Accurate Revenue Forecasting = Inaccurate revenue forecasts + wasted time
Published February 2nd, 2006 edit replace rm!
Jeff Cornwall who I do respect writes in his article Short-cut to Trouble. It is about the importance of revenue forecasting. (Via Ken )
Accurate revenue forecasting is one of the single most important steps an entrepreneur takes in planning for a new venture. And yet, we find that most entrepreneurs do not spend enough time determining how much revenue will come in their front doors. Although underestimating expenses is a common mistake in business planning, missing the mark on revenues can be catastrophic.
The article makes the classic mistake of thinking all start-ups follow the same industrial kind of model with VC’s and business plans etc. I think it is not at all relevant to web based start-ups. Where this is probably relevant are the kind of start-ups where you do need a huge upfront investment.
As all internet start-ups and sooner or later realize these revenue forecasts that you do are nothing more than a waste of time. See for example Guy Kawasaki’s Art of Business Plans :
7. Provide a one-page financial projection plus key metrics. Many business plans contain five year projections with a $100 million top line and such minute levels of detail that the budget for pencils is a line item. Everyone knows that you’re pulling numbers out of the air that you think are large enough to be interesting, but not so large as to render urine drug-testing unnecessary. Do everyone a favor: Reduce your Excel hallucinations to one page and provide a forecast of the key metrics of your business—for example, the number of paying customers. These key metrics provide insight into your assumptions. For example, if you’re assuming that you’ll get twenty percent of the Fortune 500 to buy your product in the first year, I would suggest checking into a rehab program.
What you do need to do is understand is a financial version of your business model and explain it such a way that it becomes an instinctive in your head dynamic spreadsheet for you (and any team you might have).
How does this work? Well keep it as simple as this. I sell subscriptions for $10pm. My monthly expenses are $2000. Ergo I need 200 subscriptions. When you have some real historical data and a good understanding of the real market, you can finally do revenue projections. But until then focus on the magical amount of monthly sales you need to break even. This magic number should be a mantra to you. Once you reach this point you have a much better chance of catching a VC butterfly as well.
I have written about this before as my Bootstrapping Anti Pattern #3 – Focusing on an imaginary 3 year revenue goal .
