Revenue Forecasting: A Guide for Agencies

Accurate revenue forecasts are critical for sustained business growth and profitability.

Without them, you’ll find yourself guessing about your financial needs. Which leads to misguided sales targets, less profitable project pipelines, and overworked or underutilized employees. 

Stop the guesswork and learn how to use revenue forecasts to make data-driven business decisions. This way, you can support the company’s financial health. And your team’s ability to do their jobs well.

What is revenue forecasting?

Revenue forecasting is the process of predicting your business’s future income. It is typically done monthly, quarterly, or annually. 

With accurate revenue forecasting, you know whether you: 

• Have enough business lined up for future quarters
• Are hitting your growth targets
• Need to hire more people, outsource work to freelancers, or scale back your team 

A reliable revenue forecast is based on at least three key financial elements: 

• Your won contracts: Include future projects in your forecast for the months you expect to deliver the work (or receive the revenue). Tracking based on work delivery lets you forecast won contracts further into the future. Tracking based on received revenue strengthens the accuracy of your cash flow predictions. 
• Your sales pipeline: Include any proposals or in-progress contracts with potential clients. To avoid overestimating for any month or given quarter, distribute the revenue from these deals across the project timeline. You can also forecast based on win certainty (i.e., including 80% of the projected revenue for 80% of certain contracts, 50% revenue for 50% of certain contracts, etc.). 
• Your historical performance: Use past financial results and market trends to help shape your forecast as well. For example, if you normally earn 25% more revenue in Q4, factor that in—even if it’s not confirmed yet. The same goes for increasing or decreasing market demands. Including these helps you create a high-level view of your sales and resource needs.

Why is forecasting revenue important?

Forecasting revenue growth means you make more informed decisions that support financial health across your entire business. 

Accurate revenue forecasting helps you: 

1. Set realistic financial goals and plans: Forecasting helps you set realistic business goals. When you know what your future income looks like, you’ll know how much you have to spend and can better manage your cash flow, investments, and expenses. 
2. Sell more effectively: Your revenue forecast shapes how you approach sales targets, ensuring you set goals and pricing strategies to cover slower periods and scale back when appropriate. 
3. Optimize staffing and hiring: Your revenue projections help you determine when you’ll need people to ramp up on billable work. And when they can focus more on non-billable activities, like learning and development. So, you can make more effective decisions on hiring, outsourcing, or downsizing depending on your future needs and revenue. 

Revenue forecasting models for professional services

There are two primary models used for revenue forecasting: top-down forecasting and bottom-up forecasting. 

Top-Down Forecasting

Top-down forecasting is a broad approach that relies on your past financial performance, the total addressable market (TAM), your company’s market share, and other external factors to estimate revenue. 

A basic formula for top-down forecasting is Revenue = Market Size × Market Share Assumption. 

Imagine you run a marketing agency and want to predict how much money you’ll make next year. 

You’d start by looking at the TAM and your market share.

For instance, in 2022, US companies spent nearly $481 billion on marketing services. If you estimate that your agency captures about 0.5% of that market, then your estimate would be:

$481 billion (TAM) x 0.5 (your market share) = $25 million (your agency’s projected revenue). 

Of course, this is just a high-level estimate. You can refine the forecast further based on other market predictions, reports, and company insights. 

Say you only captured 0.5% of the market last year. But recently, a major competitor closed. So, it would make sense to increase the market share you plan to capture this year. And factor that into your revenue calculation.

Pros of top-down forecasting	Cons of top-down forecasting
✔️Simple, high-level method	❌Can be inaccurate because it relies on general trends instead of business specifics
✔️ Good for long-term predictions and goals, such as annual planning	❌Often presents overly optimistic forecasting
✔️ Offers the ability to forecast without much internal data	❌Overlooks a number of important factors, such as resources available, sales pipeline, etc.

Bottom-Up Forecasting

Bottom-up forecasting is a more granular approach that uses concrete data to forecast revenue, such as signed deals, pipeline value, available resources, and planned expenses.

A basic formula for bottom-up forecasting is Revenue = Projected # of Sales x Average Sale Price.  

Say your agency’s average deal value is $10,000. And you’re on track to close 12 new sales in the next six months. So, your forecasted revenue would be $10,000 (average deal) x 12 (new sales) = $120,000.   

To achieve a more precise forecast, you could gather data across planned projects, including: 

• Projected total hours for each project  
• Known project costs, including labor costs and expenses
• Projected revenue of each contracted project 
• The average number of contracts for the given time period 
• Average revenue from past contracts or projects 
• The total pipeline value  

These numbers factor into your calculations to provide more clarity.

For example, you might subtract known project expenses from forecasted revenue to understand how much of your revenue is likely to be profit.

Or, if you don’t have projected data for future sales, you could use an average number of contracts for each quarter to forecast instead. 

But if you don’t have clear data on all your anticipated projects, you can use historical data to fill in the gaps. 

For example, if you expect to close three new website redesign projects that haven’t been scoped or quoted yet, use the average revenue from past redesign projects for your estimates. 

Pros of bottom-up forecasting	Cons of bottom-up forecasting
✔️ Greater accuracy because it’s based on your actual and historical data	❌ Can be time-consuming to collect and analyze data
✔️ Good for short-term predictions, such as monthly or quarterly planning	❌ Can be tricky to forecast long-term accurately (e.g over six months)
✔️ Helpful for companies with uncertain or fluctuating revenue since projections are based on concrete data	❌ Not as helpful for setting long-term goals, as it focuses on internal data vs. broader market trends

Top-down vs. bottom-up: What’s the best?

