Dear Small Biz Adviser:
I am planning to open a small gourmet retail store where I'll sell pots, pans, cooking gadgets and other similar items. The bank wants me to calculate month-to-month projections for the first year, then yearly for the next two years. How do I do this? I have no clue about how much I can sell each month. There are two other such stores in my city, but they are far enough away from each other, and there will be plenty of consumers for all of us. Is there a tactful way I can find out approximately how much the other two stores are selling each month? Then perhaps I can average out what I can sell based on their projections? Thank you.
The greatest challenge for most new owners is formulating the financial projections to be included in a business plan.
Your banker made a standard request regarding the month-to-month projections for year one and the yearend amounts for the second and third years. I'm surprised he didn't ask the same for your cash flow projections. Ultimately, your ability to generate and control the flow of cash in the first 12 months of operation will likely determine the long-term success of your venture.
As for learning the sales performance of the other stores, if they are privately owned or are franchise operations you will likely learn nothing. They are not obligated to release sales data except income and expense in income tax returns. If they are part of a publicly owned corporation, you may learn something of per-store sales if that information is provided to the shareholders. Otherwise, you must and can develop financial projections on your own.
Two general categories of data must be generated for you to adequately develop a set of financial projections: marketing and operations. This process may appear elaborate, but it is necessary if you are to begin developing a legitimate set of figures.
For your market research to be most useful, you first should define: Products to be offered
Note the advantages and disadvantages that the products and product lines you plan to offer will present over existing competitors' merchandise. Do not treat this category lightly. Oftentimes, such detailed product definitions result in generating provocative advertising content. They also can give you (and ultimately your customers) a greater understanding of how you can stand out from the competitors. Socioeconomic characteristics of typical customers
Examining who buys your products will help you decide where, when and how to advertise. Demographic data from the U.S. Census Bureau can be easily obtained online. It will tell you where your typical clients reside. Compare the year 2000 data with 1990 to learn if the typical customer base in your area has grown or declined. You may be able to say to yourself, "I know there are more of them today than last year," but a banker has to see the reliable data from a reliable source. Data is broken down to cities, census tracts and blocks. Sales location
If you operate a storefront, the idea is to determine where your clients reside, what media they view and whether their presence is sufficient to warrant a projection that your venture will be profitable. Pricing structure
Will you discount the product or sell it at customary or prestige pricing levels? A critical factor in this analysis is being certain the selling price covers the cost of the product and leaves sufficient gross margin to cover operating expenses and leave you with some profit to take home. Discount pricing may draw a lot of attention and added unit sales, but you have to sell more of the product to cover all your costs.
Remember that your advertising dollars, especially in the startup phase, must be used wisely. The above-noted data that you collect, especially about who your customers are and where they live, will be crucial in deciding in which media to advertise.
The other critical data category concerns the operational aspect of your business. This includes expenses associated with utilities, leases, compensation, benefits and any other expense incurred in the ongoing operation of your business, regardless of whether you are making sales.
Don't forget to include the onetime costs associated with getting the business up and running: utility and lease deposits, leasehold improvements, shelving, fixtures, office furniture, equipment and machinery. Those expenses will have to be financed by you and your loan proceeds.
Market research is probably the most important set of data to address. This will help you project sales. Remember, the sales you project cannot exceed cost of goods and operating expenses. Develop the financial projections by inserting your costs. Then plug in the numbers directly related to sales and cost of goods to find the minimal sales required to break even on those costs.
Your market research also must be sufficient to make a believer of you and your banker about the sales projections. And if you have not created an overall business plan of which these numbers will be a part, do so immediately!
Finally, if all of this is overwhelming to you, head to the nearest SCORE office or Small Business Development Center. Between the free, confidential counseling and low-cost to no-cost workshops you should be able to find your way.
I wish you well.
Article courtesy of YellowBrix, Inc.