When starting a business, an important part of
the planning process is to know your numbers—and by numbers, that means your general financial forecast. But what numbers are important? Should you be breaking down quarterly sales and projecting revenues five years into the future? Or should you estimate based on how you think the market will change/grow over the next year or two?
Entrepreneurial supporter and investor Don Rainey, general partner with Grotech Ventures, offers some helpful metrics to new startups to help analyze the data and begin to do initial short-term forecasting and insights into operations.
The Numbers You Need to Know
To help a startup entrepreneur stay organized and focused, Rainey breaks down the ‘numbers’ by noting the top three figures you should know about your business:
– Pipeline coverage: the sales pipeline is a listing of all sales prospects, in which you’d include projected sales amount and estimate the probability of success for each account; this number is a fraction (numerator is total amount in your sales pipeline, denominator is the sales goal); an easy way to think about this is if you’ve had one meeting with a customer, you may want to estimate that the closure rate has a 20% chance of closing; if you have met with them several times and agreed upon pricing/services, that percentage may increase to 50% (and so on)
– Sales per employee: this number can work for businesses of all sizes – take the gross sales number and divide it by the number of employees; sometimes solo entrepreneurs and small businesses can scale too fast ahead of their prospects, and it’s important to understand the sales per employee as an important number in the process
– Customer payback period: this metric can be the most helpful to a startup, but requires time to make an initial assessment; if you know how much it costs to acquire a customer, you can begin asking how many months it will take the business to recover that cost; once you determine this number, your business will start to make sense (how many customers can you afford to acquire with your existing capital/operating profits?); the benefit of determining this number is that you can begin to determine how much money you need to grow and how profitable your company is likely to be
To make good business decision, it’s crucial to have not only a good business plan, but to really forecast data and predict these basic sales/revenue numbers. Once you have a basic understanding of the simple concepts about your revenue stream, you’ll be able to move forward in the planning process. Knowing those numbers will also make it easier for you to present your financial forecasts to potential investors and bankers in a clear and relevant way!
To read the complete article by Rainey, as posted on Inc.com, visit http://www.inc.com/don-rainey/three-numbers-all-entrepreneurs-should-know.html.
Are there any additional numbers you would add to this list? As a startup entrepreneur, what numbers did you familiarize yourself with when approaching potential investors/funding sources?
Thanks for reading, and until next time… stay WISE!