In an early stage company, when you are still in the development phase and a while before you can even imagine paying customers, being asked exactly how much money you will make and when can feel like a silly question.
Angel investors will want to know how much you will make and how that number will grow month on month to inform their decision to invest. Of course, you have told them the total market size and the percentage of that you’re going to acquire, but you’ll need to get into the details.
It’s also beneficial to know how you intend to grow your revenue over the long term, and at what points you can hire more staff, spend more on development and when or if you will run out of money. It helps you budget for revenue growth and set milestones to work towards, helping your team see the company differently.
Start with your per-customer revenue, and if you have different prices, for example, tiered pricing, set out your per-customer revenue per tier. Put these all in a spreadsheet. These will be your starting points.
Next, you need to understand what brings you this customer, your revenue drivers. These are things like sales and marketing. Think adverts, events, SEO, or even cold calling.
This part takes a little work, but the important thing is that you document everything, as it makes it easier to spot missing parts or change numbers when your assumptions are proved wrong.
Going in-depth here and thinking about what actions will help your customer discover you and bring them to your website, and then what percentage of those will convert to actual paying customers is essential. You need to think through and plan what actions are needed to get them from going about their day to paying you for your service. Build it, and they won’t just come.
Ideally, set all of this out, line by line, and put each driver in a different section.
When you are expanding this out, it’s essential to sense-check here. By spending $10m on paid ads or expanding your target market, your conversion percentage may go down as lead quality decreases.
That marketing or sales channel may not have that many customers as its might be a limited pool or too tight on demographics, or you may see the same customers again and again. For example, the same customers might be on both linkedin and instagram, so paying for both adverts wont result in 2 customers, it might just show the same customer your ad twice.
Remember seasonality, people take time off at Christmas, and your sales may spike at different points depending on external and hopefully cyclical factors.
It’s ok to use benchmarks as a starting point, it's better to use an industry average than a total guess, and those should be fairly straightforward to find.
After you have thought through where your customers come from, how much it costs you to get them, what you have to do to get them to pay and lastly, how long they will keep paying you, you will then be able to bring all these subtotals together into one revenue line.
Keep your main budget clean and simple. Ideally, you want to keep these in-depth calculations on a separate worksheet. No one likes to see an excel with a zillion lines. You will have similar processes for working out your cost of sales, salaries and other operating expenses so that it can get out of hand quickly.
Document all the assumptions you have made. I like to do this in the final column to see it all in one place. This is important so that when you revisit it or someone challenges you on a number, you know what you were thinking at that time. It also makes it easier for someone else to work on this file without asking you loads of questions.
Where possible, test these assumptions. If you think $10 of Facebook ads will bring you 10 visitors to your site, and of those, 1 will convert to being a paying customer, then try it. Spend that $10 and see what happens. Does anyone click through and visit your site? Does 1 person express interest? (even if your product isn’t ready, you can set up the site for a test as if it is)
Make sure you have the cash flow to get these customers. Don’t just assume you will have 500% growth month on month if, at month 5, you need to find $10m to spend on advertising to do so, especially if you don’t have that $10m.
Finally, revisit regularly and categorise both spend and revenue as you go about your business activities. You might not have an in-house finance person in the early stages, and your accountant might only be helping you at year-end so, in the interim, it helps to keep track the amount of cash coming in and going out not just in total but in relation to these key drivers. That way, it’s easier for you to revisit your budget, see where you are validating those assumptions and correct if not.
If you can do this in your bank account, perfect; if not, use an excel sheet or similar. Keep a close eye on this and use it to adjust your budget but also your actions.
Now, you will answer those questions on how, where and when you will get customers, what will happen to revenue if you have additional funding and a backup plan if a channel doesn’t deliver what you had hoped.
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