There are a few key steps you can take to build accurate revenue projections for a new business:
- Identify your target market: Start by identifying who your customers will be and what they are likely to be willing to pay for your product or service.
- Determine your pricing: Calculate the costs associated with producing and delivering your product or service, and use that information to determine your pricing. Here is a general template that you can use when trying to price a SaaS product. You may also want to look at volume pricing discounts.
- Estimate your sales volume: Based on your target market and pricing, estimate the number of units you expect to sell over a given period of time. One of my older, but effective cost per unit templates focuses on doing this for a yearly snapshot and all the other financial models you will find on this site allow for bottom-up sales forecasting based on units sold over time. A good example is this manufacturing plant projection template.
- Consider external factors: Take into account external factors that could impact your sales, such as economic conditions, competition, and changes in consumer demand.
- Use financial modeling: Use financial modeling techniques to project your revenue based on your sales volume and pricing. This can help you see how changes in these variables will impact your overall revenue.
- Review and revise your projections: Review and revise your projections regularly to ensure they are still accurate and realistic. Be prepared to make adjustments as necessary.
By following these steps and using financial modeling tools, you can build realistic and accurate revenue projections for your new business.
Bottom-up Financial Projection Style (my focus)
A bottom-up financial modeling approach involves starting with the most granular level of data and working up to more aggregated figures. This approach can be beneficial for startup revenue forecasting because it allows you to build a model that is based on specific, detailed assumptions about your business. Some pros of using a bottom-up approach include:
- Increased accuracy: By starting with detailed data and working up to more aggregated figures, you can create a model that is more accurate and reflective of your business's unique circumstances.
- Greater flexibility: A bottom-up model allows you to make changes to specific assumptions and see how those changes affect your overall revenue projections. This can be particularly useful for startups, which may need to make frequent adjustments as they learn more about their market and customers.
- Better understanding of drivers: By building a model from the ground up, you can gain a better understanding of the drivers of your revenue and how different variables impact your business.
However, there are also some potential drawbacks to using a bottom-up approach:
- Time-consuming: Building a bottom-up model can be time-consuming, as it requires gathering and analyzing a large amount of data.
- Complexity: A bottom-up model can be complex and may require the use of advanced financial modeling techniques, which can be challenging for those who are not experienced in financial modeling.
- Limited scope: A bottom-up model may not be suitable for forecasting revenue at a high level, as it is focused on specific, granular data.
Overall, the choice of whether to use a bottom-up or top-down approach for startup revenue forecasting will depend on the specific needs and goals of your business. Both approaches have their pros and cons, and it may be helpful to use a combination of both approaches in order to create a comprehensive and accurate forecast.
Article found in Startups.
