The Complete Guide to Professional Services Revenue Forecasting

According to the 2023 Professional Services Maturity Benchmark Report, revenue has grown an average of 10.6% over the last five years and has remained steady throughout 2022.

These results reflect the shift toward a value-driven, qualitative approach to measuring the success of services with professional services revenue forecasting.

The ability to predict a company’s expected revenue quickly and accurately will impact how well companies can manage their budget, inventory, and staffing levels.

With accurate predictions a business can set aspirational and achievable goals. When a business waits until the project, order, or service is complete to measure revenue, it prevents the company from making any improvements until it is too late.

Revenue forecasting uses a strategic combination of historical business trends to predict the future revenue a company should expect over a set period to make better business decisions. This proactive avoids the pitfall of waiting until the project is complete to see what could have been done better when it no longer has an impact on improving profitability.

Forecasting helps firms determine the future supply and demand so they can better manage resources like how many hours will be needed for each position or skill to get a job done in advance.

These predictions can be used to give talent acquisition the lead time they need to properly fill those positions without delaying the project, especially in this tight labor market. It can also help prevent wasting payroll on a position before it is needed to perform the work.

Forecast volatility can lead to miscalculating project staffing needs, resulting in revenue leakage and decreased profitability. Alternatively, businesses that invest in consistently accurate real-time professional services revenue forecasting will experience a competitive advantage from better visibility and improved resource utilization.

Businesses that can predict the future demand for their services further out than their peers will have better resource management and strategy overall makes them more future proof than their competition with less visibility.

At the most basic level of business, it is best to understand how much money is going in or out to make better informed decisions on how to best allocate resources.

To calculate future revenue effectively, firms need to access a wide range of data on capacity, scheduling, payroll, market trends, and company history. Keeping all this information in one place that is accessible in real time with the help of a PSA will be the key, and here are just a few reasons why:

• It is easier to get updates from all members of the team responsible for data inputs for revenue forecasting that are in real time.
• The centralized location of data allows for further collaboration and reflection on ways to improve revenue or forecasting accuracy.
• Organizations can be more agile with closing a revenue period on a whim if they need to check for discrepancies and more quickly adjust compared to manual methods.
• The tedious tasks of calculating and collecting revenue become automated which frees up the forecasting team to use their skills for analysis or other big-picture improvements.

There are four main types of revenue forecasting models commonly used by businesses which each have their own strengths and weaknesses. In many cases, it can even make sense to mix-and-match different professional services forecasting models in a hybrid approach for even more accurate predictions.

1. Pipeline revenue forecasting model

The pipeline revenue forecasting model monitors key drivers of revenue to calculate a company’s trajectory of future sales. This model emphasizes a comprehensive analysis of the sales pipeline to create a sales forecast with the understanding that only a fraction of those opportunities will materialize as revenue.

2. Backlog revenue forecasting model

The backlog revenue forecasting model shares some qualities with the pipeline approach to predicting revenue since they both incorporate the perspective that considers the total revenue from contracted work even if it has not been delivered yet.

One major distinction, however, is that unlike the pipeline model, the backlog approach does not depend on uncertainty or making estimates. Instead, revenue growth is more realistically distributed over time.

3. Resource-driven forecasting model

Forecasting that is resource-driven is also referred to as bottom-up forecasting because it enables teams to rely on their intimate knowledge of operations to make the best decisions regarding how to schedule out their work so that it will align with available resources to maximize utilization.

Resource-driven forecast models depend on teams having a clear understanding of the entire project pipeline and requires continuous monitoring so that adjustments can be made when necessary to account for potential capacity limitations, bottlenecks, and surpluses.

4. Revenue forecasting through historical performance and effects of change

Organizations like managed service providers use professional services revenue forecasting with a recurring revenue business model. These organizations find the historical performance revenue forecasting model highly effective.

This approach assumes that a company will earn at least the same amount of revenue in a particular timeframe generated under the same conditions in the past.

Using the previously established performance history as a baseline, there is a standard by which to compare current conditions to determine exactly how those factors will impact revenue.

Read next: Guide to Professional Services Revenue Recognition

Despite the obvious importance of accurate revenue forecasting, many professional services organizations make the mistake of not giving it the attention it deserves.

High-performing PS organizations understand the importance of professional services revenue forecasting and actively seek ways to improve their methods of calculating revenue more accurately.

Step 1: Optimize resource scheduling and staffing as early as possible

When a services firm has achieved optimal forecasts of future demand it allows organizations to proactively adjust their workforce to avoid a slowdown from a labor shortage. This will help ensure that companies have all the resources needed to get a job done on schedule and on budget.

By maintaining the skills on staff that are required, companies can optimize those skilled labor resources just like anything else and match the right people who are best equipped to perform each task.

Step 2: Use tools and scheduling software

A common mistake that teams will make is failing to leverage resource scheduling software, which can provide managers with an invaluable consolidated view of their resource availability in real time so they can adjust their utilization rates.

The closer forecasting data is to real-time, the more precisely aligned resource commitments and revenue predictions will be, which all start with keeping an updated schedule.

Step 3: Emphasize rate accuracy

Despite billing rates being standardized across an organization, it is important to consider other factors that can cause those rates to change and influence the accuracy of professional services revenue forecasting.

One explanation that a rate would deviate from the standard is when resources or services are purchased in bulk for a discount. The ability to negotiate better wholesale rates can be a determining factor when it comes time for a firm to award a contract for work or other major projects.

Therefore, to avoid basing rates on a volatile variable that is subject to change, organizations should instead link their rates to more stable tracking systems such as scheduled hours or find other ways to standardize rates as much as possible.

Monitoring prices is an obvious component of billing rates, but it is also important to calculate when that revenue will be realized, which is especially important in phase-driven work that may depend on future earnings or hitting budgeting milestones.

Step 4: Treat projects as unique

Not all projects will be the same and firms should proactively analyze project opportunities and risks coming down the pipeline to get a more accurate revenue forecast since not every project contract will be won.

Since projects will be in various stages of the sales cycle from opportunity to proposal, the revenue expected for those projects should be factored down to avoid representing revenue that will not actually be earned.

Step 5: Anticipate and monitor variability

Companies trying to figure out how much variability is acceptable should expect a wider margin of error the further out their projections are into the future. Shorter periods of revenue forecasting should yield more accurate predictions and should be measured against those long-term objectives.

Measuring variability at the outset of a project can always be adjusted, but starting sooner helps make the professional services revenue forecasting far more accurate.

Understanding and calculating variability can be very challenging to recognize in real-time, but consistently predicting variability with accuracy will require the right software tools.

Step 6: Avoid revenue and cash flow confusion

Companies going through significant expansion are likely to have more cash flow, but cash forecasting should not be confused with revenue forecasting despite their similarities.

Cash flow is often emphasized in growing firms since it is a tangible guarantee that the business will keep running but does not replace revenue forecasting.

Tracking cash flow will only encompass financial activities like invoicing or collections. Still, revenue forecasting considers other influential factors of operations like whether a company has the resources to deliver on its promises and contracted work.

Step 7: Compare predictions to actual utilization

The final step of improving revenue forecasting is to review how well current forecasting models are working and to fix areas of weakness that are causing inaccurate predictions.

If company timesheets are not an accurate reflection of revenue forecasts, then it may require a different combination of forecast models and assistive technology.

Read next: PSA Software vs Project Management Software: What’s The Difference?

No forecasting model is better than the others on its own. Getting started with choosing a forecasting model that suits your business needs will involve a blend of all four models.

Regardless of the combination of models used, the common denominator is that companies benefit from leveraging the revenue management function of a PSA tool to aggregate schedule information and validate their predictions.

Custom vs. redundant work

For work that is more standardized and repetitive, a company can utilize their backlog to get a macro view of revenue forecasts. Alternatively, more customizable work will require the addition of bottom-up professional services revenue forecasting or potentially even the resource-driven model.

Large firms

Larger companies usually layer the backlog model with the bottom-up approach and the pipeline forecasting method to ensure the most accurate revenue forecasting results possible. Companies with tighter deadlines for delivering their services will want to utilize capacity planning methods to make the most efficient resourcing decisions.

Change-prone projects

Work projects expected to undergo dynamic modifications or unreliable changes during production will benefit from using bottom-up forecasting or resource-driven models for predicting revenue.

The next step is to monitor the work coming through the pipeline and analyze incoming opportunity demand size, duration, and date of commencement to make phase-driven forecasting predictions.

Regardless of which forecasting models are used, professional services organizations need to remember to monitor the actual revenue being generated to verify the accuracy of forecasting predictions while adjusting to get even more precise results.

For professional services organizations, the demand for more accurate predictions and better customer-centric experiences is just the start.

A value-driven approach to professional services revenue forecasting is key for organizations to identify areas of improvement while enabling a qualitative approach to measuring the success of their services.

Discover how Planview PSA’s solution can help you to accept and deliver on more customer engagements, with predictability in capacity and utilization.