Unlocking the Mystery of Revenue Forecast

Revenue is the ‘Secret” to the success of a business.? That is sort of ‘business 101’.?

Revenue and the accumulation of profits is what leads to the exits that produce riches for the founders and the return expected on investors’ capital investment in the company.?

When calculations are made on the value of a business as it is seeking to be acquired, a major component of that value is based on multiples of either revenue or profit (referred to as EBITDA - Earnings before interest, taxes, depreciation, and amortization).?

YET it is one of the biggest sources of confusion, false expectations, and disconnect between angel investors and entrepreneurs when creating the ‘value proposition’ to motivate an investor to invest in a startup business.???

Revenue as a component of the equation at the end of a company’s lifecycle is measurable.? But when a company is starting up, and even in its’ early stage?

Video Short from the RIDIN' With KAREN series - answering common entrepreneur and investor questions:

Revenue vs Capital, still Money

Money is necessary to start and grow a business.? Everything must be paid for within the operation of a business. ? Seems like common sense doesn’t it?? A startup business will not have revenue to start, and therefore must find money to start from either the founder’s savings or attract others to provide capital for the founder to start and grow.? The capital from the investors can come in the way of equity ownership, debt and revenue share.??

There is a? difference between qualifying for a bank loan and investor capital to get a company started. ? Both look at revenue but their expectations are different.? Banks want to see revenue history and a predictable future revenue based on contracts and customer commitments.? Investors, particularly seed stage investors for startups, don’t expect to see a financial history of revenue, and they know future revenue forecasts are not 100% reliable because there are many unknowns.? However, they do expect the entrepreneur to go through a thoughtful process to predict it.? Most importantly not to just say revenue is a % of a large market without variables like seasonality, sales cycle, and growing costs that are necessary to support growth.??

Personal Note: ? One of the first things I do when looking at the viability of a start up AND growth stage company that wants to work with me to source capital is their revenue forecast. ? I can usually tell within 20 min if the founder(s) really know their business and their marketplace.???

Short episode of Ridin' with Karen addressing investors concerns about revenue forecasts

Common Mistakes Startups Make in Generating Revenue Forecast

When startups with limited operating history attempt to forecast revenue and profit, they often make several common mistakes. Here are the five biggest ones:

1. Overly Optimistic Projections:

???Common Mistake: Entrepreneurs tend to be overly optimistic about how quickly they can acquire customers and generate revenue. They might assume rapid growth without considering potential obstacles or the time needed to gain market traction.

???Consequence: This leads to inflated revenue forecasts, which can misguide budgeting and investment decisions, resulting in cash flow issues down the line.

2. Underestimating Costs:

???Common Mistake: Many entrepreneurs underestimate the costs associated with scaling a business, including marketing, sales, production, and operational expenses. They may also fail to account for unforeseen expenses.

???Consequence: This results in profit projections that are unrealistic, leading to cash shortages and difficulty in sustaining operations.

3. Ignoring Market Conditions and Competition:

???Common Mistake: Entrepreneurs often fail to adequately consider market conditions, such as competition, pricing pressures, and economic factors that can affect demand. They may assume a best-case scenario where competitors have no impact.

???Consequence: Ignoring these factors can result in forecasts that are disconnected from reality, leading to missed targets and strategic missteps.

4. Lack of Sales Pipeline - Hope vs Reality:

???Common Mistake: Startups sometimes base their revenue forecasts on a small pipeline of potential deals or overestimate the conversion rate of leads to actual sales. They may not account for the time and effort required to close deals.? They don’t appreciate the sales cycle and revenue model that varies by industry and company’s product/service type.?

???Consequence: This can lead to unrealistic revenue expectations and cash flow problems if expected sales don’t materialize in the time frame predicted which can get them into a complicated situation with their investors (and lenders) when milestones are missed.?

5. Failure to Update and Adjust Forecasts:

???-Common Mistake: Once a forecast is made, some entrepreneurs treat it as static, failing to update their projections regularly as new data becomes available. They might not adjust for changes in the business environment or performance.? Adjusting the forecast based on new data and communicating that with the investors is a key sign of founder maturity and an appreciated show of transparency that strengthens the relationship.?

???Consequence: This rigidity can cause a business to miss warning signs of financial trouble and prevent timely corrective actions.

Avoiding these mistakes involves being realistic in estimates, continuously monitoring and adjusting forecasts, and maintaining a realistic understanding of market dynamics and business costs is critical for both entrepreneurs seeking capital and investors considering an investment in a startup or early stage company.?

AND if you have questions... jump on the LIVE ASK KAREN audio feed today at 1pm to ask your questions ....and get answers.