How to forecast revenue growth for your Business

Learn techniques for forecasting business revenue to maximise growth and build confidence
about the future.

Even when your small business is thriving, grappling with financial reports often feels overwhelming. But forecasting revenue growth is important for understanding business performance and growth potential. It’s not just about numbers—it’s about gaining clarity and making informed decisions that drive success.

Whether planning for growth, managing cash flow, or preparing for potential challenges, a well-crafted revenue forecast acts as a guiding light. By analysing key drivers of revenue growth, estimating expenses, and testing different scenarios, you can gain the insights needed to seize the right opportunities.

What is revenue forecasting?

Revenue forecasting predicts your Business's revenue over a certain period, usually one year. The forecast uses data from present and past sales to make an educated prediction of future revenue.

Understanding likely future revenue is useful to businesses in two ways. If you know that revenue is likely to increase, you can make plans for investment or other costs. If revenue is forecast to fall, the business can take steps to improve, such as by finding new ways to drive revenue or reducing costs.

How to forecast revenue in 7 steps

1. Decide on a timeline

Revenue is typically forecasted over 12 months but it might be helpful to provide a top-line annual prediction for the next three years. Remember, the further out the forecast, the more uncertain it is.

2. Consider what drives and hinders growth

Before you start predicting how your Business will perform, you must consider external factors that could drive or slow your sales over the next year. For example, are there seasonal upticks, major public events, or upcoming regulatory changes that might impact your sales?

Think about your planned business activity and predict how things like expansion, marketing campaigns, or new product launches might affect sales, or how the adoption of new technology could speed up order processing or manufacturing.

3. Estimate your expenses

It’s critical to account for future expenses when creating a revenue forecast. Your Business probably has fixed costs, that are easier to predict, and variable costs that will fluctuate based on sales. These expenses might include things like material costs, packaging, and labour.

Both your fixed and variable costs may need to increase to drive new revenue, so think about how the predicted and planned factors you shortlisted earlier will impact your expenses.

4. Predict sales

Sales are a vital yet difficult metric to predict accurately, but there are a couple of methods to consider. A top-down analysis, for example, estimates sales by starting with the total value of a market and predicting the share your Business might capture. While this approach provides a broad view of potential sales, it may lack accuracy.

A bottom-up analysis, on the other hand, tends to be more precise. It begins with the average value of a single sale and factors in the number of sales your Business typically generates. Using this method, you can create a revenue forecast based on actual sales volume and value, offering a clearer and more realistic picture.

5. Combine expenses and sales into a forecast

Once you have outlined the factors that could affect revenue over your chosen period, you can combine their estimated effect on sales with the associated expenses.

A simple formula for projecting sales is:

Number of customers x average sale value x number of units = projected sales

Deducting your projected expenses from your projected sales then gives you predicted net revenue.

To make a forecast, put past monthly expenses and sales in a spreadsheet up until the present date. Then, stretch your current sales and expenses forward into future months and years.

Ensure you also incorporate planned and predicted factors and their expected effects on revenue and expenses.

6. Check your forecast using key financial ratios

You can use the following ratios to determine whether your forecast is realistic.

Gross margin

Gross profit margin is the ratio of total direct costs to total revenue. For example, a manufacturing company’s margin would be calculated like this:

(Total revenue - the cost of goods sold) / total revenue = gross margin.

In general, the higher your gross margin, the better your cash flow.

Understanding and anticipating your gross profit margin helps you maintain a healthy cash flow, which in turn allows you to reinvest in and grow your Business.

Operating profit margin

Operating profit is the profit your Business makes after deducting the total operating expenses from your revenue. The operating profit formula is:

Operating income / revenue x 100 = operating profit margin

As revenues grow, you should see positive movement with this ratio.

7. Test scenarios by adjusting variables

With a revenue forecast complete, you can test it by tweaking variables within your projected expenses and sales to reflect specific scenarios.

For example, what would happen to your revenue forecast if you make 100 more sales calls each week, generating an additional two sales per day? What impact would this have on costs (labour, technology costs) and revenues (additional sales)?

These kinds of tests help you identify the factors that will have the biggest positive (and negative) impact on your revenue, allowing you to both plan for and protect your Business.

The takeaway

Revenue forecasting is a powerful way to understand your Business’s financial future and make informed decisions that set you up for success.

By following these steps, you can identify growth opportunities, manage risks, and stay prepared for whatever lies ahead. With a clear and realistic forecast, you’ll be better equipped to maintain healthy cash flow and build a resilient, future-proof business.

This article contains general information and is not intended to provide information that is specific to American Express, or its products and services. Similar products and services offered by different companies will have different features and you should always read about product details before acquiring any financial product.

The material made available for you on this website is for informational purposes only and is not intended to provide legal, tax or financial advice. If you have questions, please consult your own professional legal, tax and financial advisors.

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