Estimated revenue is the amount of earnings projected for a given accounting period. This calculation can be important for a number of financial activities including estimating taxes due, budgeting, and issuing statements to shareholders and interested members of the public. There are a number of approaches to developing estimates. The most suitable can depend on the company, the industry, and how the estimate will be used. Accountants typically pick a method and stick with it for consistency, because they want to be able to compare data across accounting periods.
One way to look at estimated revenue is to consider the earnings likely to accrue, even if they are not actively collected. This is used in accrual-basis accounting techniques. Another option involves considering how much money will actually be collected from customers, vendors, and other sources. This establishes the amount of funds likely to be available for active use on the basis of the estimate, which can be important for activities like budgeting.
Sources for information in a revenue estimate can include data from prior financial periods, analysis of the market, and projections based on current activities. Companies with significant contracts underway, for example, might expect to complete them and bill clients in the next accounting period. Government agencies could look at likely fees and taxes they will collect to determine their estimated revenue. Another consideration might be a planned product release or initiative that is likely to result in increased revenues.
Creating financial projections can be challenging. Accountants want to be as accurate as possible so organizations have the right information they need to make financial planning decisions. Overestimating can create problems because a budget might be too large, or the image created from the estimated revenue might be too rosy, and could be considered misleading. Failing to account for potential revenue sources, on the other hand, might result in an abnormally low estimate, which is not helpful either.
In financial declarations, accountants may discuss the methods used. This allows readers to doublecheck their work and consider factors that might have an influence on the resulting estimate. For example, being aware that property tax projections might change because of falling real estate values and changes to assessments could influence the reading of estimated revenue for a local tax authority. If the estimate doesn’t account for potential falls in property value, it might not be as accurate, and a reader might make an adjustment to compensate for this shortcoming.