration negotiated an agreement among most of the world’s governments to ensure that their corporations pay an effective tax rate of at least 15 percent on their offshore profits. Another part of that agreement is the “undertaxed profits rule,” or UTPR, designed to address the concern that some countries might refuse to participate, giving their corporations an unfair advantage.

The UTPR would address this problem by allowing participating countries to impose a “top up” tax on foreign-owned corporations operating in their borders if they are based in a country that does not require them to pay a total tax rate of at least 15 percent.

The President’s proposal would implement the UTPR by limiting deductions for US taxes for subsidiaries or branches of a low-taxed, foreign-owned company operating in the US. Under current law, these deductions are often used to strip earnings out of the United States and shift them to countries where they will not be taxed.

Under the international agreement, countries imposing a top up tax under the UTPR would allocate the revenue raised amongst themselves through a formula (based on employees and assets a corporation has in each country), which the President’s proposal spells out. The proposal would apply to foreign-based corporations with global annual revenue of at least €750 million (or about $820 million).

Repeal the Deduction for Foreign-Derived Intangible Income (FDII) 10-Year Revenue Impact: $158 billion

The deduction for foreign-derived intangible income (FDII) was enacted as part of the Trump tax law. It is based on the idea that income companies earn from intangible assets like patents and copyrights is particularly easy to shift offshore. The drafters thought they could deal with this by allowing American corporations a deduction when such assets are held in the U.S. and generate income (like royalties) from foreign customers.

But the FDII deduction is another provision that could encourage companies to move investment offshore. The law defines FDII simply as profits in the U.S. from selling to foreign markets minus 10 percent of the value of tangible assets held in the U.S. The reasoning is that any profits beyond this amount must be from intangible assets, but that is not necessarily true. (The 10 percent threshold is arbitrary.) Corporations could move investment offshore to increase the amount of income that is considered FDII and thus eligible for the FDII deduction.

The President proposes to repeal the FDII deduction and put the revenue towards tax breaks that administration officials believe will more effectively encourage companies to conduct research.

Address “Dual Capacity Taxpayer” Fossil Fuel Companies 10-Year Revenue Impact: $72 billion

The President proposes to prevent American corporations that extract fossil fuels from abroad from characterizing royalties they pay to foreign governments as taxes that reduce their U.S. taxes.

American corporations with offshore operations are allowed to claim a credit against their U.S. taxes for taxes they pay to foreign governments, to prevent double taxation. Some multinational companies, particularly those that extract fossil fuels, make payments to foreign governments in return for specific economic benefits, like royalties paid in return for permission to drill. Corporations that are effectively paying both income taxes and royalties to a foreign government, often called “dual capacity” taxpayers, may characterize much of their royalties as taxes, increasing the foreign tax credits they use to reduce U.S. taxes.

The President’s proposal would ensure that dual capacity taxpayers cannot claim foreign tax credits for payments that are not truly corporate income taxes that any type of company operating in the foreign country would pay on its profits.

Bar Earnings Stripping Through Excessive Interest Deductions 10-Year Revenue Impact: $40 billion

The President proposes to prevent multinational corporations from manipulating debt as an accounting gimmick to strip earnings out of the United States.

A foreign corporation can “loan” money to its U.S. subsidiary, which then makes large interest payments back to the foreign parent company. The U.S. subsidiary deducts the interest payments from its U.S. income and tells the IRS that it has little or no taxable income as a result.

In these situations, the parties on both sides of the transactions are really controlled by the same people. The “borrower” and “lender” are parts of the same company. These arrangements exist only on paper and only to shift profits out of the U.S. to a foreign country with a low tax rate or no corporate tax at all.

The President’s proposal would bar deductions for interest payments made by the U.S. subsidiary of a multinational corporation if that subsidiary is carrying a disproportionate share of the debt held by the entire corporation.

Strengthening Medicare Taxes on the Rich

Close loophole in medicare taxes for certain business profits 10-year revenue impact: $393 billion.

