How to accurately forecast future revenue
Imagine if you could accurately predict your brokerage’s future revenue for the next month, quarter, or even year.
How much easier would that make budgeting? What about resource allocation?
And how much better would you sleep at night knowing exactly where your future finances stand?
In this guide, we’ll detail everything you need to know to forecast your brokerage’s revenue with confidence, including
- Two common forms of revenue projection you should avoid at all costs
- The one thing you have to get right before you can forecast revenue
- The right way to determine how much revenue your pipeline will generate
- What often derails otherwise well-crafted revenue projection models
Let’s dive in.
The wrong way to forecast revenue
Many commercial real estate (CRE) brokerages rely on revenue projection models that lead to inaccurate results. The two most common are
- Broker projections
- Historical growth rates
Here’s why you’ll want to avoid these methods.
Broker projections
With broker projections, leaders simply ask their agents which deals they expect to close and how much revenue they expect those deals to generate.
Brokers are in a strong position to know the answers to these questions better than anyone else, but there’s one major problem—your best brokers are probably overconfident.
For the most part, this is a good thing. Your brokers need to believe they can close every deal, and they need to believe they can maximize each deal’s value for your brokerage.
After all, how can you expect them to go through the daily grind of prospecting and driving deals forward if they don’t expect significant rewards for their efforts?
Unfortunately, overconfidence is a disaster when it comes to revenue projection.
If your revenue forecast is higher than is realistically attainable, you risk agreeing to long-term commitments or recurring expenses you can’t actually afford.
Historical growth rates
With historical growth rates, brokerages look at how their revenue has grown over the past year or several years and forecast the same growth rate for the upcoming year.
This is admittedly a step up from broker projections—it is a data-based projection, after all—but it’s still problematic.
The main issue with this method is brokerages rarely grow at the same rate for long periods of time.
Several factors affect how much revenue brokerages can generate in any given year. These factors include
- Economic conditions
- New competitors
- Current organizational structure
- Government regulations
- Property trends
- Cap rates
- And much more
The point is this: Past performance is not always indicative of future performance.
While historical growth trends are worth understanding and analyzing, they are inherently a backward-looking analysis.
And accurate revenue projections require a forward-looking analysis.
How to get started with successful revenue projection
Before you can get started with revenue projection, you have to implement a pipeline management process.
There’s just no way around it.
Since this guide is focused on revenue projection, we’re not going to go into too much detail around how pipeline management works, but we will cover the basics. (For a more in-depth look, download our pipeline management guide).
Here’s what you need to know.
Pipeline management starts with segmenting your deal cycle into stages that represent points where your brokerage overcomes friction in the client’s journey.
For example, when you get a prospect to listen to your pitch, you’ve overcome one source of friction.
When the prospect is ready to see a proposal, you’ve overcome another source of friction.
For a seller rep, the stages might look something like this
- Prospect
- Proposal
- Listing
- LOI/Offers
- Escrow/Due Diligence
- Closed
By segmenting your deal cycle into stages, you can get better insight into what causes deals to break down so you can systematically drive them forward.
But it also serves a key purpose in revenue projection, which we’ll cover in the next section.
Creating a weighted pipeline
Once you’ve properly defined and implemented your deal pipeline, you can analyze trends to objectively determine how likely deals are to close.
For example, you may determine your brokerage closes 20% of deals that reach the proposal stage, 30% of deals that reach the listing stage, and so forth.
Armed with that information, calculating how much revenue your brokerage will generate is a simple three-step process
- Determine the total potential revenue available at each stage
- Multiply the revenue available at each stage by the percentage of deals that close once they
- reach that stage
- Add together the projected revenue of each stage
So, let’s say you have $8,000,000 of potential revenue available in the proposal stage, and your brokerage closes 20% of deals that reach the proposal.
That means you can expect to generate $1,600,000 (or 20% of $8,000,000) worth of revenue from deals that have currently reached the proposal stage.
Then, if you have $2,000,000 in pipeline at the listing stage, and you close 30% of deals that reach the listing, you can expect to generate $600,000 worth of revenue from that stage.
And when you add the expected $1,600,000 of revenue from the proposal stage to the expected $600,000 worth of revenue from the listing stage, you end up with a combined $2,200,000 worth of expected revenue.
And you simply repeat that process until you’ve determined the expected revenue of your entire pipeline.
Increasing the accuracy of your revenue forecast
While forecasting revenue based on the likelihood of closing deals once they reach a particular stage will generate reliable results, if you want even more accurate numbers, there are additional variables you can consider.
For instance, you may want to review past deal data to determine how likely deals are to close by property type or prospect characteristics.
You might find your brokerage closes deals that involve retail properties at a higher rate than deals that involve industrial properties. You might also find your brokerage closes deals with prospects who work for larger organizations at a higher rate than deals with prospects who work for small or mid-size businesses.
If you determine the rate at which you close deals based on these additional factors, you can use that information to further increase the accuracy of your revenue projections.
The importance of data integrity
When forecasting revenue, you can’t overestimate the importance of data integrity.
A single incorrect data point can drastically alter your revenue projection, leading you to base critical business decisions off inaccurate information.
But for many brokerages, obtaining accurate deal data is a challenge.
Part of the problem is the way brokerages store information today. They often track and manage data in multiple spreadsheets, emails, and paper notes.
This means agents and brokerage leaders must edit multiple files to update data, increasing the likelihood of human error.
It also makes it difficult to compile all the information needed for accurate revenue projections.
Fortunately, there is a better way of storing and organizing data, which we’ll cover in the next section.
How technology can help
Rethink CRM by Buildout—the client relationship management (CRM) platform designed specifically for CRE—empowers users to store, organize, update, and analyze their data from a single source.
And a combination of out-of-the-box and build-your-own reports give you and your team better visibility on deals in the pipeline, probability of closing, and more, making accurate revenue projections easier than ever.
“Having all that data available right here and being able to pull it up so fast really helped streamline the whole process,” said Luke Majewski, Sales Team Coordinator at Wolf Commercial Real Estate (WCRE). “Before, we did everything in Excel spreadsheets, which was labor-intensive to manage.”
Get in touch with our team to see a demonstration of how Rethink CRM supports accurate revenue projections.