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how to create a financial projections when you don’t know where to start

First – I think people freeze when creating a forecast because they think the forecast has to be 100% correct or they don’t know where to start – in reality I would start by trying to do the exercise in 30 minutes, take a break for a day and then come back and dive into each area.  Sometimes the hardest part is just starting.

Second – If you can’t find any information about your competitors  then pretend to be a customer for one of your competitors.  You can usually find out their pricing and most of their pitch to customers.  See if they give a free trial or anything else.  I would build a table that shows all of your competitors, their services, what they charge and where they operate.  You can expand on this in your market analysis in your business plan.

Third – finish reading this post and start building your 30 minute financial plan immediately after or while you are reading each section.  If not you will probably waste another 2 hours procrastinating and researching when the best thing to do is just start and go back and research and refine later.

30 minute financial plan outline –

First 10 minutes – brainstorm all of the ways you are going to get revenue.  If you have some revenue then spend 5 minutes and think if there are any other revenue streams or how your pricing might change over time.  Then pick 1 or 2 of what you think will be your best revenue streams – any more and you will just waste your time at this point.  You can list the others out in your business plan.

Middle 5 minutes – outline how that revenue stream will work per customer.  It should be something like get 1 customer, they pay $X and it costs me $X to provide the service.   It could be a % of sales, a SasS model, pay for upgrades to a free product for example.

Next 10 minutes – outline how you will get customers.  Investors will be very curious about this to see what customers you are targeting and how you plan to get their attention.  It is pretty common mistake to think that if I have a great product then people will just buy my product – you need to think through how people will find out about your product.  It could be spend money on marketing, give free trials, referral programs, etc.  Outline how the flow will work like Spend $100 on google adwords, get 100 visitors, convert 2% OR give a free trial for 3 months and then start charging, or charge for upgrades, etc.  If you need ideas search for “how to get your first 10, 100, or 1000 customers” and you should spend an hour learning how to get customers.  Pick one marketing method that you like the best and outline some numbers on how much you think it will cost you to acquire a customer.

Last 5 min – Take a guess at how much you will spend on marketing, how many customers you will get and what your revenue will be and compare it to your costs.  Use your assumptions you brainstormed earlier.  Don’t worry about building it out by month or anything at this point – just think of quick round numbers.  Think if there are any other costs – will you have employee salary costs? You can build out travel expenses, web hosting, etc tomorrow – just try to think of big costs.

Then sleep on it.  You will think of other revenue streams or realize that your costs will be higher than you think.  Do some research on google and quora to see if you come up with anything else.

Next block 4 hours and build a model using your high level analysis as an outline.  Think through what you need to do launch and how long it will take if you haven’t launched yet.  Estimate the costs to get you to launch.  Use your assumptions about cost to acquire a customer and how much you plan to spend each month on marketing each month to start to flow it through the model.  Don’t make assumptions like customers or revenue will grow 2% a month – build a driver based model that shows how marketing investment will get you more customers and your revenue will grow accordingly.  IF you don’t then the first thing the investor will ask is how you are going to grow revenue 2%.  Your model should show them the how you will get more customers and how it scales when you spend more or expand to other cities.

You should also understand why building a forecast is important and learn from some common mistakes –

I also recommend building a sensitivity analysis, which shows a bunch of scenarios at the same time so you can see different outcomes if your cost per click is $1 or $5 for example.  This will help you feel less nervous about picking if you should charge $100 or $500 for your product when you do not really know the market price (you will not know until you test it and see what customers are willing to pay).

This is from a post I wrote on quora – I am going to go back and edit it later but wanted to post it before I forgot about it –

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