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mediumFinancial Analyst interview question

How would you forecast revenue for a subscription software business for the next 12 months?

What the interviewer wants to hear

  • Start from current MRR or ARR base
  • Add new customer bookings from pipeline and conversion rates
  • Add expansion and subtract contraction and churn by cohort
  • Convert bookings to recognised revenue with timing and deferred revenue
  • Run scenarios and track forecast accuracy

Model answer

I would build it as an MRR waterfall. I start with this month closing MRR. Each month I add new MRR from new customers, estimated from the sales pipeline, win rates and average deal size, or from marketing leads and conversion for self-serve plans. I add expansion from upsells and price increases and subtract contraction and churn, using historical rates by customer segment or cohort, because small customers usually churn more than enterprise ones. That gives closing MRR each month. Then I convert to recognised revenue, which depends on billing terms: annual upfront billing creates deferred revenue that is released monthly, so cash and revenue differ. I would add one-time services revenue separately. Finally I run base, upside and downside cases on new bookings and churn, and each month compare actuals with the forecast to improve the driver assumptions.

Can you answer it under time pressure?

Take a timed medium round and get scored on every answer.

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