Supply and Demand Trends
Even though it sounds like a daunting task, people are still reasonably predictable. If people are acting in a certain way in one area of the country, it’s a pretty good guess that the local people will eventually follow the trend. If you think about it, on a day-to-day basis we still are pretty consistent in what we wear, eat, and do. It may vary some, but we can predict trends a lot more accurately than you would at first guess.
Rather than trying to estimate total potential profits, sometimes it’s easier to calculate all the costs first and then see how much revenue is needed each day, month or year to breakeven. The lower this number and the more confidence that everyone has that this number is very easily attainable. This takes a lot of the stress off of reaching the absolutely correct revenue stream.
Focus on the Details
Revenue as a monthly total is not very informative – it’s just a number to most readers. You are a lot more convincing if you break the revenue down into individual units. If you can dissect revenue into number of meals served per hour; number of service calls per day; number of ice cream cones served per hour; the number of square feet of flooring installed etc. your numbers have more meaning to you and to the reader. Often developers of a plan don’t know these numbers and are left to guess at what would be realistic. Don’t do it! Don’t guess. Figure it out or find someone who can. The more you guess the more risk is injected into the plan and the more uncertain you are about the predictability of success. The higher the confidence you and the reader have about the revenue numbers the more likely you are to get funding.
You don’t (and maybe shouldn’t) have to go it alone. Some business models are based on a working relationship with another company. Maybe you are subcontracting some of the work they cannot do, or building a section or component that they don’t have the expertise to develop. Yes, you are somewhat at the mercy of another company maintaining sales, but if you pick your partners carefully, this is reduces the revenue risk considerably.
Input Cost Assumptions
Closely aligned with the revenue figure is the cost estimates. Most costs are easy to find. The only difficult costs to come up with are design and development estimates for an entirely new, untested product. Research, design and development costs especially in the medical field are sometimes very difficult to predict with any accuracy. In these cases, well financed corporations are needed to back the project at whatever cost. This isn’t the procedure for a small startup company.
Can you reduce costs? Often a startup wants to gain market share by offering a lower price to attract customers away from competitors. This is a risky move unless you really do have lower production costs. Can you automate, or modernize a production process to actually lower overall costs? If you can truly reduce your production costs, this can go a long way to secure market share. Be cautious however, competitors often find ways to meet your new lower price and beat you at your own game.
It’s been said many times in business articles that “cash is king”. If you run out of cash you are dead in the water. Employees are not going to show up for work if they cannot get paid and suppliers are not going to ship you products unless you can pay for them. Net income is one thing, but cash flow is more important to the overall success of the business. Be smart about financing and using available cash. Collecting payments timely and delaying cash outflow is important.