HOW TO FIND THE RIGHT NUMBERS FOR A NEW VENTURE

Estimating revenues, expenses, and start-up costs at the feasibility stage is a daunting task at best for an entrepreneur with a new business concept. At this stage, the concept is still fluid, so many of the numbers collected may change when the business plan is complete. Even the numbers in the business plan’s pro forma statements will change when the business is in operation and the real world throws unexpected curves at the new venture
There are many reasons why feasibility estimates of sales, expenses, and start-up costs will probably change by the time the business plan is written.
1. If the entrepreneur’s business is manufacturing or outsourcing to a manufacturer, it will be nearly impossible to estimate parts of the manufacturing costs accurately without a production-quality product in place. For this reason, it is important to get to a physical prototype stage early, so as to have a better idea of the parts, components, and types of materials that will be needed, as well as what provision to make for labor
2. For many new product companies, product development may take several months to several years, depending on the nature of the product – and the costs for prototyping are always substantially higher than the ultimate production costs will be. Therefore, it is difficult to determine true feasibility from an economic perspective before there is a physical prototype.
3. For service companies, the actual cost to deliver a service must be based initially on information gathered from other companies in the industry. This is tricky to achieve without “insider information” – that is, without knowing someone who works in that type of company. Estimates for the cost of delivery of the service will be more accurate if the service is prototyped under a variety of the most common scenarios. For example, a restaurant owner might want to calculate how long it takes to completely serve a customer, from arrival to departure. The owner needs to look at the number of tables planned, hours of operation, and the number of servers and cooks needed. Peak and slow periods and other aspects of serving customers are also factored in. The more variables that can be accounted for, the better the estimates will be.
4. As entrepreneurs grow in knowledge of their industry, they naturally gather better information because they know whom to talk with and where to find the best industry intelligence. Because getting inside an industry is difficult, and time consuming, many entrepreneurs choose to start ventures in industries with which they are familiar or in which they have experience.
Armed with an understanding of the difficulties inherent in forecasting numbers for a potential new business, it’s important to have an overall strategy that will at least offer a higher probability of arriving at some numbers that make sense. In a process called triangulation, the problem is attacked from three angles: the entrepreneur’s own knowledge, the industry, and the market/customer.
The Entrepreneur’s Knowledge and Experience
The knowledge and experience an entrepreneur brings to the business will be helpful in forecasting sales, particularly if the entrepreneur has worked in the industry in which the business will be operating. Nevertheless, the entrepreneur’s experience is anecdotal and should always be confirmed by other sources.
The Industry
The importance of understanding how an industry works cannot be stressed enough. A solid understanding of typical margins, sales patterns, and purchase cycles will provide valuable benchmarks for the entrepreneur’s forecasts, although these numbers will need to be adjudged to reflect the new venture’s inexperience in the industry.
The Market/ Customer
Another critical source of information is the customer. Customers are far more likely than a competing business to provide useful information. Talking to customers and observing them in their “buying habitat” is an important way to gain insights into patterns and cycles of buying that can be applied to the entrepreneur’s forecast.
With three sources of information, – the entrepreneur’s own knowledge, the industry, and the market/customer – the entrepreneur’s estimates should be closer to reality. It is important to remember that forecasting is more art than science in new ventures, so the more information the entrepreneur has, the better.