On the recommendation of a client I am reading “Never Get A Real Job” by Scott Gerber.  Chapter 5 is entitled “Business Plans Suck” and the author starts with an anecdote about how his startup’s initially concise 10 page mission and strategy morphed into a nearly 100 page monstrosity.  Citing advice from banks and consultants purporting the need for a “traditional” business plan, they ended up with “nonsensical financial forecasts, complicated statistics and intricate details about mundane marketing tactics.”

Further (and I am summarizing here):

• Only 10% of the plan was focused on what they currently could do.
• They worried too much about grammar and formatting and not enough about strategy.
• They included suggestions from everyone who read the plan, and a lot of people read it.
• They spent weeks making it look pretty (color, binding, etc.).
• They never tested the market
• The projections were overly optimistic.

OK, so maybe the chapter should have been called “We Suck At Writing Business Plans” instead of Business Plans Suck.

Lets address these one at a time:

• I agree a 10 page focused strategic plan is better than a 100 page bloated plan full of fluff.

• I don’t believe there is such a thing as a “traditional” business plan.  As I have explained in detail in my article Five Considerations Before Writing Your Plan there is no one correct way to write a business plan.

• Focus the plan on what you can achieve.  Looking out 5 or 10 years into the future is foolish and even one to three year is “shaking the magic eight ball.”  That said if your plan is for raising financing include the plans for products and service that the new funding would allow.  I have always been a big fan of thinking of your business in phases.  Phase I might be tackling the local market with one product or service.  Phase II might be expanding geographically or adding new products and services.  But stick to writing for one phase at a time.

• As a side note here – Business Plans Help Raise Capital!  Go to an investor without a plan…they will tell you to come back with a plan.  Ask a bank for a loan…they won’t take your application without a plan.  Does every plan get funded?  Hell NO!  But does most every company funded have a business plan.  Most likely YES!

• Not everyone should read your plan.  People with industry experience, finance experience, investor experience and business mentors are a good place to start.  But follow your gut on whether to include their advice or not.

• It does not need to look pretty!  Should it be easy to read (scanable), understand and tie together nicely with the financial data?  Yes!  But pretty is not going to score you any points.  These days you don’t even have to print or bind it…just email the document after you get an Non-Disclosure Agreement.

• Successful New Businesses always test the market.  Before you invest in even writing an executive summary buy a couple of the product you intend to sell and try to make a profit.  If you have a service (as Guy Kawasaki says) “Just Get Going!”  But remember once you have testing the market you still need a plan.

• The projections were overly optimistic.  That’s because your market research was probably garbage!  Pages of industry data from Hoovers have little relevance to startup financial projections.  Projection can be based on local market data if you have a small business that serves a community or based on a break even point buildup method if you have an entrepreneurial venture that serves people online, an entire country or the world.  Neither of which involves the statement “If I could only get .01% of the people on the internet to give me a dollar I would be rich.”  Silly assumptions equal silly financial projections.

Do Business Plans Suck?  Sometimes, but they don’t always have to.  Our free business plan software has six sections that will amount to 10-15 pages when completed and hardly has an ounce of fat.  If done correctly, you will have a useful tool that isn’t a paperweight that gets stuffed in a drawer.

By the way… I LOVE THIS BOOK.  It’s a fun read full of useful advice.  Following the above mentioned section Mr Gerber gives a ton of great advice on how to write a proper business/strategic plan, one page plan and even a “Pre-Execution One-Paragraph Plan.”  It doesn’t get any easier than a one paragraph plan…and the sentiment is in the right place to get you started, but eventually, the so-called “traditional” plan will rear its ugly head once again.

<< Start-up Sales Projections Part 2 - Coming Soon >>

Now that we have covered the Break Down and Buildup methods of projecting sales I thought it would be worthwhile to demonstrate the financial projection program included in Capital Business Plan Software.  Below is a demonstration video tutorial where I complete a financial projection based on a pizza restaurant I owned with a business partner back in 2007.  While we offer three different pro forma financial projection models – a basic, intermediate and advanced excel workbook, the video below covers the intermediate model.  

Trouble Loading The Video?  Try Here

<< Start-up Sales Projections Part 1 – Start-up Sales Projections Part 3 >>

Well the summer break is officially over and school is back in session.  Welcome back!

In Part 1 we discussed developing “a reasonable range of sales” using the breakdown method which takes a market and estimates the sales based on market capture.  For some types of businesses where the potential market is too large (Nationwide/Worldwide) or is not granular enough we can use the “Buildup Method.”  The Buildup method takes your variable costs (merchandise/inventory/cost of sales), your fixed costs (rent, utilities, payroll, etc) and your average selling price per unit and figures the break even point. Once you know your break even point then it is just a matter of setting sales goals to achieve profitability.

Let’s use the same hypothetical maternity clothing store in Fargo, ND as an example.  Again the numbers in this example are not 100% real but they are pretty close and should give you a good idea of how to use this method.

