The 101 of revenue forecasting in professional services

Forecasting revenue is something every company does for obvious reasons. It helps you plan the business: when to hire, how many, can we invest, and often most importantly: are things progressing in the right direction?

At the end of the day, every company has targets and this is no different for professional services companies. Getting the process right makes the management job easier and provides the needed transparency for the whole company. This makes making decisions easier, leading to better performance.

However, forecasting revenue in a professional service business Is tougher than one might imagine. In theory, it’s a simple process. You simply take your effective average hourly rate and multiply that with your effective utilization and billable FTEs. However, to have these numbers readily available, you must know your average hourly rate and effective utilization. Then again, the past is not a perfect proxy for the future, so in essence you’re still basing your revenue forecast on past numbers and guesstimates. On average, you get reasonable outcomes with this method, but you will end up with months with huge deviances between the planned and actual revenue. This raises doubts and puts everyone’s guards up. “Everyone, you need to push 110% this month, so we don’t repeat the same mistakes from last month.”

But what if everyone was already giving 110%, and it was simply a forecasting error. As you based your guess on past data, you forgot to notice that your predicted capacity and utilization actually went down along with billable FTEs. So it might’ve been a sales and staffing problem instead of consultants not working hard enough – and often it is so.

Introducing a bottom-up revenue forecasting process

We’ve discussed how everyone in the company should join the capacity forecasting and resource allocation efforts. Simply put, this means that instead of managers allocating people’s time on projects, people should be in charge of their capacity forecasts. They should also know their hourly rates, and project budgets to make better decisions with the use of their time! Project managers are in charge of projects, account managers in charge of accounts, P&L managers for their unit, and finally, the C-level of the whole company. Instead of thinking capacity planning as a top-down exercise, you should build a culture where everyone is accountable and incentivised to plan their own work. There's another article on the topic of bottom-up planning and how to make it work, you can read it here.

Bottom-up means less admin overall

Now, if everyone plans their weeks and months ahead when possible, and simply estimates their hourly rates in the process, you suddenly have a bottom-up revenue forecast. Naturally, project managers and account managers should help consultants with the task, but ultimately, if your consultants have to ask their next week’s workload from a direct manager, you might just be running a ship with too much middle management overhead.

You can get to an accurate revenue forecast with the consultants having nothing to do with the allocation process, but this means the admin work accumulating to limited group of people, who hoard the visibility of the future capacity. Running a fully bottom-up process enables you to run a leaner organisation with more transparency and engagement.

Group your data by team, client, project etc.

When looking at your revenue forecast, different roles seek different answers. You should have flexible grouping options in place. Most likely P&L managers want to look at their group specifically, and compare the growth and size of the accounts or clients. Project managers want to have visibility on a project level, whereas the management needs to have an overview of the whole portfolio.

Make sure your forecasting tool has great filtering UX.

Why is having this data important

As mentioned in the starting chapter, a company needs to have an estimate of its future business. Otherwise you’re driving blind. There are many people who have expectations of the business: the shareholders, management team, consultants, clients etc. and no one likes (negative) surprises. The revenue forecast and a solid process to build one, is the crystal ball the company uses as backbone to make decisions. Hiring, sales, offering development, internal projects: they all stem from how the business will be doing in the next months.

Also, let’s face it. Your board will want your company to talk about the future, not so much about the past. In all conscience, when was the last time your company had even somewhat accurate predictions of the future of your business for the board? Improved forecasts help them feel that you’re on top of the situation. It's a noticeable confidence boost for the top management.

Summary

In professional services, getting revenue forecasting right means moving beyond traditional methods that often fall short. A shift to a bottom-up approach involves everyone from consultants to managers, using their firsthand situational knowledge. This improves accuracy and reduces administrative overhead by distributing the workload.

By involving team members directly and breaking data down by team, client, and project, the process becomes more efficient and insightful. This streamlined approach helps firms achieve accurate forecasts, creating a proactive business environment and boosting confidence among stakeholders.