<< Start-up Sales Projections Part 1 – Coming Soon >>

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!

Guest post by Bill Grodnik CEO of Davinci Virtual Office Spaces and Solutions.

Dare to be different– Starting out, it’s vital to choose to operate a business where you already know something about the industry, or you have experience having worked in the field. Nobody wants to invest in a business where you’re reinventing the wheel, so use the knowledge to innovate something different in your field before you forge ahead.

Bootstrap like there’s no tomorrow- With no debt and no investors, you’re free to take your company in whatever direction you see fit. Rule #1 for the small business owner should be to self-fund for as long as is humanly possible – then look to external sources for funding. With the emergence of Internet business, you can cut down on costs by finding the right Web Hosting Choice to create your own site, and operate your business from the Internet.

Be more attractive– The #1 most attractive trait? It’s not being a blond or driving a Maserati – it is being profitable! If you’re not there yet, have a clear, well-thought-out plan in place that shows your company’s path to profitability. This will enable you to at least negotiate some of the terms of third party investments.

Show your growth– For most businesses, funding in the early stages of a company’s launch is incredibly difficult. As the business owner, your #1 priority should be growing your business, in terms of customers and infrastructure. The best way to do this is to focus all of your energies on your core function and outsource what you can – the cloud offers ample opportunity to save time, effort and money. Even early stage companies that show solid growth will be attractive to investors.

The impetus behind increments– The first step is to decide how much money you need. And no, “a lot” doesn’t count! When you’re talking to potential to investors, they’re going to ask you the size of the increments you’ll be offering. (i.e. $1 million raised in $100,000 increments.) Pick the largest increment size you think you can get investors to match. You can always split and quarter your increments, but some investors will take “one” no matter the size, and the fewer investors you have, the more control you’ll have over your own business.

VCs can be costly– My best advice is to avoid VC funding in your company’s early stages. When there is little you can offer them in terms of value, many VCs will “offer” to take a controlling stake in your business in exchange for the funds you seek. If you take them up on their offer, you will likely end up with a group of “bosses” that tell you what to do with your business to ensure a quick return on their investment. Once you’ve built a team and an infrastructure, and you’re profitable – that is the right time to go after VC funding.

Consider other options- Many times there are alternatives to VC funding including local angel groups, private investors and – surprise! – friends and family. In fact, the easiest money to raise is from friends and family – friends will follow other friends and, if you’re willing to let your family invest in your business, most will consider the investment sound. Try to evaluate what your venture realistically needs to succeed and first look for funding and strategic support close around you – you may be surprised at the interest and advise you’ll find!

Learn more about Davinci Virtual by visiting http://www.davincivirtual.com/

<< 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! 

<<  Know Your Entrepreneurial Strengths  - Why Write A Business Plan >>

Before we delve into what makes for a good business opportunity we must first discuss the two general approaches to starting a business.  The first type is the Technician.  By technician we don’t necessarily mean an auto mechanic (though that fits this archetype) but a person with a technical skill or are technically knowledgeable in a specific product.  The second type is the Opportunist. The opportunist derives their business idea from the market itself. 

The important differentiation is that the opportunist has two distinct advantages the first being they have explored the market and are providing something that is already known to be in demand.  The second is that they “fail fast, fail cheep” in that they test the waters.  Why dump tons of money into a business model that might not even work?  Test, Test, Test!  Then when you have a product or service that works (with PAYING customers) then dump money into product and process improvements, office space, employees and other over head. 

If the number one reason why business fail is lack of capital (they run out of money!) than doesn’t it make sense to give your new business a fighting chance by ensuring you have a product that people want and are willing to pay for?  Sell your product on eBay, test market on a college classroom, go to tradeshows or open air markets, make your product in a rented commercial kitchen before you sign a five year lease and buy a bunch of equipment and inventory. 

OK…so now that you are not going to go broke before you even get started let’s talk about what makes for a killer start-up.  It’s easy…so listen close.  You can either be CHEAP or DIFFERENT.  So before you say “OK…I’ll be cheap” let me explain the problem with that strategy.  If you come into the market and cut pricing by 10% the natural reaction of your competition will be to do likewise.  So you cut another 10% and they do the same.  Pretty soon it’s a race to the bottom and guess who wins?  That’s right…they do.  Why?  Because they have deeper pockets and they will just wait until you go out of business and then raise their prices back to where they were. 

If you are going to be cheap then you have to be lowest COST not just lowest price.  If you have a technology or process that allows you to make a product or deliver a service for less than the other guy then you can be lowest price.  Wal-Mart has a motto of “Low Prices…Always” because they have buying power through economies of scale, a logistics system that rivals FedEx and brand recognition to bring in the customers.  You don’t so you probably are going to have to be different.

So in what ways can you differentiate?  If we look at the continuum above we can see that there are several steps up from low cost/low price:

• Efficiency – is really just a function of being low cost but not necessarily with the low price (in other words you provide a good value that costs you less). The benefit of living in the information age is that internet startups tend to have significantly lower overhead. Successful businesses like Owen Tripp Reputation.com have been springing up more and more over the last decade because of the ease with which efficiency can be realized.
   
• Quality/Reliability/Dependability – This is the true value play.  Think Honda Accord – good at everything but excellent at nothing.  Usually provides a standard amount of features at a fair mid market price.
   
• Exceptional Customer Service – While this is self explanatory there are some companies out there that have such a connection with their customers, employees and stakeholder they really shine in this area.  One example is www.Zappos.com.
   
• Quality as excellence – Here thoughtful design, engineering excellence and user friendly features take center stage.  Apple is the quintessential example.  Premium pricing is in play.
   
• Innovation – All the bells and whistles and the price tag to match.  Think of the technology in a Mercedes-Benz with more processing power than a super computer.

Aside from determining where you land it is important to bring up a concept proffered by Doug Hall in his book Jump Start Your Business Brain.  After analyzing over 50,000 data points related to new inventions and ideas brought to market they determined that successful products and services have the following characteristics:

1. Overt Benefit – It has to be obvious to the customer what’s in it for them.  One of my favorite examples is www.mint.com who’s tagline is “The Best Free Way To Manage Your Money”.  Straight forward and simple.  No technical specification, no feature diagrams just a clear message to the customer.
    
2. Dramatic Difference – So now that they know what’s in it for them they have to know why they should care.  Just because you say they should want or need something doesn’t make it so.  To get their attention your offering has to be wildly different.  Seth Godin refers to it as a “Purple Cow”.  It has to be remarkable.
    
3. Real Reason To Believe – Your claims need to be credible.  Every day your customer is barraged with advertising.  You can’t even go to the bathroom without seeing electronic displays in the stalls.  So now that you have their attention with #1 and #2 above you have to make sure they don’t just blow your claims off as mere puffery.  Back up your claims with real statistical differences and customer testimonials. 

 So where do you begin with all this information?  My suggestion is to first figure out what makes your new business idea different.  This is what makes you unique, dramatically different or your “secret sauce” if you will.  Then put yourself in your potential customer’s shoes and ask how does that “difference” benefit me as a user.  Then you can categorize where your company lands on the competitive advantage scale.  The more advantages you have the higher your chances for survival as a new business and success in the future.