VI-209: Accurate Revenue ForecastingIs it Really Possible?

Insight 2011

Presented byPeter Stein & Sandy LeDuc

Agenda

April 18, 20232 ©2011 Deltek, Inc. All Rights Reserved

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 forecast

Session Objectives

In this session you will:

Learn how to use Deltek to create accurate forecasts Understand a little bit of why it works

April 18, 20233 ©2011 Deltek, Inc. All Rights Reserved

Why is Forecasting Important?

• Company valuation

• Anticipating hiring / resourcing needs

• Anticipating expense reduction / purchasing decisions

• Provide relative future comparison of offices / segments

• Keep everyone on same page

modification

April 18, 20234 ©2011 Deltek, Inc. All Rights Reserved

Why is it so challenging in Professional 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 labor

April 18, 20235 ©2011 Deltek, Inc. All Rights Reserved

What data goes into a forecast?

Committed Labor Resources The “Plan” in Vision

Opportunities Qualified: Value; Start, End

“IDIQ / BPA” OpportunitiesAwarded Contracts that will issue

unknown qty/duration of Task Orders

Non-labor Revenue Software / Units

Mark-ups / Fixed Price Margin Additional Profits

Leads Stuff You Don’t Know About

April 18, 20236 ©2011 Deltek, Inc. All Rights Reserved

See the Forest… Not the Trees

April 18, 20237 ©2011 Deltek, Inc. All Rights Reserved

Average of many large-error measurements is very exact Similar to estimating the height of a population of peopleExample: Let’s throw darts at a dartboard

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.

April 18, 20238 ©2011 Deltek, Inc. All Rights Reserved

That’s really confusing! What do I care?

Permits use of monthly smoothing in Plans

Permits use of weighted forecasting

Permits uniform (straight-line) opportunity forecasting

It means that you can be comfortable with not being precise!

April 18, 20239 ©2011 Deltek, Inc. All Rights Reserved

Better Yet… Let’s Look at Projections

10 Projects

0

50

100

150

200

250

300

350

400

450

1 2 3 4 5 6 7 8 9 10 11 12

Month

Cum

ula

tive L

abor

Average Monthly Labor: 353; Std. Dev.: 32 (9%)

April 18, 202310 ©2011 Deltek, Inc. All Rights Reserved

Better Yet… Let’s Look at Projections

25 Projects

0

100

200

300

400

500

600

700

800

900

1000

1 2 3 4 5 6 7 8 9 10 11

Month

Cum

ula

tive L

abor

Average Monthly Labor: 875; Std. Dev.: 54 (6%)

April 18, 202311 ©2011 Deltek, Inc. All Rights Reserved

Better Yet… Let’s Look at Projections

50 Projects

0

200

400

600

800

1000

1200

1400

1600

1800

2000

1 2 3 4 5 6 7 8 9 10 11 12

Month

Cum

ula

tive L

abor

Average Monthly Labor: 1750 ; Std. Dev.: 75 (4%)

April 18, 202312 ©2011 Deltek, Inc. All Rights Reserved

Better Yet… Let’s Look at ProjectionsAverage Monthly Labor: 1750 ; Std. Dev.: 75 (4%)

50 Projects

0

200

400

600

800

1000

1200

1400

1600

1800

2000

1 2 3 4 5 6 7 8 9 10 11 12

Month

Cum

ula

tive L

abor

April 18, 202313 ©2011 Deltek, Inc. All Rights Reserved

Committed Labor: Project Plans Use the Labor Resource Forecast Report

Labor Resource Forecast Report

Labor Resource Forecast Report

April 18, 202314 ©2011 Deltek, Inc. All Rights Reserved

Report Output: Committed Labor

April 18, 202315 ©2011 Deltek, Inc. All Rights Reserved

Prospective Labor: Opportunities Use Opportunity Forecast Report – with WEIGHTED Opportunities

Opportunity Forecast Report

Opportunity Forecast Report

April 18, 202316 ©2011 Deltek, Inc. All Rights Reserved

Report Output: Opportunities

April 18, 202317 ©2011 Deltek, Inc. All Rights Reserved

Produce a Raw Forecast

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 $362,000

• Add ALL of the forecasts together • Be Careful Not to Double-Count Projects with Active Opportunities and Plans!

Date of Forecast is July 1

April 18, 202318 ©2011 Deltek, Inc. All Rights Reserved

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

As of July August September October7/1/10 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$

2010

April 18, 202319 ©2011 Deltek, Inc. All Rights Reserved

Monitor Changes in Pipeline Strength Example: Calculate a 6-month “look ahead”

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$ 6,980$ 12/29/10 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$

2010

April 18, 202320 ©2011 Deltek, Inc. All Rights Reserved

Don’t Forget About “The Stuff You Don’t Know About”

Months Ahead

1 1 (%) 2 2 (%) 3 3 (%)

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 NA

Calculate the deviation from actual revenue for future month forecasts

TOTAL REVENUE FORECAST

As of July August September October7/1/10 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$

2010

April 18, 202321 ©2011 Deltek, Inc. All Rights Reserved

Now Compute the Leads Contribution to Revenue

Months Ahead

1 (%) 2 (%) 3 (%)

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.

April 18, 202322 ©2011 Deltek, Inc. All Rights Reserved

Develop Final Forecast Add in the Leads and Arrive at Your Forecast

ProForma ForecastJuly August September October

1-JulPlanned 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$ 658,182$

April 18, 202323 ©2011 Deltek, Inc. All Rights Reserved

… 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 November7/1/10 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$ 689,030$

April 18, 202324 ©2011 Deltek, Inc. All Rights Reserved

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 forecasts

April 18, 202325 ©2011 Deltek, Inc. All Rights Reserved

April 18, 202326 ©2011 Deltek, Inc. All Rights Reserved

Q & A

April 18, 202327 ©2011 Deltek, Inc. All Rights Reserved

Engage With The DeltekAE Community

@DeltekVision

deltekae.wordpress.com

deltekvisionblog.wordpress.com

facebook.com/deltekinc

youtube.com/user/deltekinc