The Affordable Care Act (ACA) made two tax changes to better fund Medicare. First, it modified the 2.9 percent Medicare payroll tax to effectively have a higher bracket of 3.8 percent for high-earning individuals. Second, it created a comparable 3.8 percent tax on investment income for high-income households. The general idea was that well-off people would pay a 3.8 percent tax to help finance Medicare, whether their income was earned or from investments. But one of the compromises made to secure enactment created a loophole and allowed a long-standing scheme to avoid the Medicare payroll tax to continue, allowing certain business profits (or income described as business profits) to escape both taxes.

Individuals who are actively involved in managing a business that they own often distribute profits to themselves that are not subject to the Medicare payroll tax. The compromise made in drafting the ACA ensured that the newly created 3.8 percent Net Investment Income Tax (NIIT) would not apply to these distributed profits either.

This also left in place the technique used by some individuals to route what is really earned income through a business entity as a distributed profit, in order to avoid paying Medicare taxes.

The President’s proposal would ensure that such profits would be subject to either the Medicare payroll tax or the NIIT (meaning high-income people pay a 3.8 percent tax on those profits one way of the other). This reform would be phased in for those with incomes between $400,000 and $500,000.

See ITEP’s more  detailed explanation  of the President’s proposals to strengthen Medicare taxes on the rich.

Increase Medicare Taxes for the Rich from 3.8 Percent to 5 Percent 10-Year Revenue Impact: $404 billion

Currently, high-income people pay a 3.8 percent tax on most types of income to help fund Medicare. This is accomplished with two different taxes. One is the Medicare payroll tax on earnings, which effectively has a top rate of 3.8 percent. The other is a 3.8 percent tax on investment income that only applies to high-income people. The President’s proposal would add a 5 percent bracket to both taxes for people making more than $400,000, requiring them to pay an additional 1.2 percent compared to what they pay now.

Limiting Tax Breaks for Capital Gains

Billionaire minimum income tax 10-year revenue impact: $503 billion.

Most people think of a capital gain as the profit one receives when selling an asset for more than it cost to acquire it. But when an asset becomes more valuable, that asset appreciation can also be thought of as income for its owner, even if they do not sell the asset. Economists consider these “unrealized capital gains” to be income, but the tax code usually does not.

As a result, wealthy people can defer paying income taxes on gains until they sell assets, and this is a major tax break for capital gains. The President’s proposed Billionaire Minimum Income Tax would limit this tax break and would be phased in for taxpayers with a net worth between $100 million and $200 million.

Those wealthy enough to be subject to the proposal would generally be required to pay at least 25 percent of their total income, including unrealized capital gains, each year.

When this equals more than they owe under the regular tax rules, affected taxpayers would have five years to pay the difference (nine years for the tax assessed in the first year the proposal is in effect). This gradual payment would smooth out long-term calculations of the tax for someone whose assets fluctuate dramatically in value. If unrealized gains in one year are followed by unrealized losses in another year, only a portion of the minimum tax is paid for the first year and then potentially refunded in the following year. Payments of the minimum tax would also serve as prepayments of the tax that would otherwise be due later when a taxpayer sells an asset or passes it to an heir.

Some other proposals, like Sen. Ron Wyden’s  “Billionaires Income Tax”  create something closer to a “mark-to-market” system of taxation, which would treat unrealized gains as income each year. The President’s proposal is different because it is structured as a minimum tax, ensuring that very wealthy people pay at least 25 percent of their total income, including the unrealized gains that escape taxation under current law.

See ITEP’s more detailed explanation  of these proposals.

Limit Capital Gains Breaks for Millionaires 10-Year Revenue Impact: $289 billion

The President also proposes to sharply limit two other tax breaks for capital gains.

First, current rules tax capital gains (when they are realized) at lower rates than other types of income. In effect this means that people who live off their investments can pay lower tax rates than people who work for their income.

