Many people forecast revenue using an annual growth multiplier against the previous year’s revenue. While simple, this method doesn’t help explain what’s driving the change in revenues.
For any company, revenue is derived from a mix of price and volume, while considering the growth in each variable. Seeing the revenue deconstructed by price and volume enables critical thinking and helps the modeler articulate and defend what might happen in the future.
To estimate sales price for a company, you may have to start with a gross sales price and then deduct items like freight, warehousing, discounts and commissions in order to arrive at a net sales price.
To project sales volume, you may have to consider capacity constraints.
It may even be useful to break down revenue by product, service and/or segment to make the model easier to understand and provide more explanatory power. However, you should limit this to the most significant revenue contributors to avoid too much detail.
A price multiplied by volume relationship can be established for any business.
Example A
This Revenue Schedule is illustrated with gross and net sales as well as capacity constraints.
Notice the simplicity of the schedule which includes pricing, volume, and the resulting revenue. Even with the freight and warehousing and capacity constraints, the schedule is still easy to understand and logical to follow.
Example B
In Example B, the core revenue schedule is similar to Example A with price multiplied by volume to get revenue.
This company has Other Sales as well and it is labelled as Auxiliary sales. Auxiliary Sales increases by a growth rate. To find Net Revenue, Core Sales and Auxiliary Sales were added together.
Other Examples to Consider:
Coffee Shop:
Expected price x Daily units
Mining Company:
Commodity price x Volume (ounces, barrels)
Retailer:
Square feet x Average revenue per square foot
Airline:
Seat miles x Average revenue per seat mile
Service provider:
Hourly rate x Billable hours
