Dr Jeff Cornwall

Accurate revenue forecasting is one of the single most important steps an entrepreneur takes in planning for a new venture. And yet, we find that most entrepreneurs do not spend enough time determining how much revenue will come in their front doors. Although underestimating expenses is a common mistake in business planning, missing the mark on revenues can be catastrophic.
If sales fall way short of expectations, the business can fail due to lack of adequate cash flow. And if sales wildly exceed expectations, the business is not prepared for demand and customers will abandon the new start-up due to inability to meet their needs with products or services in a timely manner.
Some estimates indicate that entrepreneurs spend only about 20% of their time forecasting on revenues and 80% of their time on expenses, when they should spend most of their time trying to gain an accurate forecast of revenues.
Specifically accurate revenue forecasting is important for a number of critical reasons:
– Bank financing and equity investment are based in part of these forecasts. If the entrepreneurs misses the mark and as a result needs more cash than they first thought, this will cause a significant loss of confidence on the part of the banker or investor.
– Inventory assumptions are based on this forecast. Inaccurate revenue assumptions can lead to either too much or too little inventory. Both are potentially fatal errors for a start-up.
– Staffing decisions are also made in anticipation of future sales. If the forecasts are wrong, the business is either over or under staffed.
– Revenue forecasts will determine how much space is needed for the business. Again, too much or too little space are both detrimental to the new venture.
Revenue forecasting can be overwhelming for the entrepreneur. Some say they feel like they are looking into a crystal ball, and it is too cloudy to see the future. So rather than do the work to improve these forecasts, entrepreneurs take short-cuts. They simply plug in numbers into revenues that have no real basis in fact. Often they put in numbers that seem to give them the profits they hope to achieve. Expenses are easier to estimate as we can do fairly simple research to get these numbers. So we spend time getting good expense forecasts and then plug in revenues that make things look right.
There is a time tested approach to revenue forecasting that can significantly improve the odds that they will be more accurate. Revenues are a simply formula:
Revenues = Price X Number of Units Sold
A well developed marketing plan should be able to give you these numbers. Pricing is one of the questions that are answered in the marketing plan, so that will give you half the equation. Knowing what our customers want, how many customers we can likely expect, and how much of what we have to sell they will want will tell us the rest. That is why a good plan helps us to “Think Like the Customer.” If we know how the customer thinks, that helps us determine how to position our product.
Knowing more about the overall market, including size and competition, can help us to begin to estimate demand. The promotion plan will tell us how we will reach these customers to tell them about our new business.
Experts on reading business plans, such as investors and bankers, usually do not read a business plan in the order it is written. They will often read the marketing plan and then go back to the revenue forecast to see if it numerically represents what is said in words in the marketing plan. That is the backbone of any good business plan. If the revenue forecast does not make sense based on the marketing plan, the investor or banker will usually read no further.