Establishing a Professional Services Revenue Forecast

FinancialForce PSANetSuite OpenAir
Forecasting

Establishing a revenue forecast in a professional services organization is an art as there are a lot of factors involved such as opportunity pipeline, resource availability, negotiated selling prices, and so on. Mastering this art requires methodology, measures, and a little bit of instinct. There are three basic methods of forecasting that I’ve used in the past to define revenue forecasts as a way to measure progress against established revenue plans within the organization.

The first is what I call the trending method. In this method, you rely on historical trending information to estimate a forecast, assuming many factors remain the same over time. Factors such as average bill rate, billable utilization, and the bid-to-win ratio of opportunities are measured and trended to provide a forecast relying on this same information. This type of forecasting requires an ability to capture historical information in some format, such as timesheets and billing or revenue. By compiling this information in a forward-looking timeline, you can continually adjust the forecast as actuals are captured and trends change. Companies using this approach are in a steady state of business with predictable growth.

The second revenue forecast method is what I call straight-line forecasting. It’s a simpler method in which you rely on the predictability of engagement start dates and end dates along with the proposed or estimated value. Simply put, the forecast is a spread of the estimated value between the start date and end date. This could be computed down to the working days per month or simply dividing the value by the number of weeks or months expected for the delivery timeframe. Although not very precise, unless the engagement is a staff augmentation situation, it does provide a basic forecast approach and would be useful for newer companies working to establish measures.

The third model is the resource-based method, which is the most in-depth method and is based on the planning or scheduling of resource delivery hours and knowledge of rates or earning calculations for those hours. This model is a bottom-up calculation and requires you to schedule the resources considering which type of resource or skill set is needed for a specific amount of effort for specific dates. What really becomes important is the accountability for resource scheduling as the more accurate the scheduling the more accurate the forecast. The resource-based method has an additional benefit by providing insight into resource demand which can be compared to capacity for hiring decisions and staff development planning.

The three revenue forecast methods do not actually standalone. A good forecast will include a combination of methods depending on the opportunity, type of contract, and other such factors. By establishing a forecasting approach and an overall growth plan, you have a continual measurable checkpoint process to measure progress and manage growth throughout the year.

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