Deltek Insight 2011: Accurate Revenue Forecasting

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  • 1. VI-209:Accurate RevenueForecastingIs it Really Possible?Insight 2011Presented byPeter Stein & Sandy LeDuc
  • 2. Agenda  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 forecast2 May 22, 2012 ©2011 Deltek, Inc. All Rights Reserved
  • 3. Session Objectives  In this session you will:  Learn how to use Deltek to create accurate forecasts  Understand a little bit of why it works3 May 22, 2012 ©2011 Deltek, Inc. All Rights Reserved
  • 4. Why is Forecasting Important? • Anticipating hiring / resourcing needs • Anticipating expense reduction / purchasing decisions modification • Provide relative future comparison of offices / segments • Company valuation • Keep everyone on same page4 May 22, 2012 ©2011 Deltek, Inc. All Rights Reserved
  • 5. Why is it so challenging inProfessional 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 labor5 May 22, 2012 ©2011 Deltek, Inc. All Rights Reserved
  • 6. What data goes into a forecast? Committed Labor Resources The “Plan” in Vision Opportunities Qualified: Value; Start, End Awarded Contracts that will issue “IDIQ / BPA” Opportunities unknown qty/duration of Task Orders Non-labor Revenue Software / Units Mark-ups / Fixed Price Margin Additional Profits Leads Stuff You Don’t Know About6 May 22, 2012 ©2011 Deltek, Inc. All Rights Reserved
  • 7. See the Forest… Not the Trees Average of many large-error measurements is very exact Similar to estimating the height of a population of peopleExample: Let’s throw darts at a dartboard7 May 22, 2012 ©2011 Deltek, Inc. All Rights Reserved
  • 8. 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.8 May 22, 2012 ©2011 Deltek, Inc. All Rights Reserved
  • 9. That’s really confusing!What do I care?  It means that you can be comfortable with not being precise!  Permits use of monthly smoothing in Plans  Permits use of weighted forecasting  Permits uniform (straight- line) opportunity forecasting9 May 22, 2012 ©2011 Deltek, Inc. All Rights Reserved
  • 10. Better Yet… Let’s Look atProjectionsAverage Monthly Labor: 353; Std. Dev.: 32 (9%) 10 Projects 450 400 350 Cumulative Labor 300 250 200 150 100 50 0 1 2 3 4 5 6 7 8 9 10 11 12 Month10 May 22, 2012 ©2011 Deltek, Inc. All Rights Reserved
  • 11. Better Yet… Let’s Look atProjectionsAverage Monthly Labor: 875; Std. Dev.: 54 (6%) 25 Projects 1000 900 800 700 Cumulative Labor 600 500 400 300 200 100 0 1 2 3 4 5 6 7 8 9 10 11 Month11 May 22, 2012 ©2011 Deltek, Inc. All Rights Reserved
  • 12. Better Yet… Let’s Look at Projections Average Monthly Labor: 1750 ; Std. Dev.: 75 (4%) 50 Projects 2000 1800 1600 1400Cumulative Labor 1200 1000 800 600 400 200 0 1 2 3 4 5 6 7 8 9 10 11 12 Month12 May 22, 2012 ©2011 Deltek, Inc. All Rights Reserved
  • 13. Better Yet… Let’s Look atProjectionsAverage Monthly Labor: 1750 ; Std. Dev.: 75 (4%) 50 Projects 2000 1800 1600 1400Cumulative Labor 1200 1000 800 600 400 200 0 1 2 3 4 5 6 7 8 9 10 11 12 Month13 May 22, 2012 ©2011 Deltek, Inc. All Rights Reserved
  • 14. Committed Labor: Project Plans Use the Labor Resource Forecast Report Labor Resource Forecast Report14 May 22, 2012 ©2011 Deltek, Inc. All Rights Reserved
  • 15. Report Output: Committed Labor15 May 22, 2012 ©2011 Deltek, Inc. All Rights Reserved
  • 16. Prospective Labor: Opportunities Use Opportunity Forecast Report – with WEIGHTED Opportunities Opportunity Forecast Report16 May 22, 2012 ©2011 Deltek, Inc. All Rights Reserved
  • 17. Report Output: Opportunities17 May 22, 2012 ©2011 Deltek, Inc. All Rights Reserved
  • 18. Produce a Raw Forecast• Add ALL of the forecasts together• Be Careful Not to Double-Count Projects with Active Opportunities and Plans!Date of Forecast is July 1 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 $362,00018 May 22, 2012 ©2011 Deltek, Inc. All Rights Reserved
  • 19. 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 2010 As of July August September October 7/1/10 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 $ 660,00019 May 22, 2012 ©2011 Deltek, Inc. All Rights Reserved
  • 20. Monitor Changes in Pipeline Strength  Example: Calculate a 6-month “look ahead” 2010 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 $ 6,98012/29/10 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 20 May 22, 2012 ©2011 Deltek, Inc. All Rights Reserved
  • 21. Don’t Forget About “The Stuff You Don’tKnow About” Calculate the deviation from actual revenue for future month forecasts TOTAL REVENUE FORECAST 2010 As of July August September October 7/1/10 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 Months 1 1 (%) 2 2 (%) 3 3 (%) Ahead 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 NA21 May 22, 2012 ©2011 Deltek, Inc. All Rights Reserved
  • 22. Now Compute the Leads Contribution toRevenue Months 1 (%) 2 (%) 3 (%) Ahead 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.22 May 22, 2012 ©2011 Deltek, Inc. All Rights Reserved
  • 23. Develop Final Forecast Add in the Leads and Arrive at Your Forecast ProForma Forecast July August September October 1-Jul Planned $ 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 $ 658,18223 May 22, 2012 ©2011 Deltek, Inc. All Rights Reserved
  • 24. … 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 November 7/1/10 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 $ 689,03024 May 22, 2012 ©2011 Deltek, Inc. All Rights Reserved
  • 25. 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 forecasts25 May 22, 2012 ©2011 Deltek, Inc. All Rights Reserved
  • 26. Q&A26 May 22, 2012 ©2011 Deltek, Inc. All Rights Reserved
  • 27. Engage With The DeltekAE Community @DeltekVision deltekae.wordpress.com deltekvisionblog.wordpress.com facebook.com/deltekinc youtube.com/user/deltekinc27 May 22, 2012 ©2011 Deltek, Inc. All Rights Reserved