Forecasting Recurring Revenue Deserves More Attention

Needless to say, revenue is the lifeblood of any business. Driving that revenue is fundamental for every company’s success and deserves full attention from board rooms and down.

Simple fundamental questions deserve answers:

•   What’s our revenue year to date? vs budget? vs target?

•   Where will our revenue come from? Existing customers? New?

•   What’s realistic compared to pipeline? What’s our upside?

•   What does history tell us? Seasonal variations?

The list can be made longer and every month, fair basic questions need answers. This is where forecasting has a central role to play. It enables us to understand and put focus on what matters.

We drive sales in CRM systems and forecasting has a central place in these. CRM systems like Salesforce are fantastic from many perspectives but designed primarily for “selling products at a price” which means there is more to wish for if you run a recurring subscription business.

How can I know what an Opportunity with Amount 100k means for my business? A 100k is not just a 100k if I sell recurring subscriptions in addition to one-time transactions. Does it mean:

  • 100k one-time, paid up front or through fixed schedule?
  • 100k contracted over three years, linear growth with upside above committed volumes every month?
  • 100k contracted over three years with 40k one-time fees + 60k recurring with linear growth and upside above monthly commit? Non-linear ramp up of commit level?

Simply summing up Opportunity Amounts to a total number without considering recurring revenue aspects says very little about how the business actually performs. CMOs, VP Sales, CEOs of recurring businesses need to know more to take action. When can we hire? Do we need financing? Do we need to cut down?

Growing a Recurring Revenue Business

Recurring revenue is built up month-by-month over multiple years as opposed to a single discrete up-front fee. The beauty is that every year is started from a strong recurring revenue base line as opposed to having to win all new business. The flip side is that recurring revenue is inherently deferred and cash will come in across multiple years. This can be extremely challenging from a cash flow point of view and cash flow is often the limited factor for growth.

A company can have tremendous traction today winning lots of new business and yet struggle with cash. A big win in Q4 does not automatically save the year in an additive recurring model. Seemingly small performance deviations can have large impacts on a recurring businesses.

This Forbes Executive Finance Council article provides additional insights into the dynamics using a SaaS software company in growth as an example.

The SaaS Addiction To Deferred Revenue

Even when 12 months up-front payments are applied, growing a recurring revenue business remains a balancing act that requires attention.

Subscription Forecasting and Planning

As companies turn towards recurring subscription business models for both existing and new offerings, forecasting does too. Monthly and Annual Recurring Revenue (MRR, ARR) become central key performance indicators in addition to understanding one-time revenues. Multiple revenue types need to be properly managed in a sliding multi-year perspective to understand how the business actually performs. The following questions deserve answers every month:

•   What’s our ARR? How will it evolve month-by-month the coming 18 months? 24 months? 36 months?

•   What changed compared to our view previous months? What does that mean short term and long term? Any immediate actions to take?

•   How much is contracted? How much growth from existing customers?

•   How much relies on new customer growth? How does this compare to pipeline?

•   How much is marked Committed-Realistic-Upside from Sales?

•   How much related one-time revenues such as consulting and hardware can we expect attached to our recurring revenue?

•   What if scenario [a]? What if scenario [b]? What if scenario [c]?

I have asked and answered questions like above to stay on top of recurring sales and revenue forecasts. I have built and refined spreadsheets outside various CRM systems that have been less than optimal for driving subscription businesses. Even in small organizations it’s been challenging, error prone and work intense.

For companies using Salesforce there is now a better alternative.

Subiterum’s Subscription Forecasting and Planning application enables companies to drive their subscription business with confidence in Salesforce.

It adds the Revenue Type and Multi-Fiscal Year perspectives and enables forecasting of Opportunities as well as generic Subscriptions.

Subscription Forecasting and Planning is fundamental for driving recurring subscription businesses. It belongs in the CRM Sales domain and it deserves more attention.

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