Revenue Projections for Startups: Aligning Sales and Finance Teams

Startups are tasked with managing limited resources and often unpredictable sales — all while having to grow and advance to become relevant and capture market share. While challenging, revenue projections are among the most important things that your startup can do to help set a budget, attract investors and facilitate growth.

Considering that up to 90 percent of startups will eventually fail — many from poor financial management — you must be checking all the boxes when it comes to revenue projections and aligning sales and finance teams. In this post, we’ll share why revenue projections are so important for startups, tools and methodologies for accurate predictions, and how Graphite Financial can help. Read on to learn more or contact us today for more information.

Why Revenue Projections Are Crucial for Startups

Revenue projections are designed to predict future revenue, expenses and cash flow, all key factors that can help with strategic decision-making. Revenue projections are especially important for startups, which often have unpredictable growth and require precise planning to avoid some of the common pain points that startups may face. While nobody can predict the future, we can all learn from the past, specifically from startups that have charted similar courses. That’s the value of working with a partner like Graphite on your financial services, including the all-important revenue projection. Having worked with hundreds of startups, Graphite can lean on this experience and tailor its solutions specifically for your startup.

Aligning Sales and Finance for Better Revenue Forecasting

One of the biggest keys to more accurate revenue forecasting is the alignment of sales and finance. At many startups, these two departments can work in silos and collaboration is minimal. However, if you want better revenue forecasting, there must be collaboration —- and no collaboration may be more important than the one between your sales team and financial team.

What are some of the key benefits of alignment when it comes to revenue forecasting? Alignment can help create shared goals and keep these important teams in regular communication to ensure the right strategies are in place to meet these goals. Technology can help streamline collaboration and create pipeline transparency. Tools like Salesforce and other accounting software programs are popular with startups for such purposes.

Methods for Probability-Based Revenue Projections

Probability-based revenue projections are forecasting methods that work to estimate future revenue by assigning probabilities to certain outcomes or scenarios. It’s a common approach for startups used in financial planning, sales forecasting and business modeling, and helps account for uncertainties to provide a better view of revenue projections based on expected streams.

The go-to-market team has the best idea of what the pipeline is and applying probability can be applied to these projections over time. Some tips for probability-based revenue projections include:

• Set a timeline for how far out you want to project.
• Evaluate your pipeline, perform market research, and figure out what the reality of the market is.
• Assess financial statements and various factors, such as time required to close the books and sales efficiency metrics.

From there, you can apply some level of probability based on what you expect over the designated period. Again, these metrics can be tracked with programs like Salesforce to have a constant real-time look at what the pipeline is for monitoring purposes. Then applying that level of probability can help create that financial projection based on reality and not hope or ambition. Other tools, like Ramp, can help track pipeline efficiency as well and position your startup in a positive state.

Building Realistic Revenue Models

What’s the best way to create practical revenue projections for your startup? According to Asher Kaplan of Ramp, multi-scenario forecasting can play a significant role. This involves creating different projections based on best-case, worst-case and the most likely scenarios. The benefit of multi-scenario forecasting is that it can help predict future outcomes based on what could potentially happen rather than relying on a single estimate. It’s especially helpful for startups where there’s still a high level of uncertainty.

Some other tips for building realistic revenue models include layering future lead projections such as new hires and campaigns. The benefits of doing so include better accuracy in planning, optimized resource allocation and smarter overall decision-making.

Tools and Methodologies for Accurate Projections

Building realistic revenue models that make accurate projections is made much easier with the right tools and strategies. Some of the best tools to help improve accuracy and streamline the overall process include solutions such as Runway, Ramp and Salesforce.

These solutions can be especially helpful when you factor in how startups are often dealing with imperfect and incomplete information, which can make accuracy difficult. Such tools can also help with creating financial projections that can help determine where startups plan to be from both a growth and an expense perspective and move toward those targets. These solutions incorporate more automated features that can help streamline certain operations and help people work smarter and faster. Automation also helps reduce errors that humans may be prone to making.

Some other best practices include operating with transparency and communicating often. An FP&A platform can also help startups gauge their financial health and track key metrics and ratios.

