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Revenue Forecasting & Planning Guide: 4 Models For Planning Your Top Line

Revenue forecasting is the toughest part of any planning process — but it’s also the most critical. Learn how you can model your top line effectively and take advantage of Mosaic’s new Topline Planner to streamline the process.

Steve Groccia

Head of Customer Operations

Published on April 20, 2022
Strategic Planning
Revenue Forecasting & Planning Guide: 4 Models For Planning Your Top Line

Ask any finance leader what their toughest responsibilities are, and you’ll inevitably hear revenue forecasting near the top of the list.

No matter how many years of experience you have, each organization comes with unique inputs, processes, and source systems that make top-line forecasting a bespoke, often painful, part of planning.

But it’s critical that finance pushes through the sleepless nights and headaches to nail down an accurate revenue forecast. Your company lives and dies by its ability to hit growth targets and revenue projections. And your top-line forecasts tie directly into your SaaS valuation as VCs look to understand the trajectory of your business.

While revenue forecasting is a highly-customized process for each business, there are still certain principles, approaches, and best practices that every finance team should understand. Here’s what you need to know to plan your top line (and make revenue forecasting a pain-free process with Mosaic).

Table of Contents

What Is Revenue Forecasting?

Revenue forecasting is the first step of any planning process in which you project future top-line growth with driver-based forecasting and assumptions that are most relevant to your business model.

An effective revenue forecast sets the stage for an entire budgeting cycle. It’s what aligns the entire business on growth goals, creates the foundation for each department’s budget, and sets the stage for strategic decision-making.

There are multiple ways to model your top line. But before you worry about the nuts and bolts of modeling, you have to approach revenue forecasting as a project manager. There are three things to think about before you actually start the process of revenue planning:

  • Timing. You’ll revisit your top-line plan consistently throughout the year. But the primary process ties directly to your annual planning cycle. For companies that end the year in December, you should be kicking off the revenue forecasting process in October, just after completing Q3. You have an idea of how the year will close out, and you can use that projected information to launch planning conversations about realistic/unrealistic growth.
  • Philosophy. Are you a hyper-collaborative organization, or do plans take a more top-down path in your organization? If you’re going to frequently meet with department leaders, build that into your timeline because those conversations could extend the planning process. If your company is more direct with revenue expectations, you can have more streamlined talks with your salespeople to build the plan.
  • Stakeholders. Prioritize alignment across necessary stakeholders as early as possible. What sales ops sees as the key drivers may not be the same as what the sales leader thinks — which may not be the same as what finance believes. The sooner you align with stakeholders on the approach to revenue planning, the smoother the process will be.

These pre-planning fundamentals are what could make the difference between revenue forecasts that inform an efficient, aligned growth plan vs. ones that miss the mark (setting your company back in the process).

Why Is Revenue Forecasting Important to Get Right?

The simplest answer to “why is revenue forecasting important?” is that it gives the company a concrete overview of its growth path and allows you to make relevant business decisions. Revenue equals customers, customers inform hiring and product development, new customers and renewals equate to cash flow, and cash is the lifeblood of any business.

There are ripple effects of the revenue planning process that go beyond just projecting top-line momentum. Strong top-line planning also helps you:

  • Verify the headcount plan. Headcount is typically the biggest expense for a small business (especially for SaaS companies). That’s why modeling out your headcount plan is just as crucial as your revenue plan. But without accurate revenue forecasts, you risk having to push out staffing plans, which in turn sets product development back and prevents you from meeting your growth potential.
  • Push the limits of customer acquisition costs. For earlier-stage startups, growth at all costs is almost essential as you fight to capture as much market share as possible. Accurate revenue forecasts give you a better idea of acceptable acquisition costs and give your marketing and sales teams more realistic budgets to attack the market opportunity.
  • Build trust with investors. Presenting inaccurate revenue forecasts in your board deck quarter after quarter will erode trust. Instead of getting to tap into the strategic value of your board, you’ll spend entire board meetings trying to explain why your company can’t effectively map out its growth path. Maintaining clean, consistent revenue forecasts creates a foundation of trust between you and your investors.

Finance teams only unlock these advantages when they come up with the best possible approach to revenue planning for their organizations — and that starts with choosing the right model.

4 Revenue Forecasting Models to Plan Your Top Line

You’ll never find a one-size-fits-all financial model template for top-line planning. But there are a few broad categories of revenue forecasting methods that you can adapt for your needs.

The following 4 revenue forecasting models cover both sides of the top-down vs. bottom-up budgeting conversation, giving you an opportunity to triangulate results and ensure accuracy.

