At the center of every professional services firm, there is a revenue forecast. Regardless of the platform used to develop a revenue forecast—spreadsheets, whiteboards, or Professional Services Automation software—every services manager is trying to predict what the future may hold. And revenue forecasts are just that, a prediction.
In my last post (link below) about revenue forecasting mistakes, I took a look at resource schedules, rates, and contract structures. In this post, I will review some of the more nuanced errors that professional services firms can make. These mistakes often arise at companies that are growing rapidly, or simply do not have the proper tools to model their business.
See: 6 Revenue Forecasting Mistakes Professional Services Firms Make – Part 1 for items 1 – 3
4. Make sure that Schedule is Up-to-Date
Using a resource schedule to build a forecast from the bottom up is one of the most precise ways to model revenue. In a recent post about revenue forecasting models for professional services firms, I highlighted why this is the case. But when things change, and they will, if managers don’t update the schedule their revenue predictions will become increasingly inaccurate. There are often two ways schedules become out of date at a professional services firm—short-term changes and long-term delays.
Every project manager is familiar with making short-term adjustments to keep their plans on track. What project managers often overlook, however, is the ripple effect that those changes have on other projects in the organization. Pulling in additional resources, diverting a senior team member, or just allocating more time to a task will have an impact on the near-term revenue forecast. Professional services firms that use centralized resource scheduling software can model this adjustment and update their forecasts in real-time.
As the flow of work evolves, so will the schedule. It is no secret that these changes will influence a firm’s revenue forecast. What is important is that a firm promptly documents these changes in their resource schedule. Failure to update the schedule promptly will influence numerous decisions in both the sales and delivery operations of the business. From over-committing resources to overstating revenue, the closer to real-time a professional services firm’s data the more useful it will be for decision-making.
5. Understand and Factor for Variability
Successful professional services firms need to be flexible, and the result of flexibility is variability in revenue forecasts. Forecasting for the next one or two months is straightforward and actual revenue will likely be within 5% of the estimate. Forecasts six to twelve months out are much more variable and could be off by 20% or more. But what if you could measure, predict, and then plan for variability?
Understanding and measuring variability will provide valuable insights. In fact, one of our client’s experience with predicting professional services variability has turned into competitive advantage. The short version of that story is that it turns out PS variability tends to be consistent. Consistent variability means that predicting it with a reasonable level of accuracy is achievable, provided you have the right tools.
6. Know the Difference between Revenue and Cash Flow
This tends to be an issue for rapidly expanding professional services firms where cash is king, but it is necessary for any service manager nonetheless. Revenue forecasts and cash forecasts are two closely related, but very different things. Growing firms will often put an emphasis on cash flow because it is what keeps the business running. Cash forecasting is essential, for sure, but foregoing a revenue forecast can lead to issues down the line. This is because cash forecasts focus on financial activities, such invoicing and collections, while revenue forecasts focus on operational activities, such as project staffing. While a healthy cash forecast can help you understand if you can keep the lights on, it will not highlight if the organization has the right resource mix to deliver the work it has won.
Forecasting revenue becomes even more necessary for managing fixed price projects. Understanding actual effort to date and the estimated effort to complete a fixed price project provides project managers with tools to test the health of their engagement. The estimated effort to complete component is what aggregates into a firm’s revenue forecast and helps increase the accuracy of the revenue recognition process. These are two areas where forecasting cash simply will not help.
The Next Step for better Revenue Forecasts
Revenue forecasting can be both nuanced and complex. If any of these common forecasting mistakes sound familiar to you, it might be time to look at both your processes and your tools. It could be that you are having a hard time consolidating data for a reliable forecast. Alternatively, the processes you follow could be leading to stale or untrustworthy information. The most successful professional services firms address these issues by utilizing professional services automation software to model and measure their forecasted work. PSA tools help services firms decentralize the scheduling workflow and quickly provide a consolidated view of the organization.