Currently, income from capital gains and dividends is taxed at a top personal income tax rate of just 20 percent, compared to a top rate of 37 percent for ordinary income (39.6 percent under the President’s budget). The White House proposes to tax all income over $1 million at the top ordinary personal income tax rate regardless of whether it is capital gains, dividends, or some other type of income.

Second, current rules entirely exempt capital gains on assets that a taxpayer does not sell before the end of their life. In other words, unrealized capital gains on assets passed to heirs are never taxed.

This break is sometimes called the “stepped up basis” rule. When assets are passed on, the heirs receive those assets at a basis (original value) set to the date at which the assets are inherited. For example, if some asset is originally purchased at a value of $50 million and is then passed to an heir at a current value of $100 million, the heir can immediately sell the asset for $100 million without reporting any capital gain. This rule allows an enormous amount of capital gains to go untaxed.

The President’s budget would partially address this problem by treating unrealized gains as taxable income for the final year of a taxpayer’s life. Still, generous exemptions would apply. This proposal would exempt $5 million of unrealized gains per individual and effectively $10 million per married couple. The President also proposes allowing any family business (including farms) to delay the tax if the business continues to be family-owned and -operated.

Limit Like-Kind Exchanges 10-Year Revenue Impact: $20 billion

President Biden proposes to bar taxpayers from using “like-kind exchanges” to shield more than half a million dollars of capital gains from income taxes.

Capital gains on property sales can be the main type of income received by large-scale real estate investors, but they can avoid paying taxes on this income by structuring their transactions as “like-kind” exchanges. In these deals, one property is traded for another similar property rather than sold for cash. (The transfer can also be partly for cash and partly a like-kind exchange.) The general idea is that no income tax is due on a profit from the sale to the extent that the seller received another property rather than cash.

This policy was originally intended as an administrative convenience in situations where farmers traded land or livestock without any money changing hands. Today, the definition of like-kind is extremely generous, “allowing a retiring farmer from the Midwest to swap farmland for a Florida apartment building tax-free,”  according  to the Congressional Research Service. The New York Times has  reported  that Jared Kushner, who is heavily invested in real estate, avoided paying income taxes for several years, partly by using like-kind exchanges.

Limiting Tax Breaks for Pass-Through Business Owners

Expand limit on business losses 10-year revenue impact: $76 billion.

Under rules enacted as part of Trump tax law, when business owners report losses, they cannot use these losses to offset more than $305,000 of their non-business income (or $610,000 of non-business income for married couples). One of the rare provisions of the 2017 law that limited tax avoidance for the wealthy, this prevents high-income taxpayers from deducting business losses that exist  only on paper  to reduce the other income they report to the IRS.

The limit on business losses was set to expire after 2025. The CARES Act controversially  suspended it for 2020 and retroactively for 2018 and 2019. The American Rescue Plan Act extended it for one year, through 2026. The Inflation Reduction Act extended it for another two years, through 2028.

The President’s proposal would make two changes.

First, it would make the limit stricter by imposing the $289,000/$578,000 limit on excess losses even after the year when those losses are reported. (Under the current rules, after excess losses are carried into the following tax year they are treated as net operating losses, which are not subject to the same limit.)

Second, it would make the limit permanent.

Prevent Partnerships from Shifting Basis 10-Year Revenue Impact: $15 billion

The budget includes a reform that would prevent related partners in business partnerships from generating deductions by shifting the “basis” among themselves.

The “basis” is usually the amount a taxpayer has invested in an asset and is used to calculate the income generated from selling the asset. For example, if a taxpayer buys an asset for $3,000 and, a few years later, sells it for $10,000, the income generated from the sale is calculated by subtracting the $3,000 basis from the $10,0000 sale price, which comes to a capital gain of $7,000. In some situations, determining the basis can be more complicated, particularly when assets are owned by a partnership rather than a single individual.

Under current law, related partners in partnerships can generate tax losses on the distribution of property. This can happen when one partner receives property from the partnership that is greater in value than their actual investment (basis) in the partnership.

