The Essential Guide to Revenue Forecasting for Your Startup Food or CPG Business

As a founder of a startup food business, you face countless challenges daily. One of the biggest hurdles? Accurately forecasting revenue. Missteps in this area can lead to stockouts, wasted resources, and missed sales opportunities, jeopardizing the growth and sustainability of your business.

In this guide, I’ll break down why revenue forecasting is crucial, the risks of getting it wrong, and the best methods for forecasting revenue for your e-commerce or CPG business. Let’s dive in.

Side note: this blog is a summary of our more detailed guide on the same topic. If you'd like a copy of that, as well as the modeling templates we use, click here to grab a free copy. 

Why Forecast Revenue?

Revenue forecasting isn't just a financial exercise—it's the backbone of your business strategy. Here’s why it’s indispensable:

1. Size and Activity Levels: Forecasting gives you a clear picture of your business’s scale and activity levels. It’s a reliable indicator of product-market fit. Steady revenue growth signals that your product is resonating with customers.

2. Marketing Budget: Your revenue forecast helps determine your marketing budget. For instance, if you project $100 in revenue and your customer acquisition cost is 30%, you can allocate $30 for marketing.

3. Inventory and Supply Chain Planning: With a solid forecast, you can accurately plan your inventory and supply chain, ensuring you have the right amount of product to meet demand.

4. Hiring Plans: Knowing your projected revenue allows you to plan your staffing needs appropriately, ensuring you’re neither overstaffed nor understaffed.

5. Valuation Methodologies: Investors often use your revenue forecasts in their valuation methodologies. Accurate forecasts can enhance your credibility and attract investment.

Risks of Getting Revenue Forecasts Wrong

Forecasting Too Low

1. Stockouts: Running out of stock leads to unsatisfied customers and can negatively impact your rankings on platforms like Amazon.
2. Understaffing: If your forecast is too low and actual revenue exceeds expectations, you might not have enough staff to handle the business volume.
3. Missed Sales Opportunities: Inability to meet demand means lost sales and profits.

Forecasting Too High

1. Tied-up Cash and Resources: Over-forecasting leads to excess inventory, especially problematic for perishable goods.
2. Wasted Money on Overheads: Overestimating revenue can result in hiring too many staff, increasing your overhead costs unnecessarily.
3. Unhealthy Balance Sheet: Excess inventory can mean less cash or more debt, negatively impacting your balance sheet.

Methods of Revenue Forecasting

There are four primary methods for revenue modeling you may encounter:

1. Website-Based Forecasting: This method uses traffic or visitors, conversion rates, and average order value. It's suitable if a significant amount of your business comes through your website or marketplaces like Amazon.

2. Store-Based Forecasting: Ideal for retail-centric businesses, this method involves multiplying the number of stores by the sales per store in each period. It's useful if your business relies heavily on brick-and-mortar stores.

3. Customer-Based Forecasting: Focuses on individual customers. You divide your ad budget by customer acquisition cost to estimate the number of customers acquired, then multiply by the average order value. This method is good for businesses with subscription models or those heavily reliant on paid customer acquisition.

4. Market Share-Based Forecasting: This method looks at market share multiplied by market size. It's suitable for commodity-type products or businesses with highly seasonal products.

Choosing the Right Forecasting Method

Consider the following when choosing a forecasting method:

1. Data Availability: Choose a method where you have the most data or experience. This will make the assumptions and inputs more reliable.
2. Growth Lever: Identify your business's growth lever. For example, if expanding into more stores will double your sales, use a store-based model. If you’re skilled in paid media, a customer-based model may be more appropriate.
3. Multiple Models: It’s common for businesses to use more than one revenue model. For instance, you might have separate models for Shopify, Amazon, and wholesale channels.
4. Simplicity and Usability: Your model should be simple enough to update monthly. Complicated models that are burdensome to maintain will not be updated consistently.

Final Thoughts

Revenue forecasting is crucial for the success of your startup food or CPG business. It impacts everything from marketing and inventory to staffing and financial health. Choose the method that fits your business best, use reliable data, and keep your models simple for regular updates.

If you'd like to get access to our free guide on revenue forecasting as well as the templates we use for modelling our clients' revenue, grab your free copy below!