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Dec 22 2012

How to plan company revenues

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Every business aims to make a profit. Everyone knows that the amount of profit depend on two main parameters namely from the value of the revenue and value of expenses. It should be noted that the value of expenses plans is based on the expected amount of revenue in many cases.

My first article on this site I want to dedicate such important topic as planning of company business revenue. Well let’s start.

First of all we need to give some revenue definition.

A revenue is an increasing of company’s assets as a result of the sale of goods, services, works or other operations.

The total revenue of non-financial companies can be divided into the following types:

  • Operating revenue
  • Financial revenue
  • Investment revenue
  • Other revenue

1. Operating revenue.

Operating revenue is the income received by the company as a result of its manufacturing, service or retail business.

The value of this revenue will be based on the specific company.

If the company is engaged in manufacturing, its operating revenue will be based on the manufacturing capacity, average percentage of product sales and prices.

If the company engaged in trading, its operating (sales) revenue will be based on the value of forecasted turnover, which should be determined by each individual product group.

If the company is engaged in services or execution of works, its operating revenue will be based on the average number and value of orders.

For most companies operating revenues are the main form of revenues. I will describe an example of planning of operating revenue for manufacturing company in one of the next posts.

2. Financial revenue.

Financial revenue is the income received by the company in the form of interest on loans or deposits.

Financial revenue from loans based on the value of the loans, terms of the loans and their rate.

Financial income on deposits based on the amount of deposits, terms of deposits and interest on deposits.

3. Investment revenue.

Investment revenue is the income that company receives in the form of dividends on the investments or by the sale of securities.

Investment income from dividends is difficult to planning, because its size depends on the performance of investments. Also, if the company does not own a controlling block of shares in the facility of investment, it can not affect to the amount of dividends. Planning for this income should be carried out by analyzing the subject of investment and behavior analysis of the major shareholders.

Investment income from the sale of securities depends on the situation on the stock market. Its value is determined based on the number of securities proposed to be sold and the projected cost of sales.

4. Other revenues.

Other revenues include all types of income that company can receive, other than operational, financial and investment revenues. Other revenues may include:

  • Private financial aid and grants
  • State financial aid or tax revenue
  • Amounts of received insurance
  • Income from the lease of premises or equipment if it is not the main activity of the company
  • Income from currency fluctuations if the company carries out foreign activities
  • Received fines, penalties, and other revenues.

In order to predict the total revenue of a company we must separately predict the expected revenues on all the above groups and then add all the results.

If a company has separate units revenues should be planned for each of them separately. Also, if the company is engaged in various types of business activity revenue should be planned for each activity separately.

Revenue is planned for one calendar year in terms of months and quarters in most cases.

However, if you write a strategic business plan it is necessary to plan revenues for 3 or 5 years at least. For the first year income should be planned monthly, for second and third year – quarterly, for the remaining years it can plan a yearly amount.

Planning of revenues can be made using the following table:

Income statement form (plan)

Items

 1st

quarter

2nd

quarter

3rd

quarter

4th

quarter

Year

1.

Operating revenue (1.1+1.2+1.3)

1.1.

products sales

1.2.

services

1.3.

execution of works

2.

Financial revenue (2.1+2.2)

2.1.

interest on loans

2.2.

interest on deposits

3.

Investment revenue (3.1+3.2)

3.1.

dividends

3.2.

securities

4.

Other revenue

5.

Total revenue (1+2+3+4)

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