Estimating Revenue

[charliee]

Hey guys,

Just a quick question, although it probably will require a long answer. I've started my first business plan and I need to be able to estimate my businesses revenue for the first 12 months of its existence. Would anyone here be able to guide me?

I know its a pretty broad question, and you may need some more details about my business, so let me know what you need to know.

Thanks guys,
Charlie

[SIMPLEROBB]

First. Your type of business.

[charliee]

oh yeah, that's an obvious one to leave out - It will involve providing a service. If I am able to get the lingo right, it will come under the quaternary sector of the economy.

[pboychuk]

What I do is speculate sales minus expenses, obviously, find that figure, then cut it in half.. it works better than one may think unless you are very pessimistic, however that's probably horrible advice.

[speedguy]

1. Start off by identifying your target market.
2. Evaluate how innovative and competitive your service is as compared to your competitors and establish a price range in which you will market your service.
3. Evaluate the buying power of your target market in the current economic situation.
4. Estimate your costs and multiply them by 1.5

This should give you a basic revenue model to play with. You can now play with the numbers to see how you can maximize your revenue. For example based on the above analysis you can see if:
- a recurring price model is good for your service or a one time subscription will be good enough.
- the buying power of your target market and the strength of your service is good enough to charge a high enough premium to increase the price of your service
- offering customized versions of your service to different geographic/demographic groups can help you improve your revenues

Overall I do not think there is a hard and fast rule on estimating revenue. Your best bet is to identify maximum possible factors that can impact your sales price and number of potential customers and work with these factors to estimate best and worst case scenarios

[pboychuk]

4. Estimate your costs and multiply them by 1.5

Great Advice

[BusinessAdviser]

It can't be just a shot in the dark. When you present your business plan, the reader will not look at the numbers and accept them as reliable, his first question will be, "How did you arrive at these numbers?"

You need to look at comparable products, or products meeting a comparable need.

[charliee]

Great advice guys, thanks! I'm getting the feeling that the idea is to be very conservative about the sales while maximising the expenses figure.

I have identified my target market, and I know that my service is unique, in that it has never been offered before. The price for the service will range from around $3.00 - $6.00, the exact number still hasn't been determined.

Speedguy - By potential customers, do you mean anyone who falls into my target market, or the number of people within my target market whom will potentially be exposed to my advertisements...

BusinessAdviser - I do know of a few comparable products, however I don't believe there are any products meeting a comparable need. Do you have any advice as to researching the sales figures of the comparable products, where would I begin to look?

Once again, thanks!

[speedguy]

Speedguy - By potential customers, do you mean anyone who falls into my target market, or the number of people within my target market whom will potentially be exposed to my advertisements...

Potential customers are people who will be exposed to your ads as those who do not know about you cannot become customers

[charliee]

Rightyo. Thanks speedguy.

I have been thinking about it all day and I have come up with the following parts for a plan.

1. Find out how many 13-18 year old kids there are in the area I will be campaigning in.
2. Find out from TV networks, magazine companies, and other media companies how many of these people they target through advertisements.
3. Use this raw data to roughly estimate how many customers I will have. (Maybe multiply the number given to me by the media companies by 0.01 or 0.02 or something to get a relatively conservative number of customers).

What do you guys think, any one care to add to this or criticise at all?

Thanks.

[RyanRich1016]

I think a conservative number to use is half of 1 percent or .005 return on your marketing. Im starting a bathroom remodeling company and we just recently sent out direct mailers. Out of 500 cards we received 1 or 2 calls which figures to be about .004. I havent read through your product description, but I think this figure is fairly generic and applies to most companies. Hope this helps!

[charliee]

Thanks Ryan, ill definitely take that advice on board.

[akula]

Hey guys,

Just a quick question, although it probably will require a long answer. I've started my first business plan and I need to be able to estimate my businesses revenue for the first 12 months of its existence. Would anyone here be able to guide me?

I know its a pretty broad question, and you may need some more details about my business, so let me know what you need to know.

Thanks guys,
Charlie

okey dokey...let me tell you how it's done
there's three things to remember when it comes to forecasting revenues, all of which culminate in you having to complete one critical step, without which it's impossible to meaningfully forecast revenues

1. revenues defined by audience: your forecast is going in your bplan. your bplan is being written for an audience. the audience has certain expectations for what the revenues ought to be, and therefore, your forecast will need to meet those expectations.

