7 Forecasting Tips That Help B2B SaaS Companies Plan Successfully

Q4 is planning season for most B2B SaaS companies, and that means it’s time to start your revenue forecasting process for the year ahead.

But, for many companies, revenue forecasting can be a bit of a guessing game. The last couple of years has taught us that many of the conditions that impact our business are completely out of our control, and it’s impossible to see into the future.

While no one can predict next year’s revenue with absolute certainty, there are a few tactics you can use to make your forecast more useful and accurate.

Let’s dive in!

1. Start by focusing on your unique business strategy

Before getting into the weeds with your forecast, make sure you have a clear grasp of the strategic changes and key drivers for your business in the next year.

In terms of strategic changes, consider any variables that will significantly alter your forecast above and beyond simply taking this year’s revenue and projecting it forward.

• Are you launching a new product line? If so, what might your attach rates be?

• Are you adding self-serve as a channel?

• Are you changing your pricing structure? If so, how might that affect net dollar retention rates?

In terms of your key drivers, most businesses usually have 1-3 things they can obsess over that will significantly move the needle. For example:

• If you mostly rely on inbound lead sources and have a highly optimized and predictable funnel, then increasing your inbound traffic might be your best lever

• For businesses that drive a lot of leads from Facebook ads, you might need to focus on your cost per lead and your overall ad budget

• For freemium businesses, perhaps it’s your number of signups or your free-to-premium conversion rate

• If you have more demand than sales capacity you might need to focus on the number of sales representatives you have

When creating your forecast, make sure these strategic changes and key drivers are the variables you’re paying the most attention to. And, as we’ll talk about later, plan for different scenarios based on changes to these key variables.

While it may be tempting to simply download a forecasting template and plug in your own numbers, you’ll be starting from a much stronger position if you build your forecast based on what actually matters to your business.

2. Plan for multiple scenarios

The last few years have reminded us how events outside of our control can impact revenue.

When things go wrong—either within the company or externally—you may find yourself scrambling in the middle of the year to recalculate your projections, and your team may feel demoralized if your company goals suddenly become impossible to hit.

While not every year is going to bring a global crisis like COVID, it’s smart to continue to be prepared for multiple possibilities.

Perhaps hiring will become more of a challenge next year, and you’re only able to hire 50% of the sales representatives you had planned. Or maybe market conditions have an outsized impact on one segment of your customers, and many of them go out of business or don’t renew.

So, what’s the best way to plan for multiple scenarios, and how extreme should they be?

It’s wise to plan three different forecasts:

• One for likely conditions. This is your base plan, which everyone will use for planning their goals.

• One for best-case conditions in which markets improve, revenue grows faster than expected, and you don’t encounter any major internal struggles. You can think of this as your stretch plan. Start by estimating an increase in revenue of 20% for planning purposes.

• One for worst-case conditions in which revenue drops off significantly. Again, a difference of about 20% from your base plan is a good starting place. This is your backup plan, but it likely won’t be used by the broader team. Your goal here is to understand how long your cash reserves will last if your revenue decreases but your spending stays the same. If you’re uncomfortable with how long your cash will last, you may need to prepare to make difficult spending cuts.

Each of these plans will also impact how you think about headcount, so keep referring to your three different scenarios when you consider how your hiring might change throughout the year.

By planning for each of these scenarios now, you’ll be prepared to react faster when unexpected events occur throughout the year, and every minute counts.

3. Approach your forecast from multiple angles

Instead of implicitly trusting your projections based on one method of calculation, it’s smart to take a 360-degree look at your revenue forecast. Approaching your projections from multiple points of reference gives you a sanity check and keeps you from being led astray by anomalies.

For example, consider these four different angles for calculating your projected revenue:

• Forecast based on your current pipeline. Use what's currently in your pipeline, along with your historical close rates, to forecast your revenue for the year

• Forecast based on lead-to-close conversion rates. Map out how many leads you expect to generate each month, and then multiply that by your expected close rates for those leads, and the average deal size you expect.

• Forecast based on your sales capacity. If you know how much revenue each account executive can generate, then you can forecast your revenue based on the number of reps you have fully ramped at any moment.

• Forecast based on your overall market penetration. If you know your market size, your current market share, and your desired market share by the end of the year, you can calculate how much revenue you will need to generate to get there.

If you consider all of these factors and they don’t agree, you need to think carefully about why. Are your growth expectations based on your lead-to-close conversion rates unrealistic, given your existing sales capacity?

It’s also a good idea to think through which piece of this puzzle feels the riskiest to you. Is it lead generation? Quota attainment? This helps you focus your strategy and reduce risk in those areas.

4. Consider using a cohort-based approach

For most companies, leads don’t turn into opportunities, much less close, the same month they’re created. However, it’s very common to use a lead-to-close conversion rate when projecting future revenue.

Unfortunately, this leaves out the time delay between when a lead is created and when it is closed. This can give you misleading data, especially if you have a longer sales cycle.

If instead, you use a cohort-based approach to forecasting, you can account for time delays and get a much more accurate view of future revenue.

The trick is that you’ll need clean data to get accurate results, because you’ll be factoring in conversion rates of leads to opportunities and opportunities to closed won deals by months after lead creation, as well as expected leads per month and average deal size.

That’s a lot of data, so make sure you trust your data sources!

5. Double check your forecast with the Last 4 Months (L4M) model  

Lots of companies get bullish when forecasting for the year ahead, predicting an aggressive growth trajectory. They make the assumption that growth will accelerate as headcount expands, processes get more efficient, customers make referrals, and many other positive factors.

It’s great to be ambitious and set aggressive goals, but too much optimism when forecasting can set you up for failure.

Once you’ve created a first draft of your forecast for next year it’s a good idea to check it by building a L4M model that projects the next twelve months based on your data from the last four months.

While there are tons of great reasons not to completely replace your forecast with this model, it’s a good reality check, and it can be a helpful starting point to identify risks—and strategies to address these risks.

6. Don’t set it and forget it for the year

There’s a lot of value in forecasting the next twelve months in Q4: it allows your teams to set departmental goals and work plans, it’s necessary for budgeting, and your board will almost certainly expect it!

That said, a lot can change over the course of the year. You don’t want to fall into the trap of stubbornly clinging next August to a forecast you set this December. You will collect a lot of crucial information each month in the coming year, so use it to your advantage.

It’s smart to maintain a rolling forecast that you update each month based on past performance. This is a great opportunity to use your L4M model and check it against your goals. Which model is looking more accurate? If market conditions change, it’s okay to reset and adapt, rather than chasing goals that are no longer realistic. This is also a good starting point to have a conversation with your leadership team about your biggest focus areas for the upcoming month or quarter.

7. Make sure you can actually measure your data easily

Any model you use for forecasting relies on data, from ARR to conversion rates. Your forecast is only as good as the data that informs it.

That's why you need to have confidence in both the inputs of your model, and the outputs that will tell you how you're doing throughout the year. If measuring actuals is too difficult or unreliable during your yearly forecasting stage, it’s going to remain quite hard all year.

With Subscript, it’s easy to measure your revenue data—along with all of your key metrics—in one place. Subscript gives you access to all of your B2B SaaS metrics, including ARR, churn, LTV, and more, in a visually intuitive dashboard. That way, you can find the answers you need quickly, without having to spend hours in Excel.

Interested in seeing how it works? Let us show you around.