Starting a new business is a daunting task, one to be considered very carefully before proceeding. One should never enter any business, as an owner, unless one already has experience in it, whether as an employee, an associate or one who has some other concrete experience or knowledge in the field. If you don’t have that experience you consider getting it before starting a business.
Most people have considerable knowledge about the business they are about to undertake. However, this knowledge should be organized and quantified early on in the process. This will force one to answer the hard questions to determine if you and your organization have capability to succeed. This is where the business plan comes in. Not only is the plan something that you will need to get financing or credit, but it will provide insight into the key issues that will drive action that will lead to success. And highlight any other resources that may be needed.
The Business plan.
So first, write a one paragraph statement outlining what the purpose and mission of your business is. This statement should define in spirit what your organization is and what it is going to do. Hopefully, it will be one part a market-based attainable doctrine of your mission and one part inspiration.
For the next steps, each section should be answered first qualitatively, and then quantitatively.
A fundamental question to be derived is what your first year revenue will be. For the first step, the question that needs to be answered in detail is “What market are we serving?”. This should be answered generally at first. For instance, if your basic idea is to sell aftermarket headlights to auto body shops, than you may want to define your market as the secondary auto parts market. Of course your initial sales estimates may be limited to one area, but it’s important to identify the broader market. This may provide insight into where future growth may come and what the larger market dynamics are.
You should then estimate what your sales volume will be in the first year. Consider only those resources you feel certain you will have during the year. No pie in the sky. If you are the organization then it is a matter of what you can realistically sell given the resources you have available right now. You should also estimate what your volume will be for years two and three. It is here where it may be wiser to assume growth based on in increased resources based on first year earnings and/or what financing or investment you are likely to receive during this period.
You’ve forecast your volume for the first three years – now you can make some pricing assumptions to complete the revenue picture. For the first year it should be fairly straightforward. You can assume the current market price and whatever changes are known to be on the short-term horizon. For years two and three further analysis is needed to determine what changes may occur in the market, and what the effect on prices will be. Once you’ve made your pricing assumptions simply multiply by your volume forecast to come up with your revenue forecast
Of course, we can delve much deeper into what the underlying factors are in you revenue stream. I’ll leave to a separate article how analyze the market to form ideas on different products, and ways alter your revenue based on what you learn.
The next step we’ll take is to determine what our direct cost will be to acquire each customer. Or to make each sale. For each business this cost could take a different form. This will be the next article in the series.
28Mar