Estimating your revenue is one of the trickiest parts of starting a business. You might have a target revenue in mind or a clear idea of how much you need to earn to make your business profitable, but forecasting those numbers can be confusing. I often work with small business owners who struggle with this, and I’m here to guide you through a simple process to make it easier.
Here are 2 steps on how you can get a handle on your revenue projections:
Step 1: Use Industry Averages
1. Research Industry Data: Start by looking into industry data. You can find out the total revenue generated annually for your industry and how many businesses are in it across the U.S. By dividing the total revenue by the number of businesses, you get an “average revenue per business.” Just keep in mind that if your industry has a few big players, this average might be higher than what you can realistically expect. Also, remember this is a national average, so it might not reflect your local market accurately.
2. Check Regional Market Data: Next, dig into local data. Your state or region might have specific sales volume information for businesses similar to yours. Local libraries or business directories can be great resources for this. You might find revenue statistics for businesses in your industry and state based on their size, which can help you gauge what to expect.
3. Reasonableness Test: Compare your numbers to these averages. If the average business in your industry makes $850,000 a year, but you’re projecting $1.2 million in your first year, you might be aiming too high. Conversely, if you’re forecasting $500,000, it’s likely a more realistic target.
Step 2: Project Based on Customer Spending
1. Estimate Customer Traffic: Start by figuring out how many customers you expect to attract. Think about how many people will visit your store, hire your services, or use your products daily, weekly, or monthly. Your revenue will depend on these numbers.
2. Calculate Average Spend: Next, estimate how much an average customer will spend. For a restaurant, you can predict average spend per meal including drinks and extras. For a retail shop or consulting service, calculate the average sale or service fee. This step is crucial for understanding your revenue potential.
3. Multiply to Estimate Revenue: Multiply the number of expected customers by the average amount they will spend. This gives you a basic forecast of your potential sales.
4. Reasonableness Test: Finally, check if your revenue estimate is achievable. Ask yourself if you can actually meet the demands required to generate the sales you forecasted. If you’re a consultant working alone, your revenue will be limited by your available hours. For a manufacturer, your production capacity will set a limit. For a restaurant, consider your seating capacity and how long customers stay.
Final Tips
If you’re applying for a bank loan, you’ll need to justify your revenue projections. Use both methods to create a detailed forecast and include this in your business plan. Lenders want to see that you can generate enough revenue to cover expenses and make loan payments.
Even if you’re self-financing, estimating your revenue is still crucial. It helps you understand how much you need to make your business worthwhile.
Don’t forget to utilize local resources like your library or the Small Business Development Center (SBDC) for additional data. For more insights on starting or growing your business, check out my other blog posts.
If you have any questions about forecasting your revenues or need help with your projections, drop a comment below! I’m here to help and would love to hear from you.
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