The Buildup Method

The basic formula for break even point in terms of units sold is:

BEP = Fixed Costs / (Selling Price Per Unit – Cost of Goods Sold Per Unit)

Where:

Fixed Costs = Total Operating Expenses Per Month or Year

Selling Price = Average Selling Price Per Unit

Cost of Goods = Average Cost of Goods Per Unit

*Don’t forget Order of Operations – Solve the ( ) first then divide!

So, in the example above if the average price of maternity shirts, underwear and pants is $22.50 and the average COGS is $12.50 that means that the contribution margin is $10.00 per item sold.  The annual operating expenses (not including inventory of course) is $75,000 so $75,000/$10 = 7500 units or articles of clothing sold.

That means that this clothing store will have to sell 625 items a month or 144 items a week or about 20 items a day.  Alternatively we can multiply those numbers by $22.50 to determine the annual, monthly or daily sales goal to achieve break even point.  Past the point of break even every dollar of sales contributes  $0.44 to the bottom line of this business.

Because the annual break even point of this company is $170,000 the entrepreneur starting this company will have to analyze the break even point against the potential market for this type of business (determined in part 1 as $380,000 a year) is large enough to take on the risk of starting this business.  If they believe that their reasonable range of sales of $380,000 plus or minus 10%, 20% or 30% is correct then they would probably proceed with starting the business.  However if the data for the market showed a total market of only $200,000 and Break Even is $170,000 this would probably not be a good opportunity at all.

Remember, projecting sales for a start-up is not about being right…it’s about what happens if you are wrong.  Every aspiring entrepreneur should complete a scenario analysis raising and lowering sales and expenses to create a best, worst and expected scenario.  Your success in the long run and ability to stay in business is dependent on it!

<< Building Quality Financial Projections – Start-up Sales Projections Part 2 >>

When projecting sales for a startup business there are generally two ways come up with what we have called “a reasonable range of sales.”  The first is the Breakdown method where you take a large potential market and break it down into a smaller target market and finally determine a percent of market capture.  The second is a Buildup method where you calculate breakeven point for your company and then determine the buildup of sales over time to achieve profitability.

Let’s use a hypothetical maternity clothing store in Fargo, ND as an example.  The numbers in this example are not 100% real but they are pretty close and should give you a good idea of how to use this method.

The Breakdown Method

The more local and the more specific the target market the more reliable the Breakdown method becomes.  The example of a maternity clothing store is perfect because it is a niche market but also statistics are readily available for the demographic set.  When you research data is that already available from another source we call that “Secondary Market Research”.   When you conduct your own survey or gather your own data we call that “Primary Market Research”.

To figure the Total Market and Target Market for maternity clothing we use secondary market research data.  The total market for maternity clothing is of course women, which account for about half of the 150,000 people in the Fargo / Moorhead MSA.  But specifically, pregnant women is the target market, therefore if we look at the number of babies born in Fargo at the two major hospitals in the area we can find that each year approximately 9,500 babies are born.

But this alone is not enough information to do a sales projection.  The second step is to make an assumption about “Market Capture” and finally conduct primary market research on the average dollars spent on maternity clothing during pregnancy.  To determine market capture you have to weigh the 4 P’s (product, place, pricing, people) against the competition to come up with an estimated market capture.  For example if we are a high end maternity clothing store in a community with lots competition we can expect to have  a lower percent of market capture but we also have a higher price per item of clothing.  On the other hand if we are going to start a second hand clothing store in a community with limited competition we can expect a higher market capture but lower margins.  At this point we have only one part of the equation solved – Target Market X Market Capture = # of Customers.

The final part of the puzzle is to determine the average annual spending on maternity clothing.  One way to determine this is to survey friends and family who have recently had a baby and ask how much they spent on average.  I had a student of one of my Entrepreneurship classes conduct this very survey and found that the average spent on the first pregnancy for clothing was $500 and about $300 on the second child.  Now again, we can’t expect to capture all of these dollars because some of it will go to the competition therefore you have to make another assumption about how many of these dollars your company will capture.  For the purposes of this example we assumed $200 of the total budget.  Therefore the second half of the equation is  – # of Customers X Capture of Annual Purchases = Sales Projection.

So to lay out the example:

Target Market X Market Capture = # of Customers
9,500       X             20%           =        1,900

# of Customers X Capture of Annual Purchases = Sales Projection
1,900                X                          $200                     =          $380,000

Let’s be clear… NOBODY should believe that this business will do exactly $380,000 in sales.  That is not the purpose of this exercise.  Nor should you believe that within the first year that it is a reasonable sales projection.  This number, $380,000, represents a basis for determining a Reasonable Range of Sales for this startup company.  It is a target to be achieved once the business has met its full potential for the current business model in its current market.

