Q: “I have a product that's in the patenting process. I know my potential market and have a very good idea how to reach them. I believe the product to be useful and that it will sell. But how can I get a realistic idea of the sales rate without any history? Advice would be appreciated.”

    A: I’ve found that many confident entrepreneurs will say, as you do, they believe their product to be useful. As a result, they suppose that it has a market. They believe they have sufficient market knowledge. But, all too often, these are intuitive assumptions. Assumptions that lack a hands-on understanding of the target customer: the problem or aspiration to be resolved.

    A sales projection made on this basis, in my opinion, is nothing more than a dangerous ‘guesstimate.’ For a quick review of money management basics, visit startupnation.com – click on Step-by-Step Advice, then Forecast Your Future - Cash In, Cash Out.

    Both a Cash Flow projection and an Operating Statement (P&L) start with Sales Revenue. The Cash Flow differs since it projects when you’ll receive and spend cash. A P&L records transactions as they are made, not necessarily when cash movement occurs. A business with good cash flow may be just borderline profitable. A highly profitable company – on paper – can go bust because cash doesn’t flow when it’s needed.

    Sorry, there’s no magic bullet to help prepare a Sales Revenue estimate. But there are several time-tested techniques.

    Start with Google to collect information about your business category: find trends, characteristics and competition. Go to the US Department of Commerce (commerce.gov). Search business and trade magazines for interviews with business owners and industry leaders. Collect financial statistics from trade associations.

    Gather competitive pricing schedules, terms and conditions. Identify competitive promotional strategies. Review your own marketing strategy. Examine your pricing strategy and promotional programs comparing with your competition. Use this information to conservatively estimate what percentage of sales you might do each month of your first year.

    Then, confirm your transaction unit. Is it sizes, colors or cases that generate revenue? Which units produce the majority of your sales? Reexamine your marketing strategy. Will you “roll out” from an initial geographic sales area? Is there sufficient time to make adjustments? At this point estimate how many units you might sell in Month 1, Month 2 and so on.

    You’ve developed your pricing – either a single price or a price list for various distribution channels. Multiply each month's unit sales estimate by your revenue per unit. Or use an average of your different prices by distribution channel. This yields a revenue sales projection by month. Add up the monthly totals and you have a first cut at Year-One Sales Revenue.

    Preparing a Cash Flow projection acts as a powerful decision-making tool. So don’t leave your Cash Flow projections until last! Start money management planning with a first draft some 3 to 6 months prior to launch.

    You’ll realize Cash Flow projection’s greatest value as you develop detailed costs for marketing, operational and financial programs. At each step, you’ll learn whether or not you can afford your plan. You’ll see how much cash you must have available in each month. Or how much you’ll have to borrow in order to carry out your plans.

    And, you’ll know all of this – in advance!

 

Jack G Hardy