How Much Will You Sell? Projecting Revenue for Your Start-Up
When you’re starting a new business, it can be really exciting to think about all the money you’re about to make. Nothing quite like your product exists today, and your friends and family assure you it will be a hit. You’ll make millions, surely. But how long will it take? And what do you need to do to reach those lofty goals?
Projecting revenue in any business is a bit of a game. It’s part educated guess, and part big hairy audacious dream. If the market for your product is growing and you have some capital to jumpstart your growth, you might be able to grow revenue faster. On the other hand, some economic event might happen that you can’t predict, which sends sales spiralling down – and in that case, no amount of marketing will help.
When you first get going, it’s hard to know whether you should be realistic or idealistic with your sales targets. Let’s look at some of the pros and cons of each.
The Idealistic Revenue Forecast
Pros: Big revenue targets can be motivating – especially if you make them public. By claiming to your friends, your mom, or even the bank that you can achieve a hockey-stick growth forecast, you’re on the hook to make sure you do it.
Cons: Many entrepreneurs forget to acquire the resources they need for fast revenue growth. If too many orders come in and you don’t have staff or inventory to fill them, you could be looking at a PR nightmare. Also, to get lots of sales, you have to do a lot of marketing – and there’s a time and money cost to that. So if you’re not prepared to do some spending, idealistic forecasts could leave you looking pretty silly at year-end.
The Realistic Revenue Forecast
Pros: With conservative revenue projections, you’re showing investors and lenders that you’ve taken time to consider the risks in your business. If you surpass those targets, you look like a champ. Entrepreneurs who project slower growth are typically bootstrappers, reinvesting the company’s small profits into growing the business bit by bit. Nothing wrong with being careful and methodical!
Cons: Lower targets often aren’t attractive to investors, who typically want to see a return relatively quickly. Also, small revenue usually equals small profit – with those projections, are you going to make enough money to keep your business going and pay the bills?
The Bottom Line
Is it better to set aggressive targets or stick to a conservative projection? It’s really up to you and your tolerance for risk. Try setting smaller objectives first and look at the projected profits in your financial model. Are those high enough to sustain your business? If not, you need to look at how to make more money.
It’s also true that how hard you work, and what you spend on marketing and staffing to reach your targets, will have a big impact on whether or not you get there. Always remember that it takes money to make money, and your profits won’t come out of thin air. So if you set lofty revenue targets, make sure you also put the resources in place to support your business.
Source: Jessica Oman, Small Business BC Blog 2013