To prepare financial projections for a new business, you have to be able to come up with a way to calculate expected revenue. I have had conversations with people who insist that there is no way to come up with such a number and really struggle with this.
My favorite example to help people think about coming up with their own revenue assumption: Imagine you are opening a new restaurant. There’s a bell above the door to let you know when someone enters. How many times does that bell ring in an hour, in a day? Now, what do you think the average meal will cost that person? Multiply those two numbers and congratulations, you have developed your first revenue estimate.
Or imagine you run a cattle operation, where you want to sell beef directly to consumers. How many head of cattle do you expect to be able to feed out, slaughter, and sell in a given year? Turn that into numbers of pounds to be sold. How much will you be able to charge on average?
Now you are going to say: How do you know those numbers are right? You don’t. Your goal in developing a revenue estimate (or any financial projections for that matter) is to arrive at numbers that are reasonable, based on the best evidence you have, and are strong enough to help you guide your decision-making. After you launch your business and it develops, you will see where estimates can be “trued up” so that future revenue estimates are more accurate.
We like to pull these numbers into an Excel spreadsheet that will then allow us to change the numbers and see what happens with your revenue (and expense) numbers when the numbers change. Doing this will allow you to test out different levels of quantity and price to gauge the effect on your top-line revenue numbers.
Coming up with revenue assumptions can help you plan for the future of your business. Stay tuned for the next financial series blog post to learn more about creating financials and financial projections for your business. For assistance in developing revenue assumptions and compiling financials for your business, contact KCARD at 859-550-3972 or via email at kcard@kcard.info.