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Forcasting of Revenue

The document provides guidance on how to forecast revenues and expenses for a startup business by first estimating expenses, then creating both conservative and aggressive revenue projections, and finally checking key ratios like gross margin and operating profit margin to ensure projections are realistic. Entrepreneurs are advised to double marketing cost estimates, triple legal fee estimates, and account for direct sales and customer service time even if doing those tasks themselves initially.

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JIYAN BERACIS
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83 views

Forcasting of Revenue

The document provides guidance on how to forecast revenues and expenses for a startup business by first estimating expenses, then creating both conservative and aggressive revenue projections, and finally checking key ratios like gross margin and operating profit margin to ensure projections are realistic. Entrepreneurs are advised to double marketing cost estimates, triple legal fee estimates, and account for direct sales and customer service time even if doing those tasks themselves initially.

Uploaded by

JIYAN BERACIS
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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How to Forecast Revenue and Growth

How to Forecast Revenue and Growth

When starting out, financial


forecasts may seem overwhelming.
We'll help you conquer the
numbers with this easy-to-follow
guide to forecasting revenues and
expenses during startup.
Forecasting business revenue and expenses
during the startup stage is really more art than
science. Many entrepreneurs complain that
building forecasts with any degree of accuracy
takes a lot of time--time that could be spent
selling rather than planning. But few investors
will put money in your business if you're unable
to provide a set of thoughtful forecasts. More
important, proper financial forecasts will help
you develop operational and staffing plans that
will help make your business a success.
Here's some detail on how to go about
building financial forecasts when you're
just getting your business off the ground
and don't have the luxury of experience.
1. Start with expenses, not revenues
2. Forecast revenues using both a
conservative case and an aggressive case.
3. Check the key ratios to make sure your
projections are sound.
1. Start with expenses, not revenues. When you're
in the startup stage, it's much easier to forecast
expenses than revenues. So start with estimates for
the most common categories of expenses as follows:

Fixed Costs/Overhead
Rent
Utility bills
Phone bills/communication costs
Accounting/bookkeeping
Legal/insurance/licensing fees
Postage
Technology
Advertising & marketing
Salaries
Variable Costs
Cost of Goods Sold
Materials and supplies
Packaging

Direct Labor Costs


Customer service
Direct sales
Direct marketing
Some rules of thumb you should
follow when forecasting expenses:
 Double your estimates for advertising and marketing costs
since they always escalate beyond expectations.
 Triple your estimates for legal, insurance and licensing fees
since they're very hard to predict without experience and
almost always exceed expectations.
 Keep track of direct sales and customer service time as a
direct labor expense even if you're doing these activities
yourself during the startup stage because you'll want to
forecast this expense when you have more clients.
2. Forecast revenues using both a
conservative case and an aggressive
case. 
 If you're like most entrepreneurs, you'll constantly fluctuate between
conservative reality and an aggressive dream state which keeps you
motivated and helps you inspire others. I call this dream state
"audacious optimism."
 Rather than ignoring the audacious optimism and creating forecasts
based purely on conservative thinking, I recommend that you embrace
your dreams and build at least one set of projections with aggressive
assumptions. You won't become big unless you think big! By building
two sets of revenue projections (one aggressive, one conservative),
you'll force yourself to make conservative assumptions and then relax
some of these assumptions for your aggressive case.
For example, your conservative revenue projections might have
the following assumptions:
 low price point
 two marketing channels
 no sales staff
 one new product or service introduced each year for the first three years

Your aggressive case might have the following assumptions


 low price point for base product, higher price for premium product
 three to four marketing channels managed by you and a marketing manager two
salespeople paid on commission
 one new product or service introduced in the first year, five more products or
services introduced for each segment of the market in years two and three
By unleashing the power of thinking big and creating a set of
ambitious forecasts, you're more likely to generate the
breakthrough ideas that will grow your business.
3. Check the key ratios to make sure your
projections are sound. 

After making aggressive revenue forecasts, it's


easy to forget about expenses. Many
entrepreneurs will optimistically focus on
reaching revenue goals and assume the expenses
can be adjusted to accommodate reality if
revenue doesn't materialize. The power of
positive thinking might help you grow sales, but
it's not enough to pay your bills.
The best way to reconcile revenue and
expense projections is by a series of reality
checks for key ratios. Here are a few ratios
that should help guide your thinking:
o Gross margin
o Operating profit margin
o Total headcount per client
Ratios that should help guide your thinking:

Gross margin
What's the ratio of total direct costs to total
revenue during a given quarter or given year?
This is one of the areas in which aggressive
assumptions typically become too unrealistic.
Beware of assumptions that make your gross
margin increase from 10 to 50 percent. If
customer service and direct sales expenses are
high now, they'll likely be high in the future.
Operating profit margin. 
What's the ratio of total operating costs--direct
costs and overheard, excluding financing costs--to
total revenue during a given quarter or given year?
You should expect positive movement with this ratio.
As revenues grow, overhead costs should represent a
small proportion of total costs and your operating
profit margin should improve. The mistake that many
entrepreneurs make is they forecast this break-even
point too early and assume they won't need much
financing to reach this point.
Total headcount per client
If you're a one-man-army entrepreneur who plans to
grow the business on your own, pay special attention
to this ratio. Divide the number of employees at your
company-just one if you're a jack-of-all-trades--by the
total number of clients you have. Ask yourself if you'll
want to be managing that many accounts in five years
when the business has grown. If not, you'll need to
revisit your assumptions about revenue or payroll
expenses or both.
Activity:
With your Business plan, how would
you forecast your business after one
year in terms of;
1. Revenue
2. Expenses
3. Profits

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