Ok, many entrepreneurs get this very wrong. Some do not apply any methodology to obtaining their sales figures. In the vast majority of business plans, the sales assumptions are simply plucked out of thin air. As a result, the vast majority of business pans are worthless and are a waste of time, energy and natural resources.
Would you build a house on quick sand? Then why would you build a business plan on unvalidated sales assumptions?
There are many different ways to estimate your sales figures. One way is to use key performance indicators for your industry sector. That’s what most accountants would suggest. However, this in unrealistic for a new business. Firstly, these figures are an average of the industry. So therefore, they naturally reflect businesses that have spent years building a client base and solidifying their market position. As a start-up, you have none of the above. Also, in start-up mode your business model will most likely be different to established businesses in your sector. As a result, I believe that Key Performance Indicators are a lazy way to compile your financial projections.
The best way to build your sales assumptions is to use a bottom up approach. This does not require any financial wizardry. It only requires a cold hard dose of common sense. In order to do this, you must understand your business model. In particular, you need to understand each step of your sales funnel.
What will the conversion rates be for each stage of your sale funnel? However, all of this is still speculation until you actually start selling. The reality is that nobody is going to believe your estimates, especially hardened business angels or VCs, without real world evidence of them being achieved.
This leads us to what could seem like a chicken and egg situation. However, it’s not. As an entrepreneur, you need to bootstrap to early stage sales and then use your results as back up to advocate your future projections when you are looking for funding to scale your business.
At the very start, you need to make assumptions for your own use. Once you start selling, monitor your conversion rates. Refine your assumptions then show them to potential investors. When they start asking questions, you will be in a great position because your assumptions are backed up by conversion rates that you are actually achieving.
Another point is that you should show each stage of your sales funnel in your projections. Have a separate assumptions page where each figure is broken down into it component parts. It’s like a story laid out in figures. The story is about how somebody is going to buy from you. Remember, when trying to get investment it’s not about science fiction it’s about science fact.
If you are looking to produce financial projections for your start-up you may find this template and how to guide useful.