2. revenues are defined by expenses: if it's gonna cost you 10c to derive each $1 of revenue, and you have $1 to begin with, your revenues will be $10. it doesn't matter what the size of your market is, because ultimately, revenues are defined by your marketing budget, inventory and, in your case, the number of hands on deck.

3. most important point, revenues are defined by your break even point: revenues = price per unit * units sold. this means that your revenues are defined by how much you are gonna charge for your services. the pricing, in tern, is gonna get worked out when you do your break even analysis. for example, when you do your break even, the analysis might show you that if you charge $x per service rendered, you will need to service 100 customers in 12 months to break even. however, because your marketing budget and lack of infrastructure makes it impossible to handle 100 customers, you will increase your price to $1.5x and find that at this price, you will need to service 50 customers to break even. at that point, your proforma revenues are gonna be $1.5x * 50.

for example; let's say, for your services venture, it's gonna cost you $1 to acquire 1 sale and you will charge $3. you also have a $50k salary that you wanna cover for your self and you have $10k in admin and other fixed expenses for the year. at this rate, you will need to sell 30,000 units to break even. to get 30,000 sales you need $30k startup capital, which you don't have. what you have is $5k, which translates into 5,000 sales (which, hypothetically, you have the capacity to service). so, what should your price be if you can only afford to finance 5,000 sales? the price will be $13. at this level, you will need to sell 5,000 units to to cover your fixed and variable expenses. so, with this data, your forecast revenue will be [$13*5000] = $65k, your fixed expenses will be [$50k + $10k] = $60k and you variable expenses will be [$1 * 5000] = $5k, leaving you a nil EBITDA

all in all: do your breakeven analysis to find your optimal pricing level and after that you will be able to arrive at a forecast figure for your revenues. the whole point of forecasting for the first year is for you to show that you can breakeven in the 1st year. find what that point is, and that's what's gonna tell you what your proforma revenues are gonna be.

[charliee]

Thanks very much for your response Akula, it looks like you put in quite some effort, I appreciate it . I just have two questions.

1. How would I know how much I will have to spend to acquire a sale?
2. Wouldn't a break even analysis include a personal salary of $0, as apposed to $50k? In my current position, a salary is not essential for the first year of operation.

[akula]

Thanks very much for your response Akula, it looks like you put in quite some effort, I appreciate it . I just have two questions.

1. How would I know how much I will have to spend to acquire a sale?
2. Wouldn't a break even analysis include a personal salary of $0, as apposed to $50k? In my current position, a salary is not essential for the first year of operation.

yeah man, no worries..

1. cost of sales is normally 30% of the price charged...if you look at 100 random P&L's that's gonna be the average cost of customer acquisition...sure it varies a lot between different ventures and over time...but in the beggining, when the venture is just getting started, cost of sales is gonna be really really high, probably over 50% of revenue because you're gonna be going through a sales learning curve, and most of resources you spend on marketing are gonna be wasted as you will be trying to figure out how to sell your product through trial and error.

2. as far as salaries...the point of the break even is to test whether you have a realistic venture. for example...if you are gonna be charging $6 for your service; even with an underestimated cost of sales at $1 (it should be about $3), you will need to sell 12,000 units for the business to simply provide a salary for one person and cover other basic fixed expenses. can you make 12,000 sales (about 40 per day)? probably not...it's not a realistic target, therefore, you have an unrealistic business proposal which is unlikely to breakeven and turn profitable.

on another hand, if you commit that basic mistake of underestimating expenses and say "I'm gonna exclude 50k salary from break even", suddenly you break even point drops from 12,000 units to 2,000 units (7 units per day)...looking at these incorrect figures, you're gonna think "hey, I can make 7 sales per day!", but really you will be be misleading your self into starting an unsustainable business...entrepreneurs do it all the time...they underestimate expenses, start a business and try to slog it out, only to find that at their incorrect pricing levels, no matter how hard they work, the business can't afford to pay them a wage. they can then no longer afford groceries, at which point they close shop and join the unemployed.

so yeah...man, do you a have a breakeven spreadsheet?