1. The Quota Capacity Model for Sales Forecasting

A sales capacity model (or a quota capacity model) is a bottom-up revenue forecasting method that uses historical data points for sales rep performance and ramp times to forecast future top-line growth.

quota capacity model example in Mosaic Topline Planner

Quota capacity top-line model in Mosaic

Sales capacity models are effective for companies with sales-heavy go-to-market motions and a decent foundation of historical data. As long as your CRM setup is clean, you’ll be able to build out an accurate sales ramp waterfall that drives bookings projections based on your sales headcount plan.

In addition to your sales headcount plan and ramp rate, this model uses quota attainment for both ramping and ramped AEs to generate outputs for new bookings, billing, revenue, and collections.

Get started with a quota capacity model template

2. The ARR Snowball Model

The ARR snowball model is another popular method for SaaS revenue forecasting. It uses trends in ARR data to project future revenue growth, broken out into new ARR, upgrade ARR, downgrade ARR, and churned ARR.

arr snowball model example in Mosaic Topline Planner

ARR snowball top-line model in Mosaic

Unlike a sales capacity model, earlier-stage companies can build out an ARR snowball without having the most granular historical data. Rather than needing deep insight into sales ramp rates and performance, you only need to see a recent trend in revenue growth to project next month, next quarter, next year, and beyond.

A sales capacity model is the truest form of a bottom-up approach to planning. The ARR snowball, on the other hand, is more of a blend of bottom-up and top-down. It leans on assumptions for things like seasonality, new customers, and average annual contract value to drive revenue outputs. However, it’s not as deeply dependent on departmental collaboration as true bottom-up models.

Download an ARR snowball model template from our finance experts

3. The Sales Cycle to New Bookings Model

The sales cycle to new bookings revenue forecasting method uses trends in sales cycle data to determine how many leads you need to generate to hit your business goals. Historical trends in opportunities created, deal conversion rates, days to close, and average bookings amounts help you create assumptions for new business in the coming months.

sales cycle to new bookings model example in Mosaic Topline Planner

Sales cycle to new bookings top-line model in Mosaic

For a company that doesn’t have a large, mature sales function, this may be an easier approach to top-line planning than the sales capacity model. It’s also a simple way to sense-check your numbers if you primarily use a sales capacity model or an ARR snowball model to plan revenue.

4. The Bookings, Billings, and Collections Model

This simple top-down revenue forecasting model uses new customer counts and average ARR per customer to forecast net new bookings. Using historical net retention rates, you can forecast renewal bookings, billings, and collections.

Unlike the sales capacity model and ARR snowball model, this approach to revenue forecasting makes broader assumptions about business growth to model out high-level company goals.

bookings billings collections model in Mosaic Topline Planner

Bookings, Billings, Collections top-line model in Mosaic

The main advantage of this type of model is that finance can build it without much input from the rest of the business, speeding up the early stages of the planning process. As long as you can come up with a 3-month average ARR per customer and a 12-month average for net revenue retention, you can generate revenue predictions for your business.

(We’ll use this approach for our walkthrough of how to build a revenue forecasting model.)

How to Build a Revenue Forecasting Model in Mosaic

Just because Excel and Sheets are flexible enough to handle the highly-customized nature of top-line planning doesn’t mean they’re the best tools for the job.

The amount of time and effort you have to put into pulling data from source systems, updating complex webs of financial assumptions, and revising models based on ad hoc requests takes away from the strategic work you should be spending more time on.

Mosaic’s Topline Planner gives finance teams a blend of both worlds — the flexibility of spreadsheets with the real-time data necessary to plan at the pace of a high-growth company. Our new Topline Planner enables you to quickly build and maintain custom revenue forecasts using elements that are unique to your business. The cloud-based grid combines on-demand metrics with intuitive formulas to create a seamless modeling experience.

You can build out any of the revenue forecasting models listed above within the Mosaic platform. Here’s a walkthrough of the bookings, billings, and collections model to give you an idea of how it works.

Create Assumptions for Customer Count Growth and Average ARR Per Customer

This revenue forecasting model starts with projecting net new bookings based on new customer growth and average ARR per customer.

Start by creating a row in Mosaic that pulls in the Customer Count metric from your actuals. Then, forecast growth using the 3-month average and apply it forward over the forecast time period.

mosaic topline planner walkthrough customer count

Mosaic Topline Planner walkthrough — customer count

Then, you can create another new row that uses Average ARR per Customer as the actuals definition. If you plan to increase your average ARR over time, apply that growth rate. For example, you could use a per-month forecast method and assume ARR per Customer will grow 5% every 12 months.

Mosaic Topline Planner Walkthrough average arr per customer forecast

Mosaic Topline Planner walkthrough — average ARR per customer

Calculate Net New Bookings Based on Your Assumptions

Before you can calculate bookings, you need to know the change in customer count month-over-month. Add a line item to your top-line model that dynamically calculates customer changes using the formula method in Mosaic.

Mosaic Topline Planner Walkthrough customer changes forecast

Mosaic Topline Planner walkthrough — customer changes forecast

Now, create another row for Net New Bookings (ARR). Forecast this metric by multiplying Average ARR per Customer by Customer changes.

Mosaic Topline Planner Walkthrough net new bookings arr forecast

Mosaic Topline Planner walkthrough — net new bookings ARR forecast

The result is an output of bookings for the new customers you expect to sign in each month during your forecast.

Model Your Renewal Bookings

The particular calculations in this step will depend on your business model. But for the example, let’s assume you have annual contracts that renew each year.

Add a Net Dollar Retention row, pulling in retention data for a 12-month lookback period that considers upsells, downsells, and churn. Use the per-month forecast method to forecast net dollar retention.

Mosaic Topline Planner Walkthrough net dollar retention actuals and forecast

Mosaic Topline Planner walkthrough — net dollar retention actuals

Add a placeholder row for Renewal Bookings that pulls in your bookings actuals. Then, add another row for Total Bookings that adds new and renewal bookings.

Mosaic Topline Planner Walkthrough total bookings arr actuals and forecast

Mosaic Topline Planner walkthrough — total bookings and ARR actuals

Go back to your Renewal Bookings row and forecast with a formula that accounts for your 12-month renewal cycle and calculates based on your average retention rate.

Mosaic Topline Planner Walkthrough renewal bookings forecast

Mosaic Topline Planner walkthrough — renewal bookings forecast

Calculate Billings and Collections

Once you’ve modeled net new and renewal bookings, you can build out calculations for billings and collections. Assume you bill your customers in the same month you book your deals. In that case, your billings forecast would be equal to your Total Bookings ARR line.

Then, build out assumptions for your collections schedule. A basic assumption might be that you’ll collect 75% on a Net 30 basis, another 20% two months later, and lose 5% of bookings as uncollectable.

Mosaic Topline Planner Walkthrough collections forecast

Mosaic Topline Planner walkthrough — collections forecast

Once you’ve finished modeling out your collections, you have a complete top-line model for the top-down scenario.

To check your forecast accuracy, you could also build out an ARR snowball or a sales capacity model to verify the numbers from a bottom-up perspective.

It’s Time to Take Top-Line Planning Beyond the Spreadsheet

Finance teams don’t have time to fight against complex spreadsheets and point system data pulls to nail down their revenue forecasts. We believe revenue planning should be a simpler process, which is why we’re thrilled to release our Topline Planner.

When you use Mosaic for revenue forecasting, you can maximize speed and precision with:

  • Direct connections to the metrics catalog. Access the full library of on-demand financial metrics to accelerate modeling with real-time actuals.
  • Intuitive formulas. Quickly create formulas with the help of a function library that has auto-complete features.
  • Sheet-like formatting. Leverage the flexibility of spreadsheets with our dynamic grid, which lets you modify cells, copy/paste, and add rows with just a few clicks.
  • Metric cross-reference. Connect top-line data to your income statement, balance sheet, and headcount planners for more dynamic forecasting and budgeting processes.
  • Simple scenario planning. Duplicate models and tweak assumptions to quickly sensitize your plans and see how different scenarios impact the business.
  • One-click goal setup. Set forecasted topline metrics as goals and quickly access them in the Analysis Canvas dashboards to track your performance.

Want to learn more about how Mosaic takes the pain out of the typical high-stress top-line planning process? Reach out for a personalized demo and find out how you can forecast revenue with ease.

Revenue Forecasting FAQs

How do you forecast revenue in Excel?

Excel has a feature called “Forecast Sheet,” which allows you to create a forecast based on values corresponding with your date range. Based on these values over time, Excel will create a customizable revenue forecast. But more often than not forecasting revenue in Excel means creating the right set of assumptions for projected performance and building formulas to calculate future revenue.

 

Unfortunately, the practicality of using Excel to project top-line growth is limited due to the need for manual revision of forecasting models and the lack of real-time data.

How do you forecast revenue in Google Sheets?

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