With this information we need to determine what will happen to the business is we only achieve 90% of the projection, or 85% or 50%.  We also need to estimate approximately how long it will take to get to that sales goal.  Will your company still be in business if it takes 18 months instead of 12 or 24 months instead of 18 months.

The number one reason why half or more of all startup businesses fail is because they RUN OUT OF MONEY!  But I believe the reason why they run out of money is because they think they are going to get to break even before they actually do…they over estimate their sales and the speed at which they will achieve them.

Take the graphic above for example.  Given the breakeven point and the sale projection this entrepreneur is expecting to burn the amount of cash where the sales are below break even.  Say that length of time is 12 months.  But what happens if the length of time to get to break even is even 50% longer (18 months instead of 12) as in the graphic below.

The amount of cash burned is almost twice as much because in the beginning months you burn more cash until you get to break even.  The “VOLUME” of the area below breakeven must be considered…the relationship is NOT one to one.  This is the single biggest reason why sales projections are so important.  You have to project different scenarios (best case, expected case, worst cast, super awful case) and prepare for the worst.  It’s the only way your startup business will survive.  And guess what…?  The assumptions for your projections come from your business plan so you can’t achieve quality sales projections without  a quality business plan.  If you put garbage in, you will get garbage out.

Part two will focus on the Buildup method for projecting sales which works best when you have a national market or a non-niche product.

<< Business Plan Templates - Startup Sales Projection Part 1 >>

Probably one of the most uncomfortable things a first time entrepreneur has to attempt is their first set of financial projections.  Frequently I hear the following:

• “Well…I don’t know how many people will buy from me!”
• “I just took a WAG (wild ass guess).”
• “This is so stupid…why am I doing this!”
• “How the hell am I suppose to know?!?”

To all of them my answer is “YOU are the expert in the business you are starting and You have to set some expectations for the banks and/or investors.”

As you may have heard, “Financial projections are part art and part science”.

So what does that mean?

It means that you won’t know really how to do them until you have done them.  Sure there are some things you can estimate based on your knowledge and experience with a particular type of business, but the rest has to come from research. And, that research, is part of the overall business plan.  In other words, the “part art” is the educated guess or the assumptions you base your projections on, which inturn is based on your expectations.  Your expectations are based on the research you completed in the written section of your business plan, that is the “part science”.

Regarding the comments above, the last one: “How am I suppose to know?!?” is peticularaly troubling. As mentioned before, you are suppose to be the expert.  But also, you should have done the research to set your expectations based on a reasonable set of (documented) assumptions.  Banks and investors will expect you to know your stuff upside down and backwards.  If you bring in a boiler plate business plan with canned financial projections, or ones written primarily by another person with numbers that you can’t explain, you won’t be getting any money any time soon.

After all that I hear:  “Well, all of that’s nice, but I still don’t know technically how to complete my financial projections.”  So here is the process:

1. Make sure you have a solid financial projection program to begin with. It can be a standalone program or excel templates but make sure the three statements (Income Statement, Balance Sheets, and Cash Flows) are interconnected.
   
2. A well researched and written business plan is a must. Every section of the business plan holds key data related to the financial statements.
   
3. Build a Beginning Balance Sheet or Sources and Use of Funds. Your Operations Plan should have laid out the assets you need to purchase to get started (Building / Equipment / Furniture & Fixtures / Inventory).  Get firm quotes from several sources on each.  Then document your funding based on sound business banking criteria including proper equity injection.  Finally, your balance sheet should “balance” – i.e. sources of funds=uses of funds (otherwise they wouldn’t call it a balance sheet!).
   
4. Build your sales / revenue projections. The data in the Market Potential section of your business plan or independent Marketing Plan will help you bracket your expectations for sales but in general, Sales projections are determined two ways: Driven from market data:  Target market size is determined in units or dollar volume and you estimate the amount of that market you can capture…bracketed by competitive factors (number, advantages, price) and industry factors (growth, decline, obsolescence). Driven from budgets:  When pursuing a broad market strategy it is better to determine break even point then estimate a sales goal to reach break even and eventually profitability.
   
5. Build your expense projection. Again, the information you compiled in your operations plan and other parts of your business plan will help you determine appropriate business overhead expenses. For example your location/building will determine your lease, utility, maintenance, insurance and property taxes.  Your inventory section will help you determine cost of goods sold and cash flow terms such as accounts payable.  The marketing section will help you budget your advertising and promotion expense.  And, your personnel section will help you forecast your salaries and wages, payroll taxes and benefits.

There is no great mystery to building financial projections.  With the right forecasting software, it can be fairly simple to do.  And now that we have demystified the “art and science” of it, you have the tools you need to get started and confidently plan the launch of your new business idea.

On a final note, you don’t have to go it alone.  There are business consultants located at Small Business Development Centers all across the country.  These counselors are usually well versed in business planning and helping your produce solid financial projections for your business.  So look them up and get started today!