Overcoming Common Challenges in Financial Forecasting

Startups by definition are constrained by time and resources. Challenges tend to arise when startups that are already taxed with time and resource constraints try to do too much. Startups need to be clear about what their priorities are between funding periods and plan accordingly. Here’s a look at some common challenges and how to overcome them:

• Don’t forecast in silos, involve other teams. Ask questions around the company to test assumptions or gain information on how the forecast can be built. Collect the information before you start putting pen to paper.
• Set priorities for what each group’s priorities are. Each group within a startup is going to have priorities, which compete for the same pool of money.
• Don’t build just one forecast plan. It’s best practice to build at least three different scenarios and determine the key drivers in the startup that are going to be the difference between these scenarios. This provides a range of outcomes. Don’t just start with one plan, come up with a range of outcomes.
• Don’t work in silos, operate with transparency. Make sure everyone is aware of the startup’s goals and can help determine the strategies that will help to drive them.

Another common challenge that startups face is cash flow. Tracking cash burn can be important to revenue forecasts and can inspire leaders to act more frequently to adjust them based on this metric.

Practical Tips for Sales Forecasting

Creating an effective sales forecast is much easier said than done — but it can be achieved with a high degree of accuracy if you know what to do and how to do it. Here’s a look at some actionable advice you can use now to create a more effective sales forecast for your startup:

• Learn from the past and apply historical metrics to future projections. Track your data as your startup grows and apply a forecast based on the reality of your fixed costs and historical projections.
• Work with your team. Remember, your go-to-market team has the best idea of what your startup’s pipeline is and what sales it is likely to generate over a period. Decide how far out you want to project, what the pipeline is, what the market trends are and then apply some probability over what you expect to close over that period.
• Track your key metrics, including the time it takes to close your financial books and your conversion rates, to avoid guesswork and create more accurate forecasts.

Aligning for Success: Elevate Your Revenue Forecasting Game

Revenue forecasting is challenging enough on its own — don’t make it more challenging by not creating alignment between departments and failing to encourage transparency in the process. Collaboration is key. You can’t operate in silos if you want to forecast revenue with any sort of accuracy.

Just as important is forecasting different scenarios to come up with a range of potential outcomes. From here, you can crunch the variables to determine what factors need to be met to achieve the best-case scenario outcomes. The right tools and best practices can help you along the way, like utilizing Ramp or working with a professional from Graphite.

Remember, revenue forecasting is crucial to the sustainable revenue growth and prosperity of your startup. You can’t afford to take shortcuts.

Build Better Revenue Models with Graphite Financial

For more information on how to build a robust revenue model and tips and best practices for building better revenue models, consider working with a trusted financial partner like Graphite. At Graphite, we have a proven track record of helping startups get their financial matters in order and tailoring our services to their unique needs. In addition to budgeting and building revenue models, we offer a full suite of accounting services. Contact Graphite today for more information and to schedule a consultation.

FAQs

What are revenue projections, and why are they essential for startups?

Simply put, revenue projections are estimates of how much money a startup will earn over a set period. They may be based on historical data, industry trends, the state of the economy, market analysis and more. Revenue projections can help startups navigate uncertainties and set startups up well for long-term success.

How do probability-based methods improve revenue forecasts?

Probability-based revenue projections are forecasting methods that work to estimate future financial performance by assigning probabilities to certain outcomes or scenarios. It’s a common approach for startups used in financial planning, sales forecasting and business modeling, and helps account for uncertainties to provide a better view of revenue projections based on expected streams.

Some tips for probability-based revenue projections include setting a timeline for how far out you want to project, evaluating your pipeline and what the reality of the market is, and assessing various factors, such as time required to close the books and sales efficiency metrics.

What tools can startups use for revenue projections?

Some of the best tools to help improve accuracy and streamline the overall process include solutions such as Runway, Ramp and Salesforce. These tools create sales projections that can help determine where startups plan to be from both a growth and an expense perspective. They also incorporate automated features that can help streamline certain operations and help people work smarter and faster.

How can sales and finance teams collaborate on forecasting?

Technology can help streamline collaboration and create pipeline transparency. Tools like Salesforce and other accounting software programs are popular with startups for such purposes.

What are common challenges in creating revenue projections?

Startups are constrained by time and resources. Challenges tend to arise when startups that are already taxed with time and resource constraints try to do too much. Working in silos, failing to track data, incomplete data sets, balancing short and long-term goals, and failure to promptly adjust forecasts are all common pain points that startups face.

How does scenario-based forecasting work?

Scenario forecasting involves creating different projections based on best-case, worst-case and the most likely scenarios. The benefit of multi-scenario forecasting is that it can help predict future outcomes based on what could potentially happen rather than relying on a single estimate.