As ambitious creative entrepreneurs, we rarely want to take a step backwards in business and if we’re completely honest with ourselves, a step back means “making less money”. With ever-increasing costs of doing business, even staying the same can take money from our pockets. With this in mind, it should be a primary focus for all business leaders to set revenue targets for the next financial year.
And while I know you know this already, it’s always important to note that we do this before the end of the current financial year. But setting targets is hard and for those of us who have never done so before, can get stuck at the starting gates.
In reality, setting targets for your agency is easy and in this article, I’ll explain some of the most common methods creative agencies can use, as well as how to decide which one works best for you.
And remember you never have to go it alone when it comes to financials. Working with your accountant will help you set your revenue targets with an acute knowledge of your business and all associated costs. For those of us who prefer to stay out of the P&L, this can be a huge source of support and guidance.
4 ways to set revenue targets
If we break it down simply, the are a few ways we can approach revenue setting.
- Growth on last year – add a % growth to last year’s revenue
- Capacity – target based on utilising employees to expected capacity
- The sum of all sales targets – based on the total of all sales targets
- Rolling forecasting – for those starting or changing business direction
If you have all your data at hand, choosing the correct revenue target for your creative business becomes pretty easy. Many agencies use a mixture of approaches to meet their expected revenue targets.
Let’s look at these methods further
1. Growth on last year
This is the most common method for setting targets across agencies. Near the start of the upcoming financial year, the agency owner, or financial director will review revenue from the past year and add a percentage on top. For example, if you want to grow your agency by 20%, and your revenue this year was 500,000. Then next year your target revenue would be 600,000.
Advantages: This method allows for a quick but focused understanding of revenue targets for next year. When your agency has been growing year on year, the understanding and perception is that this will continue.
Disadvantages: Often a headline figure of an increase in revenue doesn’t translate into as much retained profit as expected. Work with your accountant to model your increased costs for next year and check if you are happy with your expected return. If you are planning a new revenue stream or shifting services, this model may not fully capture the opportunity at hand and a more detailed forecast would be needed.
2. Capacity levels
In some agencies, it may be more appropriate to set revenue targets based on the current or planned capacity of our employees. This can include significant changes to our service offering or increasing rates across the next financial year. Some agencies further model this out to a project level to ensure they can complete an agreed quota of projects.
Advantages: This method helps to model our maximum revenue at our expected utilisation. It provides opportunities to view options for training or hiring new staff to support the revenue targets.
Disadvantages: While best endeavours are always made to retain staff, the reality is that staff numbers fluctuate. If your business doesn’t generate enough sales to reach capacity, you may fall into the trap of over-hiring for the business needs.
3. The sum of all sales targets
If you have 3 members in the sales team and their targets are each 500,000. Then the company revenue target will naturally be 1,500,000.
Advantages: If you set increased sales targets with your sales team and these are met, then you can massively grow the revenue of your agency. Generally speaking, we expect around 80% of our business to repeat year on year so the sales team targets should get easier to meet with length of service.
Disadvantages: You will have underperforming staff and you will have staff who are at different stages of training. You will also have salespeople who leave and others who join the company over the year. Neither of these will be at full steam over the next 12 months.
4. Rolling forecasting
A rolling forecast is a budgeting tool that gives continuous consideration to revenue, expenses, capacity. If you assume it’s a mix of all previously noted tools to set revenue, that’s a good start. Rolling forecasts allow for speed and agility in business, allowing you to make changes as soon as you need to.
Advantages: Forecasts allow you to look at the business as a whole and model out a prospective revenue both in terms of selling to quota and delivering it within your business. If one element doesn’t fulfil the business need, this is identified quickly. For example: if you are adding new services to your business, you can model what this adds to revenue, but also how this will be delivered and the additional cost of doing so.
Disadvantages: Setting up a forecast can be time-consuming and it’s just a forecast that can falter at any stage. It’s a guess at best.
What is the right method of setting revenue targets?
Looking at the year ahead and setting targets is always the correct thing to do. Each of the methods noted can of course help you achieve your revenue targets, but commonly, a mix of all of these will help you plan for the majority of eventualities reducing the surprise element and allowing you to focus on achieving your goal amounts.
Good luck setting and achieving your targets over the next year.