By projecting your business’s performance, you can determine if you can realistically get it off the ground and keep it running as well as determine how much and what kind of capital you will need.
How is your pricing determined? How many sales can you reasonable expect to make in a month? How will you collect on these sales? What will you do if customers don’t pay their bills on time?
Price your product competitively, but cover all of your expenses, not just the product costs. Estimate your sales very conservatively. Use a worst-case scenario rather than a hoped-for or desirable level of sales. When you plan for the worst, if it happens, you will survive, and maybe even thrive.
Regardless of what anyone (especially a salesperson) says plan on a maximum of 1/10th of 1% return on your advertising dollars. This allows room for improvement. And remember, no one succeeds without advertising.
What costs do your have? Which are standard monthly costs and which will vary with your volume of sales? What can you do to keep these to a minimum? Which costs can you drop if things take a turn for the worst? Where is your money best spent?
Costs are separated into fixed and variable costs. Fixed costs are items such as Rent, Phones, Utilities and Salaries which don’t vary that much from month-to-month. Variable costs are usually related to inventory purchases and/or manufacturing of products and deal with costs that will increase as sales increase and decrease as sales decrease. A non-manufacturing variable cost would be Sales Commissions based on sales volume.
All known costs must be listed and remember to have some set aside for the unknown, and don’t forget your advertising budget.
How long will it take to break even? Make a profit? Expand? When will you need to add personnel? Buy inventory? Purchase new equipment? Take a salary for yourself?
Make a realistic projection of anticipated sales and expenses for at least 12 months, preferably, 36 months. This should include all possible contingencies you can think of that are probable, and, remember, estimate sales low and expenses high. Include your salary as soon as you will need to take it.
By including all possible expenses with sales at their lowest anticipated point, you will give yourself some breathing room should the business not perform as well as you had hoped.