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Why is correct revenue estimation so important?
Correct revenue estimation is an important part of your business planning and it will also determine how much you will pay for key business outlays such as tax, workers compensation, liability and business revenue insurance.
What is revenue estimation?
Revenue estimation involves calculating the amount of money your business is likely to earn. You can work this out by forecasting your business growth rate, the number of customers you have (and will have) and the prices of your products and services.
Revenue estimation is usually calculated over a fixed accounting period, such as a quarter or even a financial year.
A new business should prepare revenue projections every three months, but after a couple of years you'll have a better idea of your annual business growth rate and your revenue estimation will be more accurate.
How can revenue estimation help protect my business?
Revenue estimation is particularly important for protecting your earnings through business interruption insurance, which we call "Back in Business". This type of insurance can protect your revenue against an unpredictable event that may stop your revenue completely, such as a fire, storm or cyclone.
It can also provide financial relief for some events that impact your revenue, such as a nearby shop burning down, which means your customers can’t get to your premises for a few weeks, or where parts of your city are severely damaged by a storm and you can't deliver your services.
When disaster strikes and halts your revenue, business expenses such as wages, rent and loan repayments must still be paid.
Maximising renewal periods
Most business decisions – including the renewal period for insurance – revolve around a fixed financial cycle. But if your revenue estimation uses your end-of-financial-year figures to calculate business revenue insurance for the following year, then you risk underinsurance by using old estimations.
You may only be covered at today's revenue for an event that happens 11 months later when your revenue may have gone up substantially. That means you could be risking the benefits of your business growth.
When you start a business insurance quote on the AAMI website, we have included a tool to help you to tailor your projected revenue – perhaps from your business plan – to the required time period.