The idea of forecasting revenue and expenses during the startup stage is more of an art than science. Entrepreneurs across the globe complain about the process of forecasting being a time-consuming one. Rather than building accurate forecast, they would be happy spending time selling their plans. But, you must understand that very few investors will show eagerness to invest money in your business if you fail to provide them with a set of detailed and thoughtful forecasts. Furthermore and most importantly, proper financial and revenue forecasts will enable you to develop business plans and strategies that shall assist in making your enterprise a success.
The article will provide some necessary details on how to forecast revenue and growth at a time when you are just getting your business started and don’t have enough experience up your sleeves.
- Remember, it is always smart to start forecasting your expenses first, not revenues in the startup stage. So, start estimating the most common categories of expenses. Fixed or overheard costs include rent, utility bills, accounting or bookkeeping, phone bills and other communication costs, like postage, legal, insurance, licensing fees, advertising and marketing, technology, salaries, among others. Furthermore, variable costs include direct labor costs, namely direct sales, direct marketing and customer service, and cost of goods sold like packaging and material and supplies
- Follow these thumb rules in the process of forecasting expenses. Always double your estimates for marketing and advertising, for they tend to increase beyond expectations. Trip your estimates for licensing fess, legal and insurance, for they are almost near to impossible to predict and always surpass expectations. Keep a close track of your direct labor expenses during the startup stage, for when you have more clients you would want to forecast this expenses
- It is a common mistake that once you forecast your revenues, you might forget about your expenses. You need to check the key ratios to ascertain that your revenue projections are correct. Many entrepreneurs make the folly of optimistically focusing on reaching revenue goals and presume that the expenses can be adjusted to accommodate if revenue doesn’t materialize as expected. Remember, as the business pundits say that the power of positive thinking might bring in greater sales, but certainly won’t help to pay off bills. Reality check for key ratios is the best and the most credible way to reconcile revenue and expense projections. Here are a few ratios that should help guide your process of thinking:
The first ratio is operating profit margin. As an entrepreneur you must expect positive movement with this ratio. The ratio of total operating costs – i.e. direct costs and overheard minus financing costs – to total revenue during a given period of time is the operating profit margin. As revenues increase, overhead costs must represent a small proportion of the total cost and the operating profit margin must improve. Don’t make the mistake of forecasting this break-even point early and hope that you don’t need much financing to reach this point
The second ratio is called gross margin. It is the ratio of total direct costs to total revenue during a giver period of time. Aggressive assumptions can become too realistic in this area. Stay away from assumptions that make your gross margin rise from ten to fifty percent. It is understandable that if direct sales and customer service are high now, they are expected to rise further in the future
The third ratio is total headcount for every client. This ratio is meant for those who run the business all by themselves and plan to do that in the future as well. Divide the total number of employees in your organization – would be just one if you are all-in-all – to the number of clients you have. Question yourself if you intend to manage that many accounts when your business grows in the future. If the answer is negative, then you might have to re-work on your payroll and revenue expenses
- Now let’s check out the ways to forecast revenues. There are primarily two ways, namely a conservative case and an aggressive case. To keep yourself motivated as an entrepreneur and to inspire others, you will tend to fluctuate between an aggressive dream state and a conservative reality. Rather than ignoring this state and creating forecasts that is based entire on conservative thinking, it is advisable to stick to your dreams and come up with at least a set of forecasts based on aggressive assumptions. Remember, you have to think big in order to be big in life. Like a smart entrepreneur create two forecasts, one conservative and one aggressive. Assumptions for your aggressive case might be high price for premium product and low price point for base product, two salespersons paid on a commission basis, appointing a marketing manager who will assist you to manage three to four marketing channels, one new service or product introduced in the first year and four more products or services introduced per segment on the market in the next two to three years. Again the assumptions for conservative revenue projections could be two or three marketing channels but no marketing manager, low price point, one new product or service launched every year for the next three years, no sales staff, no sales staff, among others. By creating a set of ambitious assumptions and widening the horizons of business goals, you might generate those creative breakthrough ideas that will help your business soar like never before. Entrepreneurs who have taken risk and have run business with high ideas have ended up becoming the most successful ones in the world of trade and commerce
- It is understandable that to forecast revenue and growth accurately for your startup will take time and expertise. It shall come gradually and you have to learn from your errors and consolidate on your strengths. When you make your projections for the first time, avoid going into too much detail, for the business model is bound to change and evolve with time. But don’t make the mistake of not spending too much time on business planning for you might be running the risk of avoiding many expenses on the way
Now you know the importance of making proper business planning to achieve greater success. The article will help you to learn how to forecast revenue and growth and bring in greater profits and more business.