1) Build your Revenue Forecast
Revenue will drives the rest of the model. Revenue is the top line and everything below will depend on how much money is coming in, and when.
Profitual Platform Guide:
Revenue Building Block
Revenue Forecasting Considerations:
Top-Down Approach
The top-down approach starts with the overall market size and works down to estimate the business's share. It is beneficial for understanding market potential but lacks precision.
Bottom-Up Approach
The bottom-up approach begins with individual sales and builds up to create the forecast. This method is more detailed and accurate for the business as it considers specific sales tactics and customer acquisition strategies.
Compare results of your Top-down and Bottom-up approaches. Is there a sizeable gap? How can you close that gap. Ensure your market potential is large enough for you and investors to see value. Bottom-up helps you chart a path to obtaining the desired market share.
Steps to Build a Revenue Forecast:
1. Identify Your Revenue Streams
Start by identifying all potential revenue streams. These could include product sales, service fees, subscription models, or any other sources of income from customers. Categorize them clearly to ensure all avenues are accounted for.
2. Define Pricing Strategy
Determine the pricing for each product or service. Consider market research, competitor analysis, and cost of goods sold (COGS) to set competitive yet profitable prices.
3. Estimate Sales Volume
Project the number of units you expect to sell. Base this on historical data if available, market trends, and your sales and marketing strategies. For new businesses, use market research and industry benchmarks to make educated guesses. Talk to potential customers, survey their interest levels, obtain Letters of Intent to support your early sales forecast numbers with a group of leads.
4. Calculate Monthly Revenue
Multiply the estimated sales volume by the price of each product or service to calculate monthly revenue. This should be done for each revenue stream.
5. Factor in Seasonality
Consider any seasonal fluctuations that may impact sales. Adjust your monthly forecasts to account for peak and off-peak periods.
6. Project Long-Term Growth
Forecast revenue in the near term based on leads and customer conversations. Beyond foreseeable future leverage market research and other assumptions to show revenue over a 3 year period. Include expected growth rates based on market expansion, new product launches, or increased marketing efforts.
7. Review and Adjust
Regularly review your revenue forecast against actual performance. Adjust projections as needed to reflect changes in the market or business operations.