How to Use a Crystal Ball

Posted: September 2, 2013 by Bill Cunningham in Legal, Money, Startup

Bill Cunningham Bio“I’m 100% positive that I can meet my sales forecast, I just can’t tell you when.”

–       VP of Sales at a Startup

Last year I wrote a column on “Leveraging the Power of the Press” in response to an entrepreneur getting more than their fair share of ink and airtime for something that he said. This could become an annual opportunity for teachable moments with the recent coverage of another startup that received a LOT of coverage for her public statements.

Without going into the specifics of this situation, the future revenue forecasts presented to the audiences and published in the media sounded out of this world. That’s what startups do – they create huge opportunities to make the world a better place.  I’d like you to consider the art and science of forecasting as it relates to your startup.

First of all, high growth startups create new and revolutionary ideas. They plow new ground in unfamiliar territory. Outsiders may view their idea as ridiculous or impossible or at the very least – extremely hard to carry out.  They solve unsolvable problems.

So why create forecasts?

At my favorite Covington Chinese restaurant, Kung Food, I received a fortune cookie that read: “An impossible idea is impossible until it is not.” So when entrepreneur forecast large sales figures, they do so because they believe it will happen. Just because most startups never hit their forecasted numbers doesn’t mean that they shouldn’t create them.

We need forecasts to raise capital to run the business. Investors need forecasts so they can envision how much return they will get for their investment. Operations needs forecasts so they can staff, buy equipment and space, and plan processes to meet the goals.

However, at the early stages of a company you don’t know a lot of things. You don’t know if your customers will buy your product the way you think. You don’t know what hidden costs may appear making your journey more difficult. You don’t know what your competition may do in response to your offering. You DO know what your assumptions are, and if they are right, your forecasts will serve you well.

How to create forecasts

P&G has a pretty good idea on how much toothpaste they will sell every day. Being a mature company with high volume, their forecasts become more predictable because they have a history and have analyzed all the factors that affect purchase.

Startups do not have that “rear view mirror” to be able to predict what is going to happen. Therefore, step one for startups is to create a list of assumptions that is going to drive sales. List each reason that may increase or decrease your sales and why you think it is so.

Once you have these assumptions, build a business model that turns those assumptions into numbers. This is where the rubber meets the road. You have to get this right to make your business succeed. The best way to do that is to try it on customers – get out and meet customers to see if your assumptions are right. Try to rip yourself away from the spreadsheet and test those assumptions. As Stanford University’s Steve Blanks says, “No business plan ever survives first contact with customers.”

After testing these assumptions with customers, build your model and then review periodically to see what you have learned. You will find what drives your business – so you change your assumptions, and maybe convert some assumptions into facts.

Forecasting high growth and large numbers is not a crime. Be clear to your investors, your employees and other stakeholders how you plan to achieve those numbers. Revise them often and make sure everyone knows your assumptions. Good working knowledge of your forecasts will serve you well in your quest for success.

You can read more about entrepreneurship by the thought leaders in our ecosystem at http://www.cincyentre.com.

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