The financial plan you have in place for your small business should include a segment for projected revenues and sales.
Forecasting revenue and growth can be tricky, and while estimates are never a sure thing, being able to present investors with thoughtful, solid predictions could go a long way toward securing funding, Entrepreneur magazine notes. Perhaps more importantly, having a forecast or forecasts in place (you should probably draw up multiple predictions, which we'll get to later) will help you develop appropriate operational and staffing plans.
Hitting an uneven balance by hiring an overabundance of staff or spreading operations too thin could mean the difference between success and failure for your small business, especially in such a fragile economy. With that in mind, Entrepreneur provides several financial tips for those who are just starting out and want to get things right the first time.
First, look at your company's expenses. Why? Because in the early stages of setting up a company, expenses are a lot more predictable than revenues. Estimating fixed and variable costs can help you get a fairly solid idea of the money that will be going out of your business. After that's in place, you can turn your focus to what's coming in.
Back to the idea of putting together multiple predictions. Because the future is unknown, you should plan for both the absolute best-case scenario and a more conservative, reality-based situation. Why put so much time and effort into forecasting for a state that's unlikely to come true? Because reaching for the stars is important. As Entrepreneur puts it, "Embrace your dreams and build at least one set of projections with aggressive assumptions. You won't become big unless you think big!"
From a psychological perspective, it's also easier to make realistic, conservative estimates if there's an outlet for you to lay out plans for your company without such harsh financial constraints. Additionally, the source notes, "By unleashing the power of thinking big and creating a set of ambitious forecasts, you're more likely to generate the breakthrough ideas that will grow your business." That innovative marketing campaign you dreamed up may not be compatible with your advertising budget, but the fact you came up with it means you can start thinking about ways to make a scaled-down version into a reality.
After you've drawn up some tentative revenue and expense projections, get ready to cross-check your forecasts with reality. Look at several key ratios to determine how feasible your plan is, including employee-to-client head count, gross margin and operating profit margin.
So what happens when you operate your business using sales targets you consider to be realistic but still end up missing the mark? The first thing to do is go back over your projections with the benefit of hindsight – in which areas did you fall short and why? Don't rush to judgment because often, the situation could be more complicated than it looks.
"Figuring out why you didn't make sales numbers in a quarter isn't an easy task," sales management consultant John Treace writes for Inc. magazine. "Especially in complex businesses, blame may be cast from department to department. Pinpointing where the problem is as soon as possible will help minimize inter-department strife – and remember that sales shortages are not always the fault of the sales department."
Making sure history doesn't repeat itself typically involves a combination of adjusting metrics and overhauling processes, but before you can get to this point, it's important to have a solid foundation in place.