Predicting your revenue forecast and expenses when starting a business is one of the most important, yet neglected, areas of business planning. Many consider that if you have no basis of being accurate, what is the point in being theoretical?
However, there are not many investors that would consider funding a business that has not given good thought to what level of sales are required. Of course, it is also a powerful reality that having reliable financial information will help an owner to make better business decisions.
The measure of business viability and sustainability is often determined by predicting a particular outcome, and allowing sufficient time to respond appropriately to your forecasts. While it may not be easy to determine what your sales will actually be, it is possible to reasonably define the minimum sales you have to achieve in order to survive.
Where do I begin with my revenue forecast?
Start by identifying your costs. These are much easier to research and will form the basis for showing what resources will be needed to run the business. Estimate the key categories of rent/rates/telephone/insurance/light and heat/advertising etc. It is better to over-estimate, as costs usually exceed expectations!
Estimate how much you will need to draw from the business for yourself and for your staff (wages). Also estimate how much opening/replacing stock will cost, if appropriate. Once your costs are identified you can start to appreciate the level of income necessary to cover those costs, which will become your break-even position. However, that is only the first part!
While you can predict sales relative to the above, when it comes to monthly figures, it is pointless to merely take a total figure alone and to divide it by twelve. Rather, it is important to consider your trading year and any seasonality that will be represented. The year will have various peaks and troughs relevant to your sector, for example, customer demand, weather, deliveries, competition. What evidence do you have that supports your assumptions? Do you have a contract guaranteeing sales to begin with?
You will find it helpful to produce two examples, a best and a worst-case scenario. This will give a balanced view. Each scenario may contain aspirational goals that can be modified once you review the two options. For example, you might want to look at a higher pricing model against a lower pricing model, which may affect how many customers will be needed to achieve a given outcome.
Once this part of the exercise is completed, it is helpful to measure your revenue forecast against some key ratios. For example, gross and net profit margin percentages, and number of units or hours required. With gross/net profit, it is usually easier to relate to percentages based on expectations, as fluctuations are often easier to spot this way.
Finally, get your projections reviewed objectively by a professional and independent business support specialist. This will inject a level of reality and challenge your assumptions. Review your projections regularly, (monthly/quarterly), to give you confidence that you remain on-track. Remember, just because you have done the numbers, does not mean they will run according to your expectations, but you will be able to quickly see and adapt to any changes. Think big! If you do, the numbers will help you visualise how you can achieve your expectations. ff