The art of starting with realistic financial forecasts

Editor’s note: Michelle Stockman works with Little Rock-based Arkansas Capital Corp. to promote entrepreneurship development around the state. Stockman earned a bachelor’s degree from Loyola University-Chicago in communications and fine arts, and earned a master’s in entrepreneurship from Western Carolina University. Her thoughts on business success appear each week on The City Wire.

There are many entrepreneurs who are working hard to start, stabilize or grow their businesses who are entranced by their dreams of what the finish will look like for them. It is common and needed to envision the life that can be captured if the business succeeds. The hope for grand success is the fuel for any individual to seek the entrepreneurial path.

In eager anticipation of reaching that success, many entrepreneurs begin their business journey. Some may write business plans, others may roll out of bed and begin. Some may not need immediate financing, yet others will begin the path of finding funds to get the business up and running. For most, the best path to financing the business is through bootstrapping.

However, before an entrepreneur even knows how much will be needed to get the business going or growing, a clear understanding of how to project how much the company has the potential to make is a required first step. Amazingly, most entrepreneurs have no idea how to project sound and reasonable sales for the business.

Guy Kawasaki in his book “The Art of the Start,” suggests that entrepreneurs need to take a bottom up approach to forecasting. Instead of finding out the total value of the market the business intends to enter, then guessing at how much of a percentage the business intends to capture of that market (i.e. $1.5 billion market X 1% market share = $1.5 million), entrepreneurs can use a more realistic approach.

Kawasaki notes that entrepreneurs should approach their forecasts with real world variables, such as “I have five sales people. Each sales person can make five calls per day and five percent of their sales efforts convert into actual sales within three months. There are 240 working days per year and each successful sale will bring in $1,000 worth of business.” Based on this example, five calls a day X 240 days X 5 sales people = 6,000 calls. Five percent sales success from the 6,000 calls is equal to 300 sales X $500 = $300,000 in first year sales.

When entrepreneurs approach their start-up projections utilizing real world variables that apply to the business, then the business owner will be better prepared for the financial needs of the business. Additionally, if the business owner needs outside financing for the business start-up, then the business will gain the respect of the potential investor for having realistic forecasts.

Feedback
Stockman can be reached at [email protected]