Preparing an Operating Budget—Forecasting Sales and Revenues

Print this page

Using the run rate

In the example below, the company sells products and also sells monthly services under long-term contracts. Table 1 shows projected sales for Year 2 using the run rate from Year 1. Table 2 shows projected sales for Year 2 assuming a 10% increase over total sales from Year 1.

Table 1: Forecasting Revenues Using the Run Rate for Product and Contract Sales

  

Dec. Year 1 sales

Year 2 Total Projected Sales @ Dec. Year 1 run rate

Product sales

$75,000

$900,000

Contract monthly services sales:

Client A

(added Jan. Year 1)

$4,000


$48,000


Client B

(added Apr. Year 1)

$4,000

$48,000

Client C

(added Oct. Year 1)

$6,000

$72,000

Client D

(added Dec. Year 1)

$9,000

$108,000

Subtotal contract services sales:

$23,000

$276,000

Total revenue:

$98,000

$1,176,000


Table 2: Forecasting Revenues at 110% of Total Year 1 Product and Contract Sales

  

Year 1 total sales

Year 2 Total Projected Sales @ 110% of Year 1 total sales

Product sales

$878,000

$965,800

Contract monthly services sales:

Client A

(added Jan. Year 1)

$48,000

$52,800

Client B

(added Apr. Year 1)

$36,000


$39,600


Client C

(added Oct. Year 1)

$18,000

$19,800

Client D

(added Dec. Year 1)

$9,000

$9,900

Subtotal contract services sales:

$111,000

$122,100

Total revenue:

$939,000

$1,087,900


For products, this example assumes sales are fairly evenly distributed over the course of Year 1, so there is little difference between the two approaches ($900,000 versus $965,800). However, if product sales were concentrated in only a few months of the year, using the run rate would grossly over- or underestimate product revenues for Year 2.

Projections for contract services in the example are more realistic when the run rate is used ($276,000) because many new contracts signed in Year 1 were signed late in the year. Using annual data for contract services results in a very conservative estimate ($122,100) for Year 2.

The most realistic revenue forecast for this company, and the revenue figure that will be used in subsequent examples, is $1,241,800. This amount is based on 110% of Year 1 product sales, plus the Dec. run rate for contract services.

Click here to exit the program. Warning, this will close your session. You will be able to return to the course, but any evaluation of your progress/performance will not count after you have clicked this button.