Forecasting Sales For A Start Up Company

As I get questions from readers, I will take some of the questions that I think might have a broad audience and post them here on the blog.

This one is filed under “Dragons – Sales: How Do You Forecast Revenues For A Start Up Company?”

Question:

I am working on a quickie Excel spreadsheet I developed for a business plan for my Internet startup company and am clueless how to even start getting a handle on my guessing my revenues for the first year, let alone the second and third years of my new company. I obviously need to hire you for a lot of what I’m doing since I am also clueless about a lot of things and how to implement them – and it looks like you really have already done it all! But I want to at least have a guess on revenues before I take the next step and start spending money. Help!

Dennis

Answer:

I haven’t done it “all”…but in three decades, I have done a LOT when it comes to start up companies! Working with 2,000 start up companies can do that for you!

In answer to your question, projecting future sales for ANY company can be challenging – but it can be especially difficult for a start up company with no history for guidance.

Without spending time, effort and money with validated market research, it will be hard knowing the real size of both your addressed market and your target market. For most small, start-up companies, their target market is substantially larger than the amount that will be actually captured in the first few years. That having been said, you are still faced with the challenge most start up companies have: predicting a realistic sales forecast.

Your sales forecast numbers are probably one of the most important assumptions you make in developing a business model for your new company. Your sales numbers will have an interrelationship on many of the other numbers in your plan: start up costs, personnel needs, advertising and marketing, support costs, how much space you lease, etc.

An excellent way to forecast sales is to already KNOW your customer acquisition cost. If you know when you spend $1,000 on advertising and marketing, that you end up with 10 new clients, then your customer acquisition cost would be $1,000 divided by $10 or $100. In other words, if you know from history that it will cost you $100 to acquire and sell to a real, paying customer, then you figure out how much you are going to spend in Years 1, 2 and 3 and divide the amount spent by the customer acquisition cost. The problem with this approach is that, for most start up companies, there is no history to know what the customer acquisition cost will be. (Hint: It will usually be a LOT higher than you would expect it to be!)

There is another basic rule of thumb that might still get us close…to spend about 10% of annual revenues on advertising, marketing and other sales related costs. Although you can make the case that a start up should spend more or less than this, let’s assume for now that is what we will do. So, this is what I would do for the first pass at your business model:

• Price your services and products with your best guess as to what the market will bear based on the competition or alternative choices your prospective customers have as ways to currently solve their problem.
• Figure out how big you would LIKE to be in annual sales for Years 1, 2 and 3. Say, $1 million, $3 million and $5 million (or whatever you think is reflective of YOUR vision).
• Then, go back and figure out how many UNITS of your product and services that have to be sold each month or each year to accomplish this.
• Then, figure out for each incremental UNIT you sell, what if any, incremental cost will you have associated with that new customer. Use this amount in the Direct Unit Costs for that product or service.
• That will take care of your sales forecast side.
• Now look at the number of customers you will have each month and each year and extend your vision to see what kinds of people you will need in your organization to take care of all the issues that will be required to make the sale, collect the money, update the databases, support the customers, provide enhancements to the products and services, handle complaints, manage the company, pursue strategic alliances and partnerships and every other task you can envision FOR THE NUMBER of CUSTOMERS YOU ARE SHOWING IN YOUR SALE FORECAST. List these folks in the Personnel Table with how much you think you will have to pay to get good people. Be sure and take timing into account for the hiring. You most probably won’t need everyone on Day 1 / Month 1. Many you may not need until Month 5 or 6. Many you may not need until Year 2 or Year 3. People are usually the most expensive asset you add to your company so try and stay lean without sacrificing muscle development!
• Lastly, look at each of the operating cost line items that I have in the Worksheet and try to imagine what it would cost for each item to both generate sales…and support an organization that is responsive to the growth of your vision and providing stellar support for your customers. Again, this is where we plug in the 10% of Revenues for your total Sales and Marketing costs.
• Finally, go back and fill in all the Start Up Costs you will require in the way of R&D, computers, desk and chairs, excellent consultants!…and all the other stuff you will need to open the doors – taking your projected company size for Year 1 into account.

By using this approach we have established a LOT of things somewhat independent of the revenue model we finally decide on using. You have already set what revenue goals you have and what kind and size organization you will need to be in business…and the basic operating costs to provide the kinds of services in your vision. These TYPE of costs will all change some…but surprisingly little. The amounts for each can change a lot depending on the scalability of your numbers.

However, even if we change our revenue model, you will basically need the same kinds of folks doing the same kinds of things for the same pay…and have operating costs that will be close in most areas – with all of these just scaled up or down to reflect your changing revenue model.

The important thing is to start pulling all the above components together in a working hypothesis for our business model….and then tweak as much as needed until we have a finely tuned model that works the way you want and still reflects your vision!

Good luck with your Excel spreadsheet. Just let me know when you are ready for my help.

What do you think?

Post your ideas if you have other thoughts.

Robert Lee Goodman, MBA
Ceo & Chief ImpleMentor