The “Revenues” tab in Business Model Forecast is where you are building your revenue hypotheses. One line is for one revenue stream.
There are only 4 different kind of informations to complete in this tab :
- Description : Put here a short description of your product / service. This information is only necessary to build an intelligible financial plan for you or for anyone that may analyse your forecast (investors, partners, advisors, …). So, try to be as explicit as possible to make it easy to understand each revenue stream! 😉
- Revenue (per unit) : Fill-in the per unit price of your product / service you sell. If you want advices on how to set a price for your product, read this article : 7 tips to set a price to your startup product/service
- Cost of goods sold (per unit) : Fill-in the amount of direct costs for one unit sold (expenses directly related to a product / service sold). You must add in this “Cost of goods sold” all materials and external services needed to sell your product / service. Don’t add any internal costs such as Human Ressources, fixed expenses or investments.
- Number of units sold : Fill-in here quantities you expect to sell over years. For the 2 first years, you have to specify your sales forecasts per quarters, while for the 3rd to 5th years you specify them annually. You can use formulas to forecast easily the growth, instead of filling-in all cells manually. For instance, complete with a quantitative hypothese for the first quarter, and then specify a formulas for the next quarter cells (like “=E9*1,5″ for a 50% growth in quarter 2 compared to quarter 1). If you want advices on how to forecast revenues and growth, read this article : How to forecast startup revenue and growth ?
Your business profitability starts with the gross margin per unit you make, which is simply :
Gross Margin = Revenues (per unit) – Cost of goods sold (per unit)
Try to compare it with competition. Usually, it’s easier in % or revenues ( = Gross margin / Revenues x 100 ).
The global gross margin (the sum of “gross margin per unit x quantity sold” for all revenue streams) will generate the cash you need to pay all your fixed expenses. If this global margin generated is higher than your fixed expenses, you start to be profitable, as you reach the “break-even point“. So, the profitability of your business will directly depend on the gross margin per unit you make, the quantity you sell and the amount of fixed expenses you have. The lower is the margin per unit the more will have to sell to be profitable. For more information, on how the break-even is calculated, read this article : Break-even point calculation to test startup profitability
As you see, you can manage up to 25 different revenue streams. That’s a lot! Probably too much, because it’s better and easier to forecast revenues with only a few revenue streams (from 1 to 3 it’s good, above 5 it starts to be much more complicated to build relevant forecasts for all these revenue streams). We designed Business Model Forecast to fit with a maximum of businesses, that’s why we decided to have up to 25 revenue streams. Feel confortable to do whathever you prefer, but try to remain simple. For instance, if you sell a lot of products (like for shops, e-businesses, …), it’s foolish and time-consuming to try building a revenue forecast for each product. Instead, aggregate these products in a few main categories with an average price for each, so it become easier to forecast a relevant “number of units sold” over years. For more information on why it’s important to stay simple when building a financial planning, read this article : 80/20, a golden rule in financial planning for startup
Let’s have a look to the picture example above. In this case, “My super product” is sold 100$ and its direct costs of goods are 40$. We forecasted to start our sales with a small quantity of 150 units sold in the first quarter. Then, we applied a fomula with an hypothese of 50% growth from a quarter to another during the first year. We used a similar formula for year 2, but with a 20% growth. Finally for the 3 last years, we manually estimated the growth.
This is a basic example. All numbers are just imaginary. However, in your own case, it’s really important to work deeply all these hypotheses as they are structuring your business model. Help yourself when building these hypotheses with an iterative process : build a first try of a complete financial plan with estimated hypotheses ; mesure ; analyse ; improve ; and do all these steps again and again until you get relevant and steady hypotheses. Remember to “get out of the building” to test them. Especially, be careful to compare your quantities sold with your forecasted resources over time and with the market size.