Accurate Revenue Forecasting = Inaccurate revenue forecasts + wasted time 3
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 .
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Pelle Braendgaard disagrees with Jeff Cornwall’s advice that entrepreneurs calculate accurate revenue forecasts, stating Accurate Revenue Forecasting = Inaccurate revenue forecasts + wasted time: The article makes the classic mistake of thinkin.....
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Auto loan business. Ac...
I do not think that Cornwall is saying much different than you are. His post does not talk about having a 10 year forecast but one that follows your marketing plan. How are you going to get people in the door or to use your product or serice? This is what he is talking about.
I do agree that not all business will have the same forecast model but all need one. I think it is good that you bring up this point as there is no set way to go about this process.
..be bold
Pelle posted a comment at my site about this and asked for my response, so here it goes….
First, you have assumed that I am talking about business plans for the outside world. In that case, you and Guy are probably right, as investors and bankers are probably not going to believe your numbers anyway. A VC friend likes to tell folks that he has one person on his staff whose only job is to rip apart the numbers in a plan that they like and reconstruct them with their own assumptions.
However, I am talking much more about planning for the entrepreneur than a plan for the investor.
By spending the time to develop forecasts that tie into the marketing plan, at the very minimum you have now identify the key assumptions that are tied to the big unknowns that create uncertainty in your forecasts.
You now know what you need to track carefully as your business grows. The assumptions become not only what you use to forecast, but become the barometers you use to assess where your new business is really going and why.
This way your forecasts, just like your plan, becomes a fluid and evolves as you learn, as your business grows, and as things change. You imply that I view a forecast as some sort of a contract. Nothing could be further from the truth. I want you to adjust your forecast with each month of experience, with each mistake you make, and with every brilliant decision you make along the way.
When you look at your plan and see how different your business actually looks after you’ve operated a year than it did in the original plan does not mean you should never plan. It means that your plan and your forecasts are a starting point based on the knowledge you have now and that you have learned and used that learning to get better.
When we fail to forecast we are simply setting ourselves up for a game of blind man’s bluff. That is too expensive a game and too risky for me.
I really like your site and plan to visit more often. As Jason said, you and I agree more than you realize.
Jeff, After reading your explanation I guess we are generally speaking in agreement. These plans are important and should be made for use by the company and not to satisfy external sources.
I do however still hold that for very early you really should not spend too much time on it. As I said create an intuitive dynamic mini spreadsheet in your brain, which serves you at all times.
I guess what you need to do is to work out the break even and then see if you think it is really realistic to reach it. Often it is hard for web businesses to see this without actually testing the market with assorted betas and early launches.
Thanks for your comments I thoroughly enjoy following your blog as well.