The financial forecast can be described as a roadmap that directs investors to the goal. Many forecasts fail because they assume they can take advantage of a market without telling the assumptions that lead them there. Startup financial models should be precise and have no gaps between steps From A to Z.
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My previous venture capital firm manager told me startup finance planning should begin with a more granular scale. As an experience with macro hedge funds, I didn’t know what this meant because I was used to forecasting based on trends, regular revenue, and benchmarks. However, these are not available for startups. Sometimes, it’s unclear what the market it is targeting is or even the revenues it can make.
It’s hard to convince someone to believe an idea that’s not even present. The founders generally ponder the picture for six or more months before contacting an investor for the first time. At this point, they’d simulated more than a thousand scenarios and scenarios in their heads with a vision of what they could achieve in ten years. They then become annoyed that investors don’t reach the same conclusion. They forget that they must guide investors on the same path they’ve been on themselves, though using the same route, to achieve the same goal. The only way to do this is through facts and logic.
The truth is that investors don’t have the time to go through many details in the initial meeting. Therefore, strategies are devised to grab the attention of investors – from an elevator pitch, a 15-minute teaser, to a lhour-longhy presentatiur. In the end, investors will have to examine the business plan to ensure the founder’s vision is genuine and the assumptions are believable.
A financial forecast is an outline that guides investors to their ultimate goal. Most projections fail since they implicitly presume that they can take advantage of a certain percentage of the market, or even a 100 percent annual growth rate, without providing the methods and assumptions that get the desired results. The finance model designed for a startup must be rational and believable; it has to be aligned with the company’s strategy and precise, with the correct steps from between A and Z.
Granular Financial Forecasting Methods for Revenue
A granular financial forecast should begin with the revenue since it’s the most crucial and most uncertain element to forecast. As with a business revenue forecast, it should be based on the customer’s mind of the customer. Once you have identified the target market, startups must figure out how to attract customers. There are three primary sources: marketing, organic sales, and sales.
Sales teams are direct channels that transform leads into customers. Sales are a crucial driver. What size is the sales staff, and what are the average monthly sales? The average sales may be divided into qualified leads per month, leads-to-sales conversion rate, and the average sales cycle length. For instance, if an enterprise had a sales staff consisting of 3 people, with 100 leads generated each month by a salesperson with a leads-to-sales ratio of 10 as well as an average of 2 months, the business could generate 15 sales per each month (3 (100 * 10 percent *0.5), for specific models of business, leads are generated by marketing, which leads to a two-staged acquisition process.
Marketing is not able to reach out to customers as precisely as sales. However, it is superior at reaching a broader market. Forecasting the sales generated by marketing begins by determining the strategies used to market (e.g., pay-per-click direct mail, social media, and billboards, as well as referrals) and the budget allotted to each system, along with the total cost of purchase (CPA) per strategy. For the majority of online marketers, CPA could also be defined as the cost per 1,000 (CPT or CPM) impressions multiplied by click-through rate (CTR) and convert rate (CVR).
For example, suppose a startup employs three marketing strategies–pay-per-click, social media, and referrals–with CPAs of $50, $80, and $100, respectively, and is allocating $10,000 to each strategy. In that case, it is expected to generate a total customer acquisition of 212.5 (10,000/50 + 10,000/80 + 10,000/10). According to the business strategy, purchases may be paid to customers or leads. If these are lead acquisitions, the sales will be added on top of the authorities that are qualified and created using the formula for sales above. If charges are added to over leads generated by the sales team, it is necessary to conduct a verification to ensure that the sales team can handle the additional costs.
While sales and marketing strategies have actions that pull customers in, organic sales generally arise from customers discovering the business–accidentally or strategically planned. The most common examples of this are word of mouth, footfall SEO, word of mouth, and being a part of a market. It is possible to determine the cost of buying these types of channels. However, the company typically has no control besides setting up the proper infrastructure for organic sales. To calculate organic sales, estimate the exposures multiplied by the conversion rate. For word-of-mouth, the amount of exposure could be calculated by summing the number of active customers, the percentage of potential “referrals,” and the reach per referral.
Once you have forecasted the number of sales, The second step would be to determine the average revenue each customer will generate, also known as the lifetime value (LTV). To calculate the LTV, calculate the value of a typical purchase, the regularity of purchase, and the churn percentage (the ratio of the customer’s lifespan). Customers are classified into three categories: new customers, returning customers, and lost customers. Forecasted sales are divided by the average purchase price for each period to calculate new customers’ purchases. Repeat customers are active from the previous period divided by the intermediate purchase frequency (e.g., every month or 0.5 times per month). Lost customers are determined using the multiplier of churn ratio by the total of active and new customers from the previous period. New customers plus last period’s active customers + lost customers = active customers in this period.