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Price times quantity: a revenue forecast you can defend

Almost every bad forecast starts with a percentage. Almost every good one starts with a unit.

6 minute read · part of the free minekop guides

Ask somebody for their revenue forecast and you will often get a growth rate. "We will do 40% more than last year." It is a number, but it is not a forecast, because nothing in it can be checked, argued with, or acted on.

The alternative is older and duller and works: price times quantity. What are you selling, what does one of them cost, and how many will go out of the door each month? Everything else in a financial plan is downstream of that answer.

Step one: choose the unit

The unit is the thing you sell one of. Get this right and the rest follows.

Business	Sensible unit
Coffee shop	One drink, or one average customer visit
Software subscription	One account, per month
Agency	One billable day, or one retainer month
Manufacturer	One item shipped
Online shop	One order, at the average basket size

If your unit is "a customer" and customers buy wildly different amounts, split into two or three products instead. Three rows that each make sense beat one row that averages away the truth.

Step two: the price

Use the price the customer actually pays, after the discount you actually give. List price times volume is a forecast of a world you do not live in.

If you sell in more than one currency, pick the one you report in and convert at a rate you write down. When somebody asks why the number moved, "the euro" is a much better answer than a shrug.

Step three: volume, month by month

This is the part people rush. A year is not twelve identical months. Three things shape the curve:

• Ramp. Month one is not month twelve. A new shop, a new product or a new salesperson takes time to reach a normal rate.
• Season. Almost every business has one. Retail has December. Accountants have the tax deadline. Anything selling to businesses has a dead August.
• Capacity. An agency with four consultants cannot sell more than about 4 × 20 = 80 billable days a month, whatever the demand.

Step four: the cost of one unit

Next to the price, write what it costs you to deliver one. For a coffee that is beans, milk and the cup. For a manufacturer it is materials and the labour that touches the product. For software it is hosting and payment fees.

Price minus cost is gross profit, and gross profit over revenue is gross margin. This is the single most useful ratio in a small business, because it tells you how much of each sale is left to pay for everything that is not the product.

Step five: check it against something real

A forecast with no reality check is a wish. Pick at least one:

• Last year. If the plan is double, name the specific thing that doubles.
• Capacity. Divide the forecast by your unit and ask whether the team, the kitchen or the machine can physically produce it.
• The market. How many customers exist in reach, and what share does the plan quietly assume?
• The funnel. If you need 200 sales at a 3% conversion rate, you need about 6,700 leads. Where from, and at what cost?

Common mistakes

• Starting from the number you need. Working backwards from the profit you want gives you a target, not a forecast. Keep the two apart.
• Forgetting that customers leave. If you sell subscriptions, next month's total is this month's, minus churn, plus new. Ignoring the middle term is how a plan quietly assumes nobody ever cancels.
• Straight-line growth. Nothing grows 5% every single month. Uneven months look less tidy and are far more likely to happen.
• Confusing an order with cash. A sale in March that is paid in May is March revenue and May cash. That gap is what the cash flow guide is about.

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