To get an accurate read on how much money you'll need to keep your business running in the first 90 days, you'll need to figure out how much revenue your business will produce in those 90 days. The greater the revenue, the less you'll have to come up with from your personal resources.
In an ideal world, revenues would cover expenses (and then some), and it wouldn't be necessary to figure out how much more you'll have to pay to keep the business going. It might happen, but it's not likely to within the first few months of operation.
Before we take a look at some ways to estimate revenues, a word of caution. Estimating your sales will be an inexact science. Don't count too heavily on your projections and, if you're going to err, err on the conservative side in predicting how much business you'll do in your first 90 days.
Depending on the type of business, there are a number of forecasting methods that should provide at least a ballpark estimate. For example, the National Restaurant Association and trade publication annual industry surveys provide a wealth of information about potential sales by type of restaurant, price range, location, demographics, geographic marketing area, and other statistics, along with average operational costs, gross margin, and earnings before taxes. Other trade associations, consultants, and the internet are excellent sources.
Using trade publications to estimate sales
Your estimated sales figure is probably the most difficult number to compute when planning your new business. There are many variables and assumptions that come into play when estimating sales. Your location, marketing, competition, pricing and business knowledge will have significant influences on your sales volume.
The sources for obtaining a reasonable estimate of future sales will vary by business type and individual. If you have significant experience in your type of business and are familiar with the local economic conditions, your prior knowledge may give you the best estimate. In this case, you will still want to back up your knowledge with outside verification. If you intend to get any outside financing for your business, you will have to justify your sales figures to your lender.
Most libraries have a wide range of information available for specific types of enterprises. The trade publications and trade associations are good sources of overall sales information for your specific industry. These publications will generally break out sales by geographic region and business type. The publications may also provide key financial ratios that will be useful in your cash flow planning.
Using product vendors to estimate sales
Product vendors may be an excellent source of sales data. If your new business will have high inventory levels, product or warehouse facilities may be a potential source of sales data.
For example, assume you plan to open a grocery store. You would purchase the majority of your product from a primary grocery distributor. Usually a distributor of any significant size will have access to other grocery store's sales in your trade area. This could be your starting point for your sales potential.
You will have to make adjustments to the sales figure based on site selection, competition, pricing, and marketing.
Warning
Be careful when dealing with product vendors to determine sales potential. Some may just tell you what you want to hear in order to get your business. Back up their forecasts with other sources.
Using census figures to estimate sales
The Bureau of the Census can provide you with a lot of information to help you estimate your projected sales revenue. For starters, census demographic information can reveal the numbers and types of people who live in a specified geographic area, classified by age and sex. It can also disclose the number of households, the average household size, and the average, median, and per capita income levels in a given area.
The Census Bureau also tracks information on sales volume for various business types by geographic location. This information is available in most larger public libraries. It's usually a few years out of date, so if your new business is one that will be greatly affected by the time lag, you will want to make adjustments. Remember that projected sales figures are just an educated guess.
Example
Here's an example of some information gathered from the Census Bureau for a fictitious sub sandwich shop in Cedar Rapids, Iowa.
In the Census of Retail Trade publication, it showed that in 2002 there were 303 eating and drinking establishments. The average sales per eating establishment were $638,221. The data is compiled every five years, but there is a lag in its release. Preliminary statistics show a nationwide increase from 504,641 establishments to 563,784.
Based upon other research, it was determined that this is not a realistic number for the planned sub shop. This number needs to be adjusted for other known facts. Assume that the average customer will spend $7.50 per meal. Also assume that the restaurant will have between 150 to 200 customers on an average day. Multiplying $7.50 times 175 customers (average of 150 and 200) times 365 days, the sales will compute to $479,062 per year.
Along with the sales figure, Census publications will provide other financial details, such as cost of goods sold and payroll.
