Friday, November 15, 2013

SOP Friday: Financial Goals - Realistic Revenue Projections

I maintain a spreadsheet of the basic profit and loss of my company month by month. So I have a picture of where my money came from and went to in January, February, March, etc. I start out with all of the months filled with projections. Then, as each month becomes real, I replace projections with real numbers.

(If you want to see a sample of this, download the sample Excel spreadsheet and related materials at this page: Free Business Plan Resources. That is part of a six-part blog series on building a business plan. It's from 2008/2009 but the math still works.)

Sample Revenue Projection (click to expand)
In the last few months of the year, I start working on the projections for next year. What do we expect in project labor, managed services, hardware, software, hosting, etc.? I fill in numbers for each month. And, of course, we project some growth for the new year. See the sample display of revenue projections. Notice that it moves from "projected" to "actual" in August. Of course these are all fictional numbers.

In an earlier article, I talk about basic financial goals. Now we need to take a different view of the future. I am a firm believer that every business should have a one year, a three year, and a five year projection of where you want to go. For most businesses, anything beyond that is wild speculation.

In fact, five years might be wild speculation. But three years should be based in reality and should be attainable. The one year plan should be very realistic and reflect what you really expect. Here's what I mean.

If you set a goal of doubling your business in twelve months, that might be possible. It might be very realistic. Or it might be completely impossible. You want to stretch your goals, but not to the point where they're simply fiction.

So let's say you want to have 20% growth. That's still aggressive, but much more attainable. Okay, so how will you get there? In the real world, what do you need to do to make that happen? In December of this year you make $X, and in December of next year you expect to make $X*1.2. What's the action plan that gets you there?

Somewhere from December to December you're going to have to demonstrate an increase in one or more types of revenue. What drives that increase? Tell me the story of how you will do that.

Luckily, in managed services, we can plot and plan to increase recurring revenue. So the narrative (the story that supports this projection) needs to say something like
- Add one $500/month managed service contract per month
- Add one $5,000/month manage service contract per quarter

The next question is: How realistic is that? Have you been able to sell one small client per month or one large client per quarter? If so, great. If not, then explain how you are going to do that next year. It might be very real. You might have a grand marketing plan and you just hired a new sales person. Just make sure that there's a realistic "how" behind your ambitious plan.

Here are some basic questions to ask that will keep your revenue projections realistic:

The best estimate of next year's performance is this year's performance. 
Unless you can tell me why that's not true. This year might have had an extraordinary event that simply won't happen next year (good or bad).

I had a stretch of about ten years when I signed about one new client every calendar quarter. Some were large, some were small. Sometimes I dropped small clients to serve the new, larger clients. Sometimes I hired staff. Both of those events have to been accounted for. Bumping up the revenue by $1,000/month, followed by bumping up the payroll expense by $4,000/month can both be accomplished. But they need to be in the context of a realistic larger picture.

Your future budget must start with where you are right now. 
You cannot "assume" a brighter January unless you have a plan to make that happen. From today - from this month - you can tell a story of how you'll gain clients. If you start from today, you will ground your predictions in reality.

Be clear about your assumptions for next year. 
What do you think the economy will do? Why do you think that? What changes will you make and when? Will you hire someone? Will you offer a new service? Will you raise your rates.

Make notes about your assumptions and plans in the margin of your Excel spreadsheet. For example "Assume two new managed services clients per month. Will hire new tech 20 hours/week in May." You don't need lengthy paragraphs, just enough to jog your memory about what you'll tell someone to justify your numbers. That someone might be your accountant, your spouse, or your service manager.

Keep the end in mind. 
Now we're back to the long term. If you plan to double the size of your business in five years, what are the assumptions about years 1, 2, 3, and 4? If you're going to sell your business or retire in year five, what do you need to do between now and then to reach your goals? What has to change and what has to stay the same?

Short term and medium term goals should always move you toward your longer-term goals.

Share your projections and get feedback.
Show you budget projections to someone and ask them whether it looks realistic. You might be surprised with the questions you'll get. Put your ego aside try to answer their questions. If you can't, then you need to realistically re-evaluate your budget.

This might sound like a pain in the neck. But it really is an exercise worth doing. Even if you've been in business for ten years without a budget, I think you'll be surprised at the difference it makes when you do have a budget.

. . . Of course that assumes you pay attention to it once a month after the new year begins . . .

Comments welcome.

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About this Series

SOP Friday - or Standard Operating System Friday - is a series dedicated to helping small computer consulting firms develop the right processes and procedures to create a successful and profitable consulting business.

Find out more about the series, and view the complete "table of contents" for SOP Friday at

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Next week's topic: Layoffs and Downsizing

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