Top-down and bottom-up revenue forecasting are both valuable. But offer different advantages:

Top-down forecasting is best for…	Bottom-up forecasting is best for…
Long-term forecasting (six months and beyond)	Short-term forecasting (six months and under)
Businesses without access to detailed project and sales data	Business with access to detailed project and sales data
Stable businesses with reliable revenue and market share	Volatile or new businesses with fluctuating revenue
Setting high-level sales goals and targets	Generating accurate estimates to inform  sales tactics and targets

Combine both approaches to get the best view of your financial future on both macro and micro levels. The top-down approach helps you set your long-term financial plan and goals. And the bottom-up approach helps you stay on track to meet them.

How to forecast revenue with Scoro

Revenue forecasting for service businesses can be tricky. 

You have to get data from many disparate sources (e.g., finance, accounting, sales, internal reports), then manually compile and analyze that data, and calculate your predictions from there.  

Revenue forecasting tools like Scoro can simplify—and even automate—this process. 

Scoro’s “Revenue report” takes a bottom-up approach and offers a real-time revenue forecast using data from your sales pipeline and current projects. 

Here’s how to forecast your own revenue with Scoro. 

1. Build your projects in Scoro  

Scoro makes revenue forecasting easy, as it collects and analyzes all of your current and planned project data in one place. 

Use Scoro’s Quote Builder to create project proposals and quotes. From here, Scoro will use the information you enter as the foundation of your projected revenue. 

When you create a new quote, use the “Estimated duration” box to tell Scoro how to distribute the projected revenue in your forecast. 

Then, click the grey box to the right to open a pop-up box. Here, use the toggle switch to choose whether you want to include pass-through costs in your revenue calculation. 

If you enable the toggle, pass-through costs (like outsourced services or materials) will be included in your total revenue. This is useful if you want a comprehensive view of all income generated by the project.

If you disable the toggle, only the profit margin from these pass-through costs will be included in your revenue. This gives you a clearer picture of your actual earnings after expenses.

For example, let’s say you’re managing a website design project for a client. You charge £5,000 for your design services and also pay $1,000 to a freelance developer to help with some coding tasks.

• Toggle disabled: Your total revenue would be $5,000 (your design fee), and your profit margin would be $4,000 ($5,000 – $1,000).
• Toggle enabled: Your total revenue would be $6,000 ($5,000 design fee + $1,000 pass-through cost).

Either way, Scoro automatically calculates project margin based on estimated pass-through and labor costs. 

Then, if you know your total revenue will be distributed differently (e.g., in two 50% payments, in full at the close of the project, etc.), manually adjust it under the “Revenue distribution” header:

Repeat this process across projects. And Scoro will instantly feed all this data into your “Revenue report.” 

2. Track your project budgets and progress 

Once a contract is finalized in Scoro, that project’s revenue is automatically tracked and categorized accordingly.

You’ll find a “Revenue” tab located under the “Budget” tab within each project, displaying:

• Earned revenue: Revenue earned based on work done so far 
• Recognized revenue: Revenue considered earned based on deliverables 
• Forecasted revenue: Remaining revenue expected by the end of the project

Keep these calculations accurate by tracking time spent on each project and project deliverables in Scoro. 

If you don’t, it’s easy to over-forecast your confirmed revenue. 

Say you have a website redesign project worth $100,000 that’s supposed to wrap up in July. 

In April, you’ve received $25,000 of that revenue. If you don’t have a way to track that separately, you might accidentally list $100,000 for the future revenue of the project in your forecast— but there’s actually only $75,000 left in future revenue for this project. 

When you track your project costs and hours using Scoro, everything is tracked and calculated automatically.

So, you can quickly see accurate revenue forecasts and clear project budgets and know where your cash is coming and going at all times. 

3. Review the Revenue report regularly 

Review Scoro’s “Revenue report” monthly or quarterly. This allows you to see exactly how profitable you can expect to be and when and where you might need to strengthen your sales pipeline. 

Go to the Reports module.” Then, click “Revenue report” from the left-hand sidebar. 

There’s three main types of forecasted revenue you can see in the report: 

• Pipeline (Potential revenue): Estimated revenue from quotes in your sales pipeline (light blue) 
• Committed (Guaranteed revenue): Revenue from projects already won and in progress, based on the amount of remaining work (dark blue)
• Total Forecast: Sum of your pipeline and committed revenue (total bar height)

The total forecasted revenue is broken down by month in the bar chart. Underneath in the “Quote / Project” section, the monthly breakdown is based on each project or quote, showing you exactly where your revenue will come from. 

This can help you make more effective decisions about when to increase your pipeline and which quotes or projects to prioritize. 

You can also click the “Source” filter button to sort your chart by potential revenue (“Quotes”) or guaranteed revenue (“Projects”). 

Both types of forecasts are helpful. But the higher the percentage of quotes making up your forecast, the more careful you should be about making spending or hiring decisions based on that projected revenue. 

For example, if your forecasted revenue is 90% from quotes, there’s a good chance that you won’t bring in all of that revenue. But if your forecasted revenue is 90% from confirmed projects, that’s a stable prediction you can likely count on. 

Get stronger business insights with Scoro 

From adjusting sales targets to hiring needs, accurate revenue forecasting helps you make smarter business decisions to increase your profitability. 

Beyond Scoro’s Revenue report, use our customizable dashboards to support financial health and growth. From profit margins to project pipelines, display real-time data in one spot. Then, use the information to create a data-driven strategy that drives your business forward.

Start your free trial to see how Scoro’s revenue forecasting tools gives you more visibility into the data that truly matters.