Do you struggle to know and understand your cash flow? Do you desire more clarity to help you make better decisions? How can you objectively do this without emotions causing stress and uninformed decisions?There is one activity that your team can do today that will help you have more clarity into the revenue, and ultimately, more cash flow in your business.
So what is this one simple method?
Simply compare your expected forecast by customer and service/product to actual results each month.
Try to forecast your revenue by client, service, and/or product just one month out. For many businesses this is difficult, and even if you have a very predictable business, it is still worth it.
Here are 5 reasons comparing actual results to your expected forecast will help:
1. Helps to Catch Billing Errors
Suppose you compare the expected revenue to actual, and you notice that it is much lower than expected. Maybe you missed billing this customer a fee or service. Maybe it is a new customer or a long-term recurring fee that was missed. Not only can you immediately bill the customer, but you can also improve the billing process going forward so that these types of billing errors don’t continue to happen.
2. Improve Team Communication
Companies that are growing quickly hire new employees who don’t fully understand how the company makes money. They may not understand the pricing structure or the margins. When your team is responsible for forecasting revenue, they have to gain a better understanding of the contracts, billing, and work being done during the month.
It starts with the leaders, managers, and directors and ultimately flows to the whole team. Think about the advantages of up-selling new products and services when everyone better understands how this impacts the revenue of the organization. If your organization has a commission or bonus structure based on revenue and/or profit, it can be even more motivating to learn the components of forecasting revenue.
3. More Rational Decision Making
“The first inner skill to be developed in the Inner Game is that of nonjudgmental awareness.” – W. Timothy Gallwey in The Inner Game of Tennis
I have been reading this book which has an amazing applicability to other areas of life. When we assess in a nonjudgmental way, we take the emotion out, and we learn faster.
When forecasting revenue and then assessing it to actual revenue, we can get upset when we are off. Most likely there will be many differences at first. We just need to understand what caused the variance. Some of the difference could be due to misinformation on our part, and some could be missed opportunities. We can’t change the past, but we can get better at forecasting and ultimately change the future.
4. Better Pricing and Higher Profitability
How does this one assessment help improve pricing? When we better understand the components of revenue and margin, it is easier to correctly price and build the best team going forward. For example, let’s say the team needs to increase revenue so that it becomes profitable. It is even more motivating if they are compensated this way. They will be looking for ways to become more efficient and increase revenue by up-selling. Also, when you get another customer, you can use many of these ideas to save time, increase profit, and ultimately, cash flow.
5. Practice Longer-Term Planning
I started this article by stating that this one thing will increase profits and cash flow. How does a one-month revenue forecast help going forward?
Suppose you forecast one month out more accurately. Now you can start to forecast even further out with more accuracy and confidence. This increased confidence will give you more peace to make longer-term planning decisions such as key hires, investments in equipment, or new marketing opportunities.
In summary, forecast your revenue one month out by client and service/product, and you will have more clarity and less stress in your business. You will catch billing errors, which has an immediate effect on profit. You will educate your team on revenue and margin so they can help you up-sell and improve contracts. You will improve rational decision making and decrease emotional overreactions that can be harmful. You can begin to improve pricing and profitability as you build efficiencies, hire and staff appropriately, and price new contracts correctly.
Finally, you can improve long-term planning because the more accurate you are in the short-term, the more you can feel confident about the future.
Curious about other ways your business or agency can save money and be better positioned for the future? Bender CFO Services can help you gain command over your finances. Contact us today to learn more.