How to Forecast Revenue for a 12 Month Small Business Budget: Step-by-Step Guide

Budgeting is rarely a topic that elicits excitement from business owners and managers. Instead, the process is associated with minutiae related to tracking down data from Excel files, internal systems and vendors. Then, once the budget is created teams dread being held accountable for a forecast that was made hastily or with little conviction. After all, who can predict the future?

But budgeting doesn’t have to be a painful process, and for those businesses that establish strong budgeting practices the benefits are significant. A well prepared 12 month budget can highlight opportunities for growth, help establish quarterly goals, empower managers to think strategically, and lead to process consistency.

This post will walk you through a simple process for forecasting revenue for a 12 month period, and share a practical example that will help business owners and managers overcome the negative stigma associated with the budgeting process.

Why Care About Budgets?

A forward looking budget covering the next 12 months will help small businesses:

• Manage cashflow and avoid cash shortfalls

• Plan for growth, or for slow seasonal periods

• Justify investments in growth, including equipment and personnel

• Use data to form key performance indicators and guide decisions

Budgeting will provide a roadmap that aligns financial resources with business goals, and helps you manage deviations from the plan, whether positive or negative.

Step 1: Prepare a Spreadsheet

The budgeting process is best managed in Excel or Google Sheets. Your spreadsheet doesn’t have to be fancy or well formatted. What matters is the numerical output. Start with a column on the far left that will be used for your income statement line items, followed by 12 monthly columns.

Excel or Google Sheets are good budget planning tools. Start with a column for your revenue line items and twelve incremental columns for the months in your forecast.

Step 2: Split Revenue by Products and Services

Once you’ve created a spreadsheet, our budgeting process starts at the top of the income statement with revenue.

• Begin by breaking down your sources of income. What products, services, subscriptions do you offer? 

• List each of these as a separate line item. If you have many products or services, consider categorizing these in a manner that allows you to group offerings by income streams that have similar attributes or pricing dynamics

Step 3: Break Down Price and Quantity

Under each line item, you’ll want to create four new rows – one for price, one for quantity, one for revenue (price x quantity), and one to measure year over year growth.

Under each product or service, create rows for (1) price, (2) quantity, (3) revenue (price x quantity), and (4) year over year growth.

• Breaking your line items down by price and quantity will allow you to use granular inputs for your budget that will enhance the accuracy of your revenue forecast

• To arrive at assumptions for price and quantity, reference prior months, such as the past month, or 12 months ago, to establish a baseline for your forecast

• What trends in price or quantity do you notice? Is the quantity growing? Are prices increasing, declining, or flat?

Step 4: Add Price and Quantity Assumptions for Each Product or Service

For assumptions, we’ll use a blue font in our forecast so we can quickly understand which cells contain variables that drive the outputs in our budget.

• For Product 1, we reviewed the quantity sold in the same month last year (i.e. 12 months ago) and observed that we sold 100 units. We also noted that sales picked up throughout the year, so we believe in Month 1 of this year we’ll sell 120 units based on the trend

• Pricing for Product 1 has been fairly stable at $450 per unit, so we’ll use this value for Product 1 price

• Next we multiple price by quantity to arrive at $54,000 of revenue in Month 1 from Product 1

• We then calculate the growth rate versus 12 months ago, which in this case is 4.9%

• Repeat this process for Product 2, then sum the revenue for product one and two and calculate the total year over year growth rate

Once you've reviewed historical revenue trends, arrive at assumptions for price and quantity for each product. Use the year over year growth rate to sanity check your assumptions.

Step 5: Consider Seasonality and Growth Rates When Forecasting Remaining Months

Seasonality affects many businesses, especially those that are not recurring revenue businesses. For instance, retail sales peak around holidays, tax services are busy during the first quarter, and landscape businesses may pick up in the spring.

If your historical financials show seasonal patterns, you’ll want to be sure your revenue forecast follows a similar trend. One of the benefits of using year-over-year growth rates is that you’ll capture the impact of seasonality by measuring growth this year against the seasonally active month in the prior year.

• Our hypothetical business shows a seasonal uptick from Month 3 to Month 5

• Based on our performance in the prior 12 month period, we believe Product 2 quantity will grow at a faster rate than Product 1 quantity, but that Product 1 can sustain a larger percentage price increase throughout the year

• We also know that our business finished uncharacteristically strong last year in Months 11 and 12, so we expect difficult year over year growth comparisons this year in Months 11 and 12, leading to negative growth in our forecast

• To sanity check your forecast, check the Total Revenue growth rate each month, and compare these to historical norms. If you’re exceeding historical growth rates, what is driving your assumption? Marketing spend? Sales efforts? Product changes? Regardless, think critically about what will drive your growth.

Pay careful attention to seasonal trends and total revenue growth. If your growth rates are materially higher or lower than historical growth rates, step back and review your assumptions to determine why.

Unique Considerations For Your Business

Budgeting is not a one size fits all exercise, and you’ll want to spend time thinking about angles that are unique to your offering so that you can tailor this exercise to meet your needs. For instance, recurring revenue businesses (subscription models) will likely have lower impact from seasonality and will need to consider customer churn in a forecast.

Expense requirements to support revenue are also an important consideration when forecasting. In the revenue forecast example above, it would be important to think about how products are produced. If manufacturing products, does your current capacity meet the forecasted growth need? If not, an investment in machinery and personnel might be necessary to realize growth. Prior to investing in machinery, consider your break-even utilization to avoid buying equipment that won’t be utilized enough to justify the investment.

If your business is not manufacturing products, will you need to increase the investment in inventory to sustain growth? How much will this cost? Do you have sufficient space to store extra inventory?

Concluding on Revenue Forecasting

On the surface, revenue forecasting seems straightforward. But the thought exercise should extend beyond a top-line estimate and into a plan for supporting growth. Often, business owners have ambitious growth plans, but without a detailed understanding of the people, machinery, inventory, or real estate required to support growth, owners can end up on shaky footing as they attemp to support growth.

Budget forecasting isn’t just an exercise in financial planning, it’s a strategic process that sets up businesses for growth and resilience. Ground your projections in historical data, consider trends and seasonality, and think critically about expenses and how they scale. In doing so, you can craft a budget that is realistic, actionable, and that inspires confidence in your team as you seize opportunities for growth.

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