Last week we covered the Cash Flow Statement in the Business Plan Challenge. There was a great question in the comments that we thought others might be interested in the answer to and a bit more information about projections. Kendra asked:
"I have a question about figuring out what are best case, worst case, and realistic sales for an online store? I can't base it on foot traffic or compare to other businesses, so I'm not sure how to estimate these sales without insider knowledge. Do you have any recommendations about how I might research this so that at least my guesses are educated (and not wild!) Thanks so much for the great guidance!"
Like we said, great question Kendra! The easiest of the three to project is the worst case scenario. Basically, you're seeing how much money you might be spending without taking in any sales at all. We projected a very slow start up without any sales for 6 months and then very slow growth. This cash flow will prepare you for the worst possible sales and prepare you for spending a lot more money then you take in.
Your best case is more of a gamble, and honestly a bit wild. This is the case we dream about for all of us! If you're making your own items to sell online, it would be interesting to know how much money you could make at full capacity without hiring employees. Also, if/when you do hire employees, how much extra income will that generate for your business? With this projection, try and find out how big you can be and still handle the work. If the best case comes true, you'll have a better understanding of what your life might look like!
For your realistic cash flow here are a few things that can help:
Industry Turnover Rate:
For a retail store, there are some easier to find numbers that can help you guess what your sales might be. For an online store, it may be more difficult. Since many of the business statistics have yet to catch up with the online world, I'm not sure if these numbers exist or are very easy to find. When we were writing our business plan, we found a number called the Industry Turnover Rate. This number is something small, like 5 or 3, and tells you how many times in a year a business can expect to sell their entire inventory. It is an average for all of the items a business sells for all the stores in the Industry. Some products might sell in 1 week and others 6 months. On our very first post someone asked how you determine how much inventory to carry, and the Industry Turnover Rate can also help with that.
If you know that in your Industry the turnover rate is 5, and you expect to carry $500 in inventory at one time, at the end of the year you'll record $2500 in sales. If that number isn't what you expected, then your shop needs to exceed the industry turnover rate or you need to increase your inventory.
Working backwards, if you'd like to have $50,000 in revenue (remember, this is revenue, not profit), and divide that number by the industry turnover rate, 5, you'll get the amount of inventory you must carry at one time, $10,000.
Traditional Growth Rates:
There isn't an easy way to do any of your projections and a lot of it will be following your instincts and making your best guess. For our projections we used our best guess at growth rates and applied these month to month on our cash flows. Traditionally, sales start very small, but grow at a higher rate in the very early stages of business. As the business grows older, the growth rate slows and eventually plateaus. For our realistic cash flow, we used a very high growth rate for the first six months and then a slower growth rate for the remainder of the projections. No plateau for us yet!
Hopefully these points will help you with your projections, Kendra!
Next week, we'll be talking about the two other financial statements included in your business plan.
Lili Nedved and Henry Sinha are opening a brick and mortar retail store
in Vancouver, Canada. With lots experience staying up late and working
on Lili’s handbag business, iglubu,
Henry was recently promoted from an Electrical Engineer to Director of
Fabric Organization. Lili hopes her Finance degree will give her the
edge in the competition for Employee of the Month.