For example, if a partner who has invested $100,000 in the partnership receives property with a basis of $150,000 from the partnership in redemption, their basis in the property is stepped down to $100,000 (representing the partner’s “outside” basis in the partnership). In theory, this means if they sold the property immediately and received $150,000, they would pay income taxes on a gain of $50,000. (The $150,000 sale price minus the $100,000 basis comes to a capital gain of $50,000.)

The tax rules allow the partnership to offset that step-down in basis for the partner receiving the property by stepping up the basis for the remaining property in the partnership. In this example, if the remaining property held by the partnership is worth $200,000 and has a basis of $100,000, the basis would be stepped up to $150,000. This reduces the capital gains that would be taxed (in the event that the partnership sells its property) by $50,000. If the property is depreciable, the remaining partner can immediately start claiming depreciation deductions relating to the stepped-up basis of $50,000.

In an ideal world, the step-down of basis for the partner receiving property would be perfectly offset by the step-up in basis for the other partner or partners. In this example, if all the partners sell the property involved, the $50,000 increase in income for one taxpayer is offset by a $50,000 decrease in income for others. Unfortunately, this is not what usually happens in real life. Often the partner with the stepped-down basis never sells the property, meaning, in this example, the $50,000 gain is never taxed. The property remaining with the other partner(s) is often depreciable property, so their step-up in basis results in tax deductions they can claim right away. The transfer is often used to shift basis from non-depreciable property to depreciable property to maximize these tax deductions.

President Biden’s budget calls for a new rule that would allow the remaining related partner to benefit from the step-up in basis only after the property is sold and has become a taxable gain.

Partly Reversing the Trump Personal Income Tax Cuts for the Rich

Reverse trump’s cut in top tax income tax rate 10-year revenue impact: $246 billion.

The President’s budget would reverse the provision in the Trump tax law that cut the top marginal personal income tax rate from 39.6 percent to 37 percent. The proposal would also make the top rate apply to single taxpayers with taxable income exceeding $400,000 and married couples with taxable income exceeding $450,000, which is lower than the floor for the top income tax bracket in effect now.

This provision would raise the most revenue from 2024 and 2025, the years when the personal income tax cuts are in effect under the 2017 tax law. After 2025 it would continue to raise some revenue compared to current law because it would apply the top income tax rate at a lower level of taxable income than would be the case under current law.

Ending Tax Breaks for Dynastic Wealth

Close loopholes in estate tax 10-year revenue impact: $97 billion.

The President’s budget includes several proposals to close loopholes in federal estate and gift taxes. The most important of these proposals address the ways that wealthy people use trusts to avoid taxes.

The tax code should prevent wealthy people from avoiding taxes when they transfer assets to other people. Normally, a wealthy person would pay federal gift tax if they give away an asset to a family member or friend, and their estate could be taxed if they bequeath the asset to them when they die. (These taxes exempt the first $13.6 million given or bequeathed by an individual this year, and the first $27.2 million for married couples.) The taxpayer could sell the asset to their friend or family member but would pay income tax on any capital gain.

The problem is that loopholes in our tax laws allow wealthy people to use trusts to avoid federal taxes in all these situations when they transfer assets (usually to family members). These loopholes effectively subsidize the transfer of huge sums of wealth down through generations within a dynasty. This is especially true of assets that owners expect to appreciate significantly over the coming years.

Wealthy people use two tactics to transfer these assets to others (usually heirs) without paying gift or estate tax on the subsequent increase in the assets’ value.

First, a wealthy person can place assets in a Grantor Retained Annuity Trust (GRAT), which is structured to provide an annuity payment from the assets. The trust is arranged to give the remaining value of the assets – any value that the assets have above and beyond what will be paid back to the grantor in annuity payments – to the beneficiaries of the trust as a gift, which is subject to the federal gift tax.

However, wealthy people often create “zeroed out” GRATs, meaning the gift (the value of the assets beyond the annuity payments) is zero according to the formula specified in the tax law.

