In my previous blog post, I discussed three key components in a competitive business plan. The increasing interest in Big Data and the popularity of Nate Silver style quantitative analysis both present strong evidence that objective data and hard numbers will make a stronger case for your business. This post can get you started; keep reading to learn about critical financial numbers that can add value to your business plan and where to find these values.
In part I of this blog series, I mentioned taking advantage of Balance Sheets to document your financials. If you’re not comfortable creating a balance sheet for your new business, here are some other ways you can find your business’s financial numbers.
1) Start by adding up the cost of starting your business and create a list of start up costs, the initial investment in these costs, and your expected investment over the course of the year. These costs might include:
Business plans that include financials make a much stronger case for an investor, but as a recent startup it may not make sense to spend time creating financial statements before the end of the first fiscal year. Until you reach the end of your first fiscal year in business, consider using other relevant information to take the place of the missing financials, such as the list of start up costs. Your business plan will be considered more competitive by including these numbers since it provides detailed information about the financial health of your business, which is an important consideration for any type of funding.
2) A simple Break-Even Analysis can be another great tool for a start up. Break-even analyses show when your business will be able to cover all its expenses and begin to make a profit. You can refer to the startup costs that you listed in your balance sheet to determine how much sales revenue is needed to pay for ongoing business expenses. Other critical numbers to consider are:
If you can answer these questions, then you can also calculate how many units you need to sell in order to break even. For example, if manufacturing a line of handbags costs $10,000 per month and on average you make $20 for each bag you sell, then you will need to sell 500 bags to break even (Note: $10,000/$20 = 500).
Forecasts offer insight into future trends in the market and provide important information about the best course of action for your business. As an added perk, forecasts are perfect for creating charts and graphs that can make just about every business plan look visually appealing.
Two forecasts that you may want to include in your business plan are the (1) Revenue Forecast and (2) Personnel Forecast.
Depending on how far ahead into the future you want to forecast, you will want to tailor how you present your projection. A short-term projection of the first year can be broken down by month. A longer three-year projection can be broken down by year. Projections that are more than three years are generally not included in business plans and only added if an investor requests it.
Market size and demographics are essential and standard practice for any business plan. While including it may not necessarily make your plan more competitive, not including it will make it clear to the reader that your business lacks knowledge about key markets and target clients.
To determine your market size, start by asking, “How many buyers are there in my target market?” As for demographics, start by selecting information that makes the most sense for your business and industry. For instance, if your business sells luxury vacation packages, analyzing median income is more likely produce meaningful insights than the sex of your customer. Commonly used demographics include age, gender, level of education, and median income.
If you are new to market research, you may want to start with a simple market analysis and focus your market research efforts on conducting secondary research. Secondary research is based on information that has already been gathered, compiled, and reported, such as a market report produced by a think tank. To make the most impact, look for quantitative information, such as forecasts or statistics that are specific to your target client, customer, or market.
For more seasoned professionals, including market research is a great way to demonstrate the depth of your knowledge and expertise in your field. By referencing well-known publications that are a standard among experts in your field, you can demonstrate your understanding of the industry. You may also want to include your own analysis, especially to report any upcoming trends that may impact your market.
For business owners who are interested in identifying specific preferences of target buyers, conducting primary market research is a good way to find new insights. Primary market research, unlike secondary research, refers to information that comes directly from the source, such as potential customers. For instance, conducting a survey of potential buyers is considered primary research whereas referencing the findings from a survey conducted by another company is considered secondary research.
To gain the most benefit from this approach, try formulating questions in a form that leads to a critical number. Take a look at the questions in the ‘Examples of Critical Number Focused Questions’ table and try to devise similar questions for your business. This will help your business devise a strategy to collect and track the right data and calculate the numbers critical for your business success.