Whether you’re a new or a seasoned title company owner, one thing is likely — you spend a great deal of time planning for the future of your company. You’re sure to have a solid business plan and a detailed budget. However, you may be neglecting one of the most critical steps you can take to ensure your company’s long-term success.
Just as a meteorologist relies on the study and analysis of relevant data to forecast the weather, title professionals can predict and calculate future financial trends within their companies. This process is known as revenue forecasting, and it’s highly recommended that title companies implement it before start-up, and on a quarterly as well as an annual basis.
What Is Revenue Forecasting and Why Is It Necessary?
Put simply, revenue forecasting is the process of using past sales data and current business trends to predict how much money a company will make over a specific period. This analysis is based on historical data, market trends, and economic indicators, and helps businesses anticipate revenue, expenses, and cash flow. That way, owners can make informed decisions about operations and investments.
By predicting future financial outcomes, business owners can create realistic budgets and optimize spending by allocating resources more effectively. For example, with a clear picture of their financial outlook, they can better plan for additional staff as well as the purchase of new equipment, expanded facilities, and other capital expenditures.
One of the key benefits of revenue forecasting is that it helps companies remain agile. A thorough financial forecast is one that anticipates potential financial downturns and prompts proactive measures to mitigate risks. What’s more, it helps companies manage their spending to place greater emphasis on variable versus fixed costs, so their expenses naturally fluctuate with the market.
If you’re already dedicating time to budgeting and financial planning, you may think revenue forecasting is redundant. However, revenue forecasting is not the same as financial planning. In a nutshell, financial planning is a strategic framework for achieving long-term goals, while forecasting provides a short-term perspective that helps businesses make informed operational adjustments. Both processes are important!
Why Do Title Companies Need Revenue Forecasting?
Although nearly every business can benefit from revenue forecasting, title companies are uniquely poised to gain insights from this process due to the many variables affecting the real estate market. Among the business decisions impacted by accurate revenue predictions are staffing and other fixed costs, as well as investments in new tools to meet the demand for title orders.
As a title company owner, you’re faced with a host of factors that have the potential to impact the outcome of your sales. Market dynamics that come into play when forecasting your company’s financial health include:
- Seasonality of the housing market
- Mortgage rates
- Mergers and acquisitions of underwriters, homebuilders, etc.
- Regulatory changes
- Election results
- Consumer behaviors
- Local job market growth
- Changes in title-related software
- Offerings of your competitors
What Are the Key Components of Revenue Forecasting?
As you can see, revenue forecasting is not just about crunching numbers, but involves taking control of your financial future and guiding your company in the direction that can yield the most growth and profitability. To that end, there are four main components to consider when mapping out your title company’s financial outlook:
- Historical Data: Start by analyzing your revenue trends from previous years.
- Market Factors: Always consider external influences, such as real estate market fluctuations.
- Seasonal Patterns: Be sure to recognize seasonal variations in title transactions.
- New Business Opportunities: Don’t forget to assess areas of potential growth.
Once you’ve collected the necessary historical data, you’ll analyze that data to look for patterns, trends, and anything that might affect future sales. Next, based on your analysis, it’s time to estimate and make an educated guess about future revenue growth. Finally, as time goes on and you gather more information, you’ll want to adjust your forecast as needed.
A Look at Revenue Forecasting Models
Before you dive into the process of revenue forecasting for your title company, you’ll need to decide which model to use. Generally, forecasting methods fall into two main categories: qualitative and quantitative. If you’re lacking in historical data, qualitative forecasting can help, since it relies on expert insights and opinions from key industry contacts like lenders, Realtors, homebuilders, and investors.
Quantitative forecasting relies on using data to extrapolate a future value. Here are three commonly used quantitative models to consider:
- Time Series Analysis: A specific way of analyzing a sequence of data points collected over an interval of time, it can be used for predicting future revenue based on historical data. This model requires a large number of data points to ensure consistency and reliability, but is valuable in understanding the underlying causes of trends or systemic patterns over time.
- Regression Model: This technique uses historical data to identify the relationship between a dependent variable (revenue) and one or more independent variables, such as property sales and/or interest rates. Regression models establish a linear equation to predict future revenue based on changes in the independent variables.
- Moving Averages: This method bases the current month’s revenue prediction on an average of preceding months, with the average “moving” each month. Using a weighted average of data points to predict the next in sequence can identify trends. For instance, you could examine your revenue from August, September, October, and November to project your December revenue, like this:
(August revenue x 10%) + (September revenue x 15%) + (October revenue x 25%) + (November revenue x 50%) = December revenueIn addition, you can “smooth out” your sales data with a formula that includes your most recent period’s sales and forecast, along with the new period forecast and current weighting factor. This allows you to react quickly to changes in the market while retaining insights from past data. Since it includes both actual results and past forecasts, this method tends to be the most accurate.
Revenue Forecasting Data Sources and Tools
Naturally, data is central to revenue forecasting — which makes identifying reliable data sources, such as transaction records and market reports, a crucial step. Once you’ve analyzed the market, collected your data, and chosen a forecasting model, it’s time to create your forecast. Luckily, there are software tools designed for this purpose.
Platforms that you’re likely already using in your day-to-day business can be a game changer in helping you predict future revenue trends. For instance, Microsoft Excel has a functionality named “Forecast Sheet,” which enables the creation of forecasts based on data values aligned with your specified date range.
Likewise, Google Sheets provides a “Forecast” formula that offers basic top-line projections. It utilizes past month’s revenues to predict the following month’s income. However, it lacks customization options and often calls for manual adjustments.
Avoiding Challenges and Pitfalls of Revenue Forecasting
The accuracy of your financial forecast depends upon several factors, including the breadth and quality of your data. Understanding the mistakes often made in the process of revenue forecasting can help you to avoid them. These common pitfalls include:
- Overreliance on historical data – If you rely too heavily on past performance, you may lose your focus on the road ahead.
- Ignoring market trends – Be sure to keep your finger on the pulse of what’s happening in the title and real estate industries for the most complete financial picture.
- Underestimating external conditions – Always weigh external factors and risks, such as competition, regulation, and the economy, to avoid overestimating future sales.
Keep in mind that you’ll need to continually monitor and evaluate your revenue forecast and make adjustments as you obtain new information.
Proliant Can Help You Navigate the Complex Financial Landscape
Adopting robust forecasting practices is a must for any title company looking to move closer to financial goals while adapting to changing circumstances. However, given the hurdles that come with title company ownership — from significant capital investments and compliance complexities to IT security demands and consumer protection requirements — planning for your financial future can be a daunting task.
Fortunately, Proliant Settlement Systems offers entrepreneurs a simple path to owning a title company, complete with all the financial operational advantages and support systems that eliminate the most difficult barriers to entry. Proliant’s private-label, fully compliant franchise system provides you with all the necessary production support, so you can focus on operating a successful, full-service title agency.
Plus, franchisees benefit from Proliant’s extensive knowledge base, which includes revenue and profitability analysis. In fact, Proliant provides each of its current and potential franchisees with a modeling tool that helps to determine future decisions based on historical and projected transactions for their locations. If you’re interested in starting a title franchise and have not utilized this model, reach out to your representative today!
With Proliant on your side, you can strategically position your title company for sustained growth.