Over the duration of the trust, sometimes that turns out to be true – the assets might perform only as well or more poorly than calculated, meaning there really is no gift to the trust beneficiaries – and the grantor takes back the assets placed in the trust.

But if the assets perform better than expected, the trust pays the annuity payments to the grantor and then the remaining assets go to the trust as a tax-free gift. The formula used to determine the value of the assets when the trust was set up (which determined that no taxable gift was provided to the beneficiaries of the trust) is never retroactively corrected. This means that asset value has been passed to the trust beneficiaries (usually family members of the grantor) without triggering the federal gift tax or estate tax that would normally be due on such a transfer.

Wealthy people set up multiple GRATs knowing that they will avoid taxes whenever the assets in the trusts perform better than expected under the formula used in the law, and that they will lose nothing when the assets do not.

Second, a grantor can set up a trust and sell an asset to it. No gift tax applies because the transfer was a sale, not a gift. For purposes of the income tax, the sale has not occurred at all because the grantor owns the trust, which means no tax is due on any capital gains. But for purposes of the gift and estate taxes, the asset is owned by the trust (and eventually, its beneficiaries), which means that any further increase in the value of the asset will be free of gift and estate tax. Further, the grantor can make additional gifts to the trust free of tax by paying the income taxes due on the income generated by the assets in the trust.

The President’s proposals would make GRATs far less attractive by barring zeroed out GRATs (requiring a minimum amount of the initial transfer when the trust is created to be subject to gift taxes) and requiring the trust to have a duration of at least 10 years to make it less common for assets to outperform and create untaxed gifts. It would make sales to grantor trusts taxable events and would count income taxes paid on behalf of trusts as taxable gifts to the trust.

Reforming Tax Rules Related to Cryptocurrency

Apply wash sale rules to digital assets and make related reforms 10-year revenue impact: $26 billion.

After several years of tumultuous cryptocurrency performance and scandals involving major asset exchanges, many policymakers have sought more careful regulation of digital markets. As one step in this process, the President’s budget would prevent taxpayers from avoiding taxes by abusing losses from digital assets in the same way that the tax code already limits losses for other types of assets.

Taxpayers pay personal income taxes on their net capital gains, which is their combined capital gains (profits from selling appreciated assets) and capital losses (losses from selling depreciated assets) when the net result is positive. Wealthy taxpayers with significant investments therefore have an incentive to realize as many capital losses as possible to offset any capital gains.

The “wash sale rules” bar taxpayers from deducting losses from stocks and other securities that they repurchase less than 30 days after selling them at a loss. Without these rules, an investor who fully intends to remain invested in a company might simply sell their shares in the company when they are down to deduct the losses and then immediately repurchase them. This would further exacerbate the bias in the tax system that allows investors to sell assets whenever they can realize a deductible loss but hold onto appreciating assets to defer paying income tax on the gains.

The President proposes to extend the wash sale rules to digital assets. Under current law, an individual might sell a digital asset at a loss one day and then repurchase the exact same asset the next day, and still claim a deduction for the loss even though they have not really relinquished the asset in any meaningful way or changed their economic position in terms of that asset. Given the recent significant problems in the market for crypto and other digital assets that Congress has failed to regulate, it seems sensible to subject them to the same limits that apply to other assets, at the very least.

Creating a More Energy-Sustainable Tax Code

Repeal fossil fuel tax breaks 10-year revenue impact: $35 billion.

The White House proposes closing a variety of tax breaks that benefit fossil fuel producers. The largest subset of these tax breaks provide special expensing, depreciation, and amortization breaks for oil and gas production. These tax benefits allow fossil fuel companies to write off their costs more quickly, thus reducing their final tax bill.

The tax code also provides special credits and benefits to producers when oil and gas prices are exceptionally low or to producers who are using more costly wells. Another subset of benefits creates special business and income rules for fossil fuel companies, for example, allowing corporate income to be treated as partnership (pass-through) income.

Finally, the administration would repeal several provisions that allow fossil fuel companies to reduce their contributions to the Oil Spill Liability Trust Fund, an important and immediate source of funds for federal agencies to respond to oil spills.

Reforming Retirement Tax Breaks

Prevent abuse of retirement tax breaks by the wealthy 10-year revenue impact: $24 billion.

Congress has long used tax breaks to encourage Americans to save for retirement. Unfortunately, this has mainly benefited those who have comfortable incomes and would save anyway. (See ITEP’s  explanation  of how Congress recently made this problem worse.) The President proposes to limit some of the worst abuses of these tax breaks that turn them into unwarranted tax shelters for the rich.

Americans typically pay taxes on their income and are usually not allowed to defer income taxes until future years, because doing so would effectively allow tax avoidance. A tax liability to be paid in the future is worth less than a tax liability of the same amount due today because of inflation and discounting. (If you owe $100 in taxes but you can wait ten years before you pay it, you have effectively avoided tax because $100 will be worth less in a decade than it is worth now and you could have invested it and generated more income.)

However, Congress makes exceptions and allows tax deferrals and other tax breaks to encourage people to save for retirement, often allowing people to defer paying income tax on a certain portion of the compensation we save in 401(k) plans or Individual Retirement Accounts (IRAs) until we withdraw the money in retirement. The tax breaks that delay income taxes until retirement often result in much larger savings to draw down later in life.

A Roth IRA achieves something similar but through a different route. Taxpayers are not allowed to defer income tax on the income they place in a Roth IRA (meaning contributions are not tax-deductible like contributions to traditional IRAs) but the income distributed from a Roth IRA during retirement is tax-free. Whereas most tax breaks for retirement savings allow a deduction on the money flowing into the account and tax the income coming out during retirement, the Roth IRA does the reverse. The details are complicated, but in theory the savings for the taxpayer can be about the same.

The rules become complicated because tax breaks for retirement must include limits to prevent them from being tools for general tax avoidance. Unfortunately, these rules often fail. Despite the strict limits on contributions to a Roth IRA, the tech mogul Peter Thiel has a Roth IRA  worth $5 billion . Thiel placed business assets in his Roth IRA several years ago, apparently claiming they were worth no more than the contribution limits. Now those assets are worth $5 billion, meaning he generated $5 billion of income on which he will never pay income taxes. (Remember, contributions to a Roth IRA are not deductible but income coming out of a Roth IRA is tax-free.)

The President proposes several changes. The most fundamental would require withdrawals from tax-favored savings vehicles when their value exceeds certain thresholds. If a taxpayer has more than $10 million total in tax-favored retirement accounts, they must withdraw at least half of the excess beyond that threshold (ending the tax savings for the amount withdrawn). If they have more than $20 million total in such accounts, they must withdraw 50 percent of the excess and their withdrawal cannot be less than the total amount they hold in Roth-style savings vehicles.

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Accenture cuts annual revenue forecast following slowdown

It services provider is facing sluggish demand for its consulting amid high interest rates and uncertain economic outlook.

Accenture has cut its fiscal-year 2024 revenue forecast. Photograph: Getty

IT services provider Accenture cut its fiscal-year 2024 revenue forecast on Thursday, as an uncertain economy prompts clients to cut spending on its consulting services.

Shares of the company fell around 5 per cent in premarket trading. Accenture now expects full-year revenue growth in the range of 1 to 3 per cent, from its prior forecast of 2 to 5 per cent.

The firm has been grappling with sluggish demand for its IT and consulting services as high interest rates and an uncertain economic outlook prompt clients to withhold expenditure.

After elevated client spending during the pandemic, analysts say growth in the industry has been decelerating over the past six quarters.

Accenture also forecast third-quarter revenue in the range of $16.25 billion to $16.85 billion, compared with an estimate of $17.01 billion, according to LSEG data. – Reuters

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