How to Predict Revenue the Smart Way

Posted by on February 11, 2013 in Business Financing [ 0 Comments ]

predicting revenueSo you want to start a small business. Naturally, you went to the bank and asked for a loan – that’s how it works, right? But the bank said “show us a business plan.”

Gulp.

In order to write a strong business plan, you have to be able to think like a business owner. That means knowing your customer, understanding costs and, yes, learning about finance.

One of the most important exercises you’ll do when you write your plan is to forecast sales (yes, that’s the same thing as predicting revenue). Here’s how not to do it:

revenue graph

Related: Prepare your business plan with a professional

Assuming that we all agree the chart above looks ridiculous, let’s talk about a more realistic way to predict revenue in your new business. It’s a tough task, after all, since you don’t have any previous sales to base your projections on, and it’s really hard to determine growth rates for a company that no one knows about yet. So what do you do?

Find a Benchmarking Source

First, see if you can find a benchmarking report for companies in your industry (and preferably small companies like yours). Determine the NAICS code for your business and see what you can find. Industry benchmarking can be a useful way to figure out what it takes to be profitable. It allows you to set revenue goals.

Related: Business Finance: Creating Your 2013 Budget

Determine Production Capacity

Next, determine your capacity. How many loaves of bread/dog jackets/fruit smoothies can you make in an hour, and how many hours will you be open every week? If you add a staff member, can you increase your capacity? It’s important to know what your production capabilities are, because your revenue can’t get any bigger than this unless you add staff or raise your price or introduce a new product, perhaps. Your capacity is 100% of your production.

Setting Your Target

Then figure out how fast you can get to 100% capacity (if in fact you can, or want to, get there at all). In other words, set a revenue target somewhere in the future, and then set monthly or quarterly objectives that will allow you to reach your goal.

Don’t forget to consider seasonality, if that affects your business; for example, sales of outdoor kids toys are likely to be higher in the summer when families spend more time outside.

Related: Keep your finances organized with accounting and bookkeeping software

Once you’ve done all of this, your revenue chart will look a lot flatter, and that’s okay.

It’s a lot more realistic to assume that your business will grow slowly; and when it comes to your own ability to operate the business, slower growth is usually more sustainable, meaning you can bring on extra resources as you need them, without feeling too overwhelmed.

Banks prefer to see realistic revenue projections backed up by sound research and clear assumptions. This shows that you understand your business and you know that you’re not a superhero (you’re not; sorry to break it to you). If you take the time to project revenue without looking like an idiot, you’re a lot more likely to get the financing you need to starting earning money from your business sooner.

Bio: Jessica Oman enjoys helping entrepreneurs take their businesses from ‘idea’ to ‘open’. Jessica is the author of How to Write a Business Plan to Secure Financing & Launch Your Entrepreneurial Journey, a definitive guide to thinking like a business owner and creating business plans that get financing. She owns a business planning & writing firm in Vancouver, Canada, called Write Ahead.


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