Sales - that is the most important parameter of your start-up business. You start a company, because you want to sell something to your customers. Of course, there are other important aspects of your business, reflected in your costs. But those things express how you do your business. Sales is indeed the one key driver of your business plan. That's why it is our first item in the financial plan and we start the financial model with determining the sales projections.
There are several ways how you can determine your sales in a financial model. Let's talk about some of the most typical options:
There are several ways how you can determine your sales in a financial model. Let's talk about some of the most typical options:
- Top-down approach
- Bottom-up approach
- Growth-rate approach
- "Gut-feeling" approach
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1. Top-down approach
This Approach can also be called market penetration approach. To calculate your sales projections, you need to estimate the overall market size of your market segment first, and then you will need to estimate what market share you will achieve over time. This can however be more difficult than it sounds. For example, it can be hard to estimate the overall market size. The definition of your market segment is also very important. If your start-up business is for example an online fashion retail shop, and you define your market segment as a global fashion market, then it would be very hard to justify that your sales plan is to achieve 0.000001% penetration of the global 3 trillion $ market. This approach is useful in a situation where you are able to clearly define your target market segment and you know the market well. The example could be a local restaurant, or a flower shop in your city.
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2. Bottom-up approach
In this approach, you model your sales based on the number of sales personnel and the average sales value that can be generated by one salesman. It assumes that sales is driven by sales personnel, not by market demand. It is useful for businesses that have clear direct link between sales and number of salesman and where you can push your sales projections by adding additional sales force into the team. The disadvantage of this approach is that it ignores the market size and market demand, therefore there should always be some sort of sense check in the back of your mind to validate the results of sales modeled against the market potential.
3. Growth-rate approach
This approach expects that you estimate the sales volume for the first period of your financial model and then estimate the growth rates for following periods - such as annual average growth rate. This approach is used in our Feanut financial model. Its benefit is that it is easy to understand and clearly lays down your growth expectations. It is beneficial specifically in the situation where you already have past experience with similar business and know what was the growth curve. You can then apply that growth curve to your new start-up business. It's disadvantage is similar to bottom-up approach - it does not consider the market potential. So you should always check back your sales projections with the market to justify your planned growth rates.
4. Gut-feeling approach
This is the most simple and least scientific approach. It can lead in very inaccurate sales projections. But if you lack the information and assumptions, it can still be used as a yardstick plan. This approach simply means to lay down some numbers that you think you can achieve. You can simply say that you will sell 1000 units in month 1, 1500 in month 2, 2000 in month 3, etc. That will at least give you some plan and will define some milestones that you will need to lead your start-up effort. It's unlikely that it will turn out to be accurate so you will need to keep and eye on the actual results and revisit your plan regularly.
This post first appeared on Feanut - Financial Modeling Blog For Startups, please read the originial post: here
