Revenue Forecasting For A Project-Oriented Company
Any company that manages a portfolio of different projects sold to its clients experiences a challenge when forecasting revenue. This is typical for companies on industries such as software development, construction, specialty machinery and equipment.
With a limited number of projects on its portfolio, at least three types of risk may be considered on forecasting revenue. Imagine a company with 20 potential projects on its portfolio of opportunities that may eventually turn into orders that may eventually turn into revenue. At any given time, these opportunities are uncertain in terms of: the likelihood that they will turn into orders, its actual final amount and the time when it materializes. We will consider these three types of risks into our forecasting model.
We will create a probabilistic model using Monte Carlo simulation that will be able to stochastically forecast potential revenue for this company for a whole year, month by month. By the end of the process, we will be able to answer questions such as:
- What is the probability of achieving a certain target level for total annual revenue?
- Given a certain confidence, what should be the estimated total revenue forecast for an annual planning horizon?
- How does revenue distribute along the 12 months of the year?
- What are the key driving projects out of a list of 20 opportunities that the company should focus on in order to fulfill its target revenue?