How to Project Your Basic Business Numbers
by Tim Berry, Guest Blogger
- Created: April 24, 2012, 8:05 pm
- Updated: May 19, 2012, 8:00 pm
I’m not a numbers person by nature. I was a writer first, then a journalist, before I got into business. I’ve learned the hard way, though, that managing the basic numbers is critical to business success. And if it’s your business, then you either manage them yourself or work with somebody you really trust.
With that in mind, here’s my summary of the most important and most basic numbers in the business, and how to manage projections and tracking and steering ahead with them.
1. Do a sales forecast
I know that’s hard for a lot of people, in a lot of businesses, but that’s really mainly because you think you’re supposed to predict the future correctly. That’s not really the point. What you want to do is break the future down into meaningful parts, like units, price per unit, and costs per unit. You won’t guess accurately, but if you have the components of it, then you can track the difference between what you expected (or hoped for) and what actually happened. And that leads to management.
What I mean, specifically, is set up a worksheet that goes monthly along the top for 12 months, with a column for the year that adds up the months, and then two other columns to the right for the second and third year. Then think strategically about your main lines of sales, summarizing down to 2-5 lines of sales. Those lines of sales become rows on the same worksheet. Project unit sales in a set of rows, then revenue per unit in another set, and then sales (as units times revenue) as a third unit. Then do direct cost per unit as a set of rows, and finally, sum direct costs as a fifth set of rows. And of course for all of these rows, you have the same columns running to the right: first 12 months, then the first-year total, then the annualized second and third years.
The math for this is simple and obvious. Units times revenue equals sales. Units times direct costs equals cost of sales. Add the months to get the first year. Then do the second and third years annually. The illustration here shows an example for how this looks for the first three months, and you can imagine the rest of it flowing out to the right.
Although the math is simple, the assumptions aren’t. Try to find drivers that can help you project realistic numbers. For example, in a restaurant business you might draw a map of the chairs and tables and calculate how many lunches and dinners you can serve per day, week, and month. Or, in a web-driven business, calculate free traffic, paid traffic, conversion rates, and so forth. Always look for the assumptions you can track later. Hint: that tracking plan vs. actual is what drives management. I call it steering your business.
2. Estimate the expenses.
This is another worksheet. It has the same columns along the top as the sales forecast, namely 12 months, the first year total, and then the second and third year.
The rows in this worksheet are expense items. Normally you start with salaries, and then add in marketing expenses, fixed expenses like rent and utilities, salary-related expenses like payroll taxes and health insurance, and so forth.
The math is simple and obvious here, too, but the assumptions aren’t. But, if you think about it, if you’re going to be able to run a business well you probably have to have a pretty idea of what you’re paying in salaries, rent, utilities, marketing costs, and other expenses.
And you don’t have to be right. You just have to be specific so you can manage the differences.
3. Manage the plan vs. actual differences
This is where the management comes in. Once you’ve got your basic numbers projected, expect those projections to be wrong. And then you meet every month (even if it’s just you, set up the time) to look at what went right, what went wrong, and what adjustments to make.
And that’s called planning.
About the Author
Founder and Chairman of Palo Alto Software and bplans.com, on twitter as Timberry, blogging at timberry.bplans.com. His collected posts are at blog.timberry.com. Stanford MBA. Married 44 years, father of 5. Author of business plan software Business Plan Pro and www.liveplan.com and books including The Plan As You Go Business Plan, published by Entrepreneur Press, 2008.
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