The process of creating a revenue forecast is notoriously difficult in a start-up. Forecasting is never easy, but it is made more tractable by the existence of a history. In a new venture, there is no history. The forecast must be created from scratch.
Creating a reasonable forecast of future revenue or sales is perhaps the most difficult of many difficult planning exercises for a start-up. Given that so much guess work is involved, many entrepreneurs just throw numbers into a spreadsheet and treat them as though they constitute a plan. We believe this is a mistake.
This section lays out the elements of a sales forecast and a method for constructing a sales forecast. Instead of guessing at the totals, we present a method of guestimating the components of revenue. Although this method may appear to be overly formal for the start-up phase (when all of the component estimates may not be much better than guesses), we think that it is vital to the future management of the venture that a method like this be adopted very early in the life of the company for two important reasons.
Divide target customer set into segments.
Segments comprise customers who can be expected to behave roughly alike in terms of adoption pattern - rate of adoption and average revenue. Good segmentation will require solid market research as a foundation.
Many factors will be involved in segmentation. These include:
Estimate the number of customers in each segment.
By segment, estimate:
Model the selling effort by period (including a ramp up period for direct sales people or other channels).
All of the other estimates in this process create an upper bound on the revenue in each segment. This step is where the reality of customer resistance and the effort required to acquire customers and sustain a relationship are factor in. The topic is discussed in greater depth in Sales planning.
Run the model - revenue projections and direct sales expense by period will be generated.
NOTE: These forecasts will presume and depend on some set of facts and complementary activities that are not included in the forecasting process, including: