Last updated on Oct 30, 2023
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Benefits of revenue forecasting
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Methods of revenue forecasting
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Tools for revenue forecasting
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Here’s what else to consider
Cash flow is the lifeblood of any construction business, but it can be challenging to manage due to the unpredictable nature of the industry. You may face delays, changes, disputes, or payment issues that affect your income and expenses. That's why revenue forecasting is a vital skill for construction managers and owners. Revenue forecasting is the process of estimating how much money you will earn from your projects in a given period, based on factors such as contract terms, progress, market conditions, and customer behavior. In this article, you will learn how revenue forecasting can help you manage cash flow in construction, and what tools and techniques you can use to improve your accuracy and efficiency.
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- Sherezade Suhail, CA, CBV Managing Director, Value Creation and Financial Modelling, PwC Canada
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- John Kenney III, MIoR, CPRC CEO of Cotney Consulting Group
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1 Benefits of revenue forecasting
Revenue forecasting can help you manage cash flow in construction in several ways. First, it can help you plan ahead and budget for your costs, such as labor, materials, equipment, and overheads. You can also allocate resources and prioritize tasks according to your expected income. Second, it can help you monitor and control your cash flow, by comparing your actual revenue with your forecast and identifying any gaps or deviations. You can then take corrective actions, such as adjusting your pricing, invoicing, or collections strategies, or seeking additional funding sources. Third, it can help you communicate and negotiate with your stakeholders, such as clients, subcontractors, suppliers, and lenders. You can use your revenue forecast to demonstrate your financial performance and credibility, and to secure favorable terms and conditions.
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- John Kenney III, MIoR, CPRC CEO of Cotney Consulting Group
From my experience in the roofing contracting business, revenue forecasting has proven to be an invaluable tool. It provides a clear vision of potential earnings, enabling the company to plan its financial strategies more effectively, ensuring that we allocate resources efficiently, and maximizing profitability. It also offers a tangible gauge to measure actual performance against expected outcomes, highlighting areas needing adjustment. Furthermore, having an accurate revenue forecast boosts stakeholder confidence, assuring investors and partners of the business's growth trajectory. In essence, it enhances our financial management capabilities and strategically positions us in the marketplace.
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Having worked in construction and business partnered with different departments in industry, revenue forecasting is key, especially in high inflationary environments. For example, during and after the pandemic, lumber costs have fluctuated so much that instead of planning quarterly or monthly for pricing, it continued to increase in price further exasperated by supply chain issues that it was monitored weekly, if not daily to ensure prices are reasonable and delivery of goods would come on time. Any delays and/or high prices would cause completion of work to be pushed out, causing revenue recognition to stall. Moreover, higher prices eat away at gross margins and therefore profitability. So revenue forecasting is key for success!
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2 Methods of revenue forecasting
When forecasting revenue for your construction business, there are a variety of methods to choose from. The percentage of completion method calculates revenue based on the proportion of work completed on each project, compared to the total contract value. This method is suitable for complex projects with clear deliverables and payment schedules. Alternatively, the completed contract method only recognizes revenue when a project is fully accepted by the client, without recording any revenue until then. This is suitable for short-term or simple projects with fixed prices and low risks. Lastly, the projected sales method estimates your revenue based on expected sales volume and price, which is suitable for repetitive or standardized projects with high demand and stable prices.
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I agree with these methods. They help gauge what needs to be measured and the delivery of projects over time. Here's what I've used currently and in the past:% of completion, estimate at completion (EAC), earned value (EV) cost/schedule variances (CV/SV), cost/schedule performance indexes (CPI/SPI), cost-benefit analysis (CBA), %s based on revenue for related labour, material, direct or indirect costs, SG&A, CapEx just to name a few. There are many methods to choose from and picking the right metrics can make or break construction work or projects, and can relay useful or useless info to stakeholders accordingly.
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These are all appropriate ways of revenue forecasting based on the various streams of revenue in construction.The other revenue stream I saw was "fixed price" contract and "cost plus fixed fee".With a fixed fee or firm price method, close monitoring is extremely important, to identify cost overruns and when it starts to dip into the contingency portion. % completion and estimate at completion, earned value are useful computations in this case.
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3 Tools for revenue forecasting
To perform revenue forecasting effectively, you need to use reliable and user-friendly tools. Spreadsheets are a popular and versatile tool that can help you create and update your revenue forecasts, however, they can be prone to errors, inconsistencies, or security breaches. Accounting software is a specialized tool that can help you automate and streamline your revenue forecasting process, but it can also be costly, complex, or incompatible with your existing systems. Forecasting software is a dedicated tool that can help you improve and optimize your revenue forecasting process, however it can also be challenging, technical, or overconfident. It is important to understand and validate the assumptions and outputs of any tool used for revenue forecasting.
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Tools are great depending on the needs of the business and its respective departments and stakeholders. The key here is to get as many data points, as requested to put in report form, that is usable for decision-making by stakeholders in the business/company. Revenue forecasting is more of an art than a science since many inputs and factors, especially in construction can happen. For example, worker strikes, unexpected material cost delays, supply/demand shocks, seasonality and weather issues, revised requests from clients, supplier/vendor issues, etc. are factors that may not be captured by tools and needs re-forecasting for the success of the projects. Thus, flexible revisions of revenue are key to managing stakeholder expectations.
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4 Here’s what else to consider
This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?
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- Sherezade Suhail, CA, CBV Managing Director, Value Creation and Financial Modelling, PwC Canada
It is critical to distinguish between revenue forecasting and cash inflows. It is possible you may be able to record something as revenue in the current month, but this may not result in cash receipts until a future period (depending on invoicing structures, payment terms, etc.). Since cash is the lifeblood of any company and necessary to sustain the ongoing operations of the business, it is important to follow the flow of funds all the way to when they arrive in your bank account in order to build a proper projection of your future financial position.
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- Michelle Downs CPA | Accounting, Advisory, Financial Analysis
Carefully reviewed contracts are the foundation in construction cash flows--for the GC, subcontractors, and material suppliers. Retention, paid when paid provisions, construction delays, etc. are all considerations. Also, knowing the contract language for billings and payments should be at the forefront. For example, if a GC requires a subcontractor's pay applications to be submitted by the 15th of the month, and the deadline is missed, then the subcontractor has a full month to wait to bill before any cash inflows can be expected.
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