Creating More Accurate Revenue Forecasts

This week my Tennessean column looks at the link between a strong marketing plan and more accurate revenue forecasts:

Making accurate revenue forecasts is the single most important step in developing a credible business plan.

Missing the mark on revenues can be catastrophic.

If sales fall significantly short of the forecast, a business can fail because of lack of adequate cash flow. And if sales wildly exceed forecasts, the business may not be prepared to meet customer orders in a timely manner.

Forecasting revenues can seem like an overwhelming task. Entrepreneurs often feel like they are trying to look into a crystal ball that is just too cloudy to see clearly. But rather than do the work that is necessary to improve their revenue forecasts, they take shortcuts.

They simply plug in numbers that have no real basis in fact, often simply putting in enough revenues to give them the profits they hope to achieve.

Fortunately, a well-developed marketing plan, which is the core of a business plan, can significantly improve the odds that revenue forecasts will be on target.

Keep in mind that revenues are calculated with a simple formula: price times the number of units sold. A good marketing plan will give you insight into the two basic numbers in this formula.

First, study the market

One of the questions addressed in a marketing plan is pricing. For most new businesses pricing is dictated by the competition.

Entrepreneurs need to set a price that puts their product squarely where they want to be when compared to the existing competition.

Closely matching existing prices says to the world, "We are as good as the rest."

If the customer wants even more features or services, a premium price can be set.

The marketing plan also should help forecast the other half of the revenue formula -- how many units will be sold. First, learn the size of the target market for the business.

Then conduct thorough market research to figure out what customers want and how well the competition is meeting those needs.

Finally, the marketing plan should explain how the entrepreneur plans to use personal selling, publicity and advertising to reach the customers and give them the information they need to make the decision to buy.

Taken together, this information brings into focus a more realistic estimate for potential sales.

When investors and bankers read business plans, they read the marketing plan first. And as they do, they will flip back to see if the revenue forecast tells the same story in numbers that the marketing plan tells in words. If the revenue forecast and the marketing plan do not tell the same story, they will read no further.