Revenue Forecasting for IT/Software Houses

Part 1: Sales forecasting

Sales forecasting relies on a well-defined pipeline. Each deal in the pipeline should have specific attributes including:

1. Pipeline stage
2. Probability
3. Forecasting category
4. Deal amount
5. Close date
6. Deal type

Caution: Maintaining accurate and updated close dates by your sales reps is crucial for precise forecasting. 

This is what a pipeline built from the above attributes looks like in HubSpot:

Monthly Weighted Forecasting

Monthly weighted forecasting helps you estimate the finish line month by month.

To do that assign a  % probability to each deal based on its pipeline stage and multiply it by the deal amount.

Probability is updated automatically whenever a deal stage is changed.

As a result, you get a clear picture of expected revenue for each month.

Scenario-based forecasting

This approach offers a more nuanced understanding of potential outcomes for your finish line. 

Types of forecasting scenarios:

1. Won + Commit: 
2. Won + Commit + Most Likely:
3. Won + Commit + Best Case: 

Define goals for new business acquisition 

The first step in the process is to define clear and realistic new business goals for the upcoming year. Start by determining how much you want to grow, considering quarter-by-quarter seasonality.

Once you've established your overall new business goals, the next step is to split them into quarterly targets based on seasonality.

Recognize that different quarters may have varying demands and opportunities.

This allows for a more nuanced approach to goal-setting and aligns your business strategy with the rhythm of the industry.

Understanding the win rates in your sales pipeline is essential for setting realistic goals. If, for instance, you aim to win $640 in a quarter and have a 20% win rate, you'll need to have four to five times that amount in your pipeline.

Factor in your sales cycle duration, especially if it tends to be lengthy. Adjust your pipeline requirements accordingly to ensure timely and achievable results.

Asses pipeline coverage

Evaluate your pipeline coverage by comparing the required pipeline against the actual pipeline.

If you observe a deviation from the required pipeline value it's an early warning sign that you may not reach your goals in the upcoming months.

It provides a proactive approach to forecasting, allowing for timely interventions and adjustments.

Part 2: Forecasting Annual Revenue 

Service-based companies often lack the stability of fixed monthly subscriptions, dealing instead with project-based revenue. This makes forecasting complex due to varied billing models like:

1. fixed price
2. time and materials
3. consumption-based

IT projects typically span several months. Thus, you have to spread revenue across billing months based on ongoing project utilization.

Unfortunately, HubSpot's default forecasting doesn't support this approach and splits deals evenly in a SaaS manner.

(HubSpot default recurring revenue reporting)

As a result, you don't see the actuals in the revenue reporting.

Also, you cannot track future revenues from WON deals still due to be invoiced in the coming months.

Your forecasting doesn't give you business predictability and hinders decision-making. 

This is why IT and Software Houses need forecasting tailored to the service-based business model.

Using this model, you track four revenue metrics:

1. Invoiced revenue: secured revenue that has been invoiced
2. Contracted revenue: future revenue from won deals still due to be invoiced
3. Weighted revenue: revenue from open deals in the pipeline multiplied by stage probability
4. Gap: missing revenue to hit the annual target

Based on those metrics, you build a set of dashboards that give you a helicopter view of your business performance and allow forecast revenue accurately. 

Essential revenue reporting for IT and Software Houses

There are 4 questions your revenue reporting has to answer:

1. Where are you now?

2. How are you pacing?

3. What's the gap to target?

4. What can cover this gap?

The below reports will help you to find the answers. 

*In the below examples actual revenue means invoiced.

1. Where are we now?

Here you want to learn what your invoiced revenue stream looks like vs. last year, and how you're doing against your targets.

2. How are we pacing?

These reports give you insights into where you will finish the year given the actual delivery and contracted revenue.

3. What's the gap to target?

These reports 

4. What may cover the gap?

These reports give you insights into revenue that may come from open deals in the pipeline multiplied by the sales stage probability.

How to build custom revenue reporting in HubSpot 

Now you probably ask yourself: how can I build similar dashboards in my CRM?

Don't worry, we got you covered.

Below you can see a step-by-step process of creating custom revenue reporting in HubSpot we're using for our clients. 

Bonus: Reporting for better resource planning