Topic of the Week: Visible Revenue
Some people think finance professionals lack creativity. I’d like to put that notion to bed once and for all.
I’ve seen first-hand the level of creativity finance professionals utilize when creating financial projections. In fact, I would say the only way some of these professionals can put these projections in front of others, is that they believe in Fairy Revenue Godmothers.
Sadly, like many imaginative stories, it’s not hard to poke holes in these projections with a simple analysis.
What is Visible Revenue?
Visible revenue is the amount of revenue you have a high degree of confidence in earning over a projected period, based on the current state of the business.
Visible revenue is not guaranteed revenue, but it’s your reasonably expected revenue. It offers a good sanity check on projections and helps you determine whether your pipeline supports your projections.
For example, given that we are over ¾ through 2017, visible 2017 revenue should be close to your 2017 budget. If it’s not, your budget is probably s**t and needs adjustment.
How To Calculate Visible Revenue
Here’s the basic formula:
First, determine which period you are analyzing. (i.e., CY 2017, CY 2018, etc.)
Next, take your annualized live recurring revenue (this is contractually obligated revenue that is recognized on the income statement to-date).
Add – Annualized backlog recurring revenue (revenue that is not recognized today, but is contractually obligated, and will go live during the projected period).
Add – Annualized non-contractual repeat revenue (i.e., a customer orders ~$500k a year from you for the last five years and they’ve verbally committed to doing so again).
Add – Annualized revenue in the pipeline with over 90% probability of closing and implementing during the projected period (typically this is revenue in final legal review).
Subtract – Anticipated churn for the projected period
= Visible Revenue
Using Visible Revenue as a Sanity Check
Total Projected Revenue – Visible Revenue = New revenue you need to hit your goal (I call this the “Go-get”).
The closer you are to the end of the projected period, the smaller the go-get should be.
Taking it One Step Further
Here’s where it gets fun. At least for me.
The go-get is made up of three types of revenue: 1) Revenue you can realistically hope to close that is already in the pipeline, 2) Revenue for businesses with short sales cycles and 3) Fairy Godmother Revenue (i.e., revenue you need to pull out of thin air).
It takes a bit of art to break out these three categories. The first two require you to have an intimate understanding of sales cycles, pipeline conversion rates and sales team efficiency.
The Fairy Godmother Revenue is the leftover. It’s the least credible part of the projections.
Companies with strong visibility into forward revenue have small amounts of Fairy Godmother Revenue and tend to receive premium valuations.
Note: The formula used in this example is for booked revenue, but you can also calculate run rate visible revenue as well. For booked visible revenue, “annualized” means current revenue should be spread over the remaining projected period. If there are only three months in the year left, you add three more months to the prior 9. If you measure for CY 2018, you include 12 full months of revenue. For the backlog, you must pay attention to when accounts are expected to go live and use this to annualize your numbers. You wouldn’t include 12 months of revenue for an account that goes live in June.
Have a nice weekend!
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