Financial planning and forecasting, particularly of future revenue, are critical components of any good business development plan, whether you’re a start-up or an established concern. Start-ups at the funding stage especially, need to calculate their projected future revenue, since this is something that investors are interested in.
Not only does it tell the investor that you have thought carefully about how you plan to generate revenue—which is how you will eventually generate your profits—it will also give them a concrete set of estimates to refer to.
When deciding if your business is a viable investment opportunity, they will require a convincing set of benchmarks with which to gauge the scope of the progress that you hope to achieve. More mature businesses too need to determine how much money they expect to make. This will help them to determine if they’ll be able to meet their cash flow targets, cover their immediate expenses, invest in growth, and finance their debts.
The revenue projection process
Step 1: The first step in this process is determining expense patterns. As with any predictive exercise, established companies will base their projections on previous years’ performance. This will include historical costs and expenses. Start-ups, on the other hand, are in the dark somewhat, because they don’t have existing data to draw on.
Here’s a set of costs and expenses that all businesses—regardless of vintage—will need to account for when calculating future revenue projections. There are two types of costs: fixed and variable. Fixed overhead costs include
- ICTs (Internet and Communication Technologies like telephone lines, and internet and broadband services, etc.)
- Technology (computers, printers, copiers, storage systems like servers, etc.)
- Production equipment
- Employee salaries
- Advertising and marketing
- Health and property insurance
- Licenses and subscriptions
- Depreciation and amortization
Variable costs include
- Overheads like office supplies and materials
- Utilities like electricity, which varies with use
- Billable wages (when staff are paid according to the number of hours they work, instead of a direct salary
- Sales commissions
- Credit card fees
- Direct (contract) labor
- Freight charges
Step 2: At the outset, as you start calculating your revenue projections, don’t use prior expense patterns ‘as is’. Instead, since this is an exercise in projection, calculate future revenue using projected future costs. The aim is not just to generate enough revenue to cover your costs, but enough to furnish your profit margin as well. Your costs should also take economic trends like inflation into account. Some experts recommend that you double or triple certain key costs:
- Double your advertising and marketing budgets since it’s easy to overshoot your own estimates
- Triple the cost of insurance and licensing fees
Step 3: Develop two revenue generation scenarios: best case and worst case. Worst case
- No salesforce
- One marketing channel
- One product offering, with one added every year for the next couple of years
- Low suggested price
- 3 sales staff paid on a commission basis
- Three marketing channels
- Two products: mid-level and high-end
- Two different prices (one for the mid-level product and the other for the high-end)
Revenue projections are a critical tool in every company’s business development arsenal. They help businesses strategize and plan their future growth.