Originally published in SmallBusinessTalk.ca.
Revenue projections are important for new businesses as well as those that are expanding. For startups, it allows them to tell how much money they will need until they are making a profit. For those in the early days of a company, it allows them to forecast the need for more funds.
How Do You Create Revenue Projections?
- Use your current expenses
- Factor in growth
- Estimate current or estimated amount of profit and sales
Begin with Your Expenses
Expenses are easier to predict than revenue. You’ll need to get estimates for basic expenses including the following:
- Communications costs
- Legal fees
- Bookkeeping costs
- Technology, such as website maintenance or storage
Depending on your business, you will also have to account for the cost of creating goods and labor. A good rule of thumb is to double your first estimates for legal and insurance fees, since it’s difficult to predict the actual costs. It’s a good idea to do the same with advertising expenses, since you want to be able to market your company and help it to grow.
Begin with a sample cash flow worksheet, like the one found here:
Revenue is more difficult to predict for a brand new startup. If your company is up and running, use your current revenues as the basis for future projections.
For both new businesses and startups not off the ground yet, you should create two sets of revenue forecasts. Make the first one conservative, using low profits and sales. The second forecast should be more aggressive while still maintaining realism. In this projection, you could increase sales or raise prices or make other decisions that drastically increase your revenue.
The first step for a new startup is to do some outside research. Find out the demographics for your target audience. You can do this by visiting a local library or an industry association to find out the number of people in your target age and income range.
Next, you’ll need to find out how many competitors are going after the same audience. Multiple competitors could limit your ability to grow quickly. Are they building on image awareness, are they hitting the targets through social media, what do their advertising plans look like?
Consider Required Growth
When making your projections, don’t forget about additional expenses you’ll incur as your business grows. One of the biggest expenses is salaries. As an entrepreneur, you may be running the entire show, but that won’t continue as your company develops a customer base. You’ll eventually need to hire help, which will cut into your profits.
While you may be producing one base product now, the opportunity to add a premium product could mean additional revenues. You’ll have to consider how it will increase your expenses as well. Will you need more equipment or will you be able to use what you currently have? Include additional supplies for developing this product along with the extra revenue it will bring in. Decide if current customers will buy this new product in addition or instead of your current product. The answer will impact the amount of revenue you bring in.
The Bottom Line: Don’t expect to get your first attempt at revenue projections completely right. However, the exercise will help you be more aware of how your business is performing, and you can make adjustments to ensure your next projections are more accurate.