NEW VENTURE GUIDE
by the UALR Arkansas Small Business Development Center
Any new venture must be able to provide income sufficient to meet expenses, make payments on debt, and provide a suitable income for the owners. The tough part is trying to predict this before the venture is started.
Although 100% accuracy is never possible, much insight can be gained by diligently preparing a well-thought out projection. This document has been prepared to help you get started and provide some suggestions for approaching a solution. A form is included that provides a detailed list of income and expense categories for many businesses. You may not use all categories or you may need to include categories that are not listed on the form. It is important to insure that you do not omit items that may significantly impact the projection.
A simple way to start is to write down each category of revenue and expense (as shown on the worksheet provided). Work first on the items you know or for which you can readily obtain estimates from others. Write down any information that others provide so that you can identify the source later. Search for information that will help you estimate items that you do not know.
Set the projection aside after you have completed it. After a few days have passed, review each item to see if you are still satisfied with your original estimates. Most people find that some estimates need to be changed before the projection is finalized.
A couple of definitions may be useful in categorizing your work and helping you "speak the same language" as your banker. The more knowledgeable you appear to the banker, the more likely he or she is to give your proposal consideration.
Revenue - Revenue consists of all receipts from the sale of products or services to your customers. This is the money generated from the normal operation of the business. This is often referred to as sales.
Costs and Expenses - In general, costs are the monies that your company spends for the purchase or production of inventory for resale. Expenses are the monies that your company pays for the operation of the business itself (i.e., rent, insurance, utilities, etc.). While the difference between costs and expenses is sometimes difficult to determine, usually it is self-evident.
Below we have listed the major revenue, cost, and expense items, along with some general guidelines about how to project them.
Revenue (Sales) - How much a new venture will sell is definitely an unknown. This item is often difficult; however, it is one of the most critical in a projection. If you cannot find any industry data for support you must make some kind of assumption(s) and proceed.
For example:
| 1. | Estimate how much your average sale will be (e.g., $10.00) and how many sales you will make per day (e.g., 50). Therefore, your daily sales will average $10.00 times 50 or $500 per day. Simple multiplication will then give you an estimate for weekly, monthly, and yearly sales. |
| 2. | If you have several items of income, you may want to estimate how much each item will generate. If you have many items then you may want to estimate the dollar value of sales per square foot of space available (or some other common denominator). |
| 3. | If your business' revenues are based on services performed, you may want to estimate the number of billable hours or number of jobs completed times the charge per hour or job. If you have a mixture of service revenue and product revenue then separate estimates for each would be appropriate. |
The main idea is that you can make assumptions and turn them into estimates for revenues whether on a daily, weekly, or monthly basis.
To get an insight about how many potential customers are in your total market area you may want to check vehicle traffic counts at potential storefront