deltek insight 2011: accurate revenue forecasting
TRANSCRIPT
VI-209: Accurate Revenue ForecastingIs it Really Possible?
Insight 2011
Presented byPeter Stein & Sandy LeDuc
Agenda
April 18, 20232 ©2011 Deltek, Inc. All Rights Reserved
All About Forecasting
Why forecast? Why is it so hard? What’s in a forecast?
Statistical Diversion or Why it Works Probability distribution Throwing darts Accuracy through increased sampling
The Useful Stuff Producing a “raw” (but accurate) forecast “Waterfall” charts Alas, past history can indeed be an indicator of future results The final forecast
Session Objectives
In this session you will:
Learn how to use Deltek to create accurate forecasts Understand a little bit of why it works
April 18, 20233 ©2011 Deltek, Inc. All Rights Reserved
Why is Forecasting Important?
• Company valuation
• Anticipating hiring / resourcing needs
• Anticipating expense reduction / purchasing decisions
• Provide relative future comparison of offices / segments
• Keep everyone on same page
modification
April 18, 20234 ©2011 Deltek, Inc. All Rights Reserved
Why is it so challenging in Professional Services?Nature of the Beast
We don’t sell products; We sell people’s time We don’t recognize revenue all at once Every deal immediately has a continuous backlog until the project ends Most projects are not uniform in their labor requirements
People, People, People Sales people over estimate and over project Client projects are often delayed Managers don’t properly or regularly forecast the labor
April 18, 20235 ©2011 Deltek, Inc. All Rights Reserved
What data goes into a forecast?
Committed Labor Resources The “Plan” in Vision
Opportunities Qualified: Value; Start, End
“IDIQ / BPA” OpportunitiesAwarded Contracts that will issue
unknown qty/duration of Task Orders
Non-labor Revenue Software / Units
Mark-ups / Fixed Price Margin Additional Profits
Leads Stuff You Don’t Know About
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See the Forest… Not the Trees
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Average of many large-error measurements is very exact Similar to estimating the height of a population of peopleExample: Let’s throw darts at a dartboard
But how can it be so? Let’s ask Wikipedia!
“The normal distribution is considered the most prominent probability distribution in statistics. There are several reasons for this:[1] First, the normal distribution is very tractable analytically, that is a large number of results involving this distribution can be derived in explicit form. Second, the normal distribution arises as the outcome of the central limit theorem, which states that…
… under mild conditions the sum of a large number of random variables is distributed approximately normally.
Finally, the “bell” shape of the normal distribution make it a convenient choice for modeling a large variety of random variables encountered in practice.
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That’s really confusing! What do I care?
Permits use of monthly smoothing in Plans
Permits use of weighted forecasting
Permits uniform (straight-line) opportunity forecasting
It means that you can be comfortable with not being precise!
April 18, 20239 ©2011 Deltek, Inc. All Rights Reserved
Better Yet… Let’s Look at Projections
10 Projects
0
50
100
150
200
250
300
350
400
450
1 2 3 4 5 6 7 8 9 10 11 12
Month
Cum
ula
tive L
abor
Average Monthly Labor: 353; Std. Dev.: 32 (9%)
April 18, 202310 ©2011 Deltek, Inc. All Rights Reserved
Better Yet… Let’s Look at Projections
25 Projects
0
100
200
300
400
500
600
700
800
900
1000
1 2 3 4 5 6 7 8 9 10 11
Month
Cum
ula
tive L
abor
Average Monthly Labor: 875; Std. Dev.: 54 (6%)
April 18, 202311 ©2011 Deltek, Inc. All Rights Reserved
Better Yet… Let’s Look at Projections
50 Projects
0
200
400
600
800
1000
1200
1400
1600
1800
2000
1 2 3 4 5 6 7 8 9 10 11 12
Month
Cum
ula
tive L
abor
Average Monthly Labor: 1750 ; Std. Dev.: 75 (4%)
April 18, 202312 ©2011 Deltek, Inc. All Rights Reserved
Better Yet… Let’s Look at ProjectionsAverage Monthly Labor: 1750 ; Std. Dev.: 75 (4%)
50 Projects
0
200
400
600
800
1000
1200
1400
1600
1800
2000
1 2 3 4 5 6 7 8 9 10 11 12
Month
Cum
ula
tive L
abor
April 18, 202313 ©2011 Deltek, Inc. All Rights Reserved
Committed Labor: Project Plans Use the Labor Resource Forecast Report
Labor Resource Forecast Report
Labor Resource Forecast Report
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Report Output: Committed Labor
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Prospective Labor: Opportunities Use Opportunity Forecast Report – with WEIGHTED Opportunities
Opportunity Forecast Report
Opportunity Forecast Report
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Report Output: Opportunities
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Produce a Raw Forecast
July August September October
Committed $500,000 $400,000 $300,000 $200,000
Oppty’s $50,000 $150,000 $100,000 $75,000
BPA / IDIQ $0 $0 $50,000 $50,000
Mark-up $20,000 $20,000 $20,0000 $20,000
Software $15,000 $15,000 $17,000 $17,000
$585,000 $585,000 $487,000 $362,000
• Add ALL of the forecasts together • Be Careful Not to Double-Count Projects with Active Opportunities and Plans!
Date of Forecast is July 1
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Welcome to the World of Waterfalls Permits tracking of raw forecast histories Cannot run a forecast from the past (even with Vision!) Useful for trend analysis
TOTAL REVENUE FORECAST
As of July August September October7/1/10 July CO 585,000$ 585,000$ 487,000$ 362,000$ 8/1/10 August CO 600,000$ 610,000$ 525,000$ 475,000$ 9/1/10 September CO 600,000$ 635,000$ 600,000$ 550,000$
10/1/10 October CO 600,000$ 635,000$ 640,000$ 590,000$ 11/1/10 November CO 600,000$ 635,000$ 640,000$ 660,000$
2010
April 18, 202319 ©2011 Deltek, Inc. All Rights Reserved
Monitor Changes in Pipeline Strength Example: Calculate a 6-month “look ahead”
2011As of September October November December January February March April May June July August
9/5/10 September BO 5,070$ 30,400$ 29,707$ 24,670$ 24,557$ 21,613$ 18,692$ 18,089$ 18,692$ 18,089$ 14,518$ 14,518$ 10/1/10 October BO 1,692$ 18,663$ 22,869$ 33,612$ 41,768$ 39,619$ 38,809$ 40,102$ 39,585$ 37,307$ 37,307$ 11/2/10 November BO 16,936$ 25,893$ 33,958$ 29,594$ 23,544$ 14,660$ 15,148$ 14,660$ 7,322$ 7,322$ 12/6/10 December BO 323$ 5,000$ 11,411$ 17,032$ 11,644$ 12,032$ 12,162$ 8,692$ 6,980$ 12/29/10 January BO 18,268$ 23,334$ 20,448$ 17,694$ 11,691$ 11,663$ 8,177$ 6,405$ 2/1/11 February BO 29,395$ 13,796$ 12,709$ 10,742$ 10,271$ 7,646$ 7,573$ 3/2/11 March BO 18,459$ 31,578$ 34,975$ 41,626$ 37,179$ 31,848$
2010
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Don’t Forget About “The Stuff You Don’t Know About”
Months Ahead
1 1 (%) 2 2 (%) 3 3 (%)
July $15,000 3% $50,000 8% $153,000 24%
August $25,000 4% $115,000 18% $185,000 28%
Sept. $40,000 6% $110,000 17% NA NA
Calculate the deviation from actual revenue for future month forecasts
TOTAL REVENUE FORECAST
As of July August September October7/1/10 July CO 585,000$ 585,000$ 487,000$ 362,000$ 8/1/10 August CO 600,000$ 610,000$ 525,000$ 475,000$ 9/1/10 September CO 600,000$ 635,000$ 600,000$ 550,000$
10/1/10 October CO 600,000$ 635,000$ 640,000$ 590,000$ 11/1/10 November CO 600,000$ 635,000$ 640,000$ 660,000$
2010
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Now Compute the Leads Contribution to Revenue
Months Ahead
1 (%) 2 (%) 3 (%)
July 3% 8% 24%
August 4% 18% 28%
Sept. 6% 17% NA
Average 4% 14% 26%
The average percentage is the historical amount of revenue that Leads (Unknown Business) contributes to the Forecast.A smaller Standard Deviation will give more confidence in the historical numbers.
April 18, 202322 ©2011 Deltek, Inc. All Rights Reserved
Develop Final Forecast Add in the Leads and Arrive at Your Forecast
ProForma ForecastJuly August September October
1-JulPlanned 500,000$ 400,000$ 300,000$ 200,000$ Opportunities 50,000$ 150,000$ 100,000$ 75,000$ BPA-IDIQ -$ -$ 50,000$ 50,000$ Mark-ups / FFP 20,000$ 20,000$ 200,000$ 20,000$ Software 15,000$ 15,000$ 17,000$ 17,000$ Total "known" Revenue 585,000$ 585,000$ 487,000$ 362,000$ % Revenue from Leads 4% 14% 26% 45%Lead Revenue 24,375$ 95,233$ 171,108$ 296,182$
Total Revenue 609,375$ 680,233$ 658,108$ 658,182$
April 18, 202323 ©2011 Deltek, Inc. All Rights Reserved
… And Create Another Waterfall This is the final check of your forecast accuracy… Do you think the November forecast will be right?
As of July August September October November7/1/10 July CO 609,375$ 680,233$ 658,108$ 658,182$ 702,023$ 8/1/10 August CO 600,000$ 650,123$ 655,110$ 661,077$ 698,774$ 9/1/10 September CO 600,000$ 635,000$ 651,289$ 664,443$ 694,234$
10/1/10 October CO 600,000$ 635,000$ 640,000$ 659,983$ 687,331$ 11/1/10 November CO 600,000$ 635,000$ 640,000$ 660,000$ 689,030$
April 18, 202324 ©2011 Deltek, Inc. All Rights Reserved
Forecasting Summary• Determine one’s need for forecasting
• Be adamant about Deltek Plan and Opportunity updates
• Don’t sweat the details; averaging works in your favor
• Get the raw data from Vision reporting (Plans and Opportunities)
• Develop Waterfall Charts
• Measure past accuracy and incorporate into future forecasting
• More accurate past forecasting provides confidence in future forecasts
April 18, 202325 ©2011 Deltek, Inc. All Rights Reserved
April 18, 202326 ©2011 Deltek, Inc. All Rights Reserved
Q & A
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Engage With The DeltekAE Community
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deltekvisionblog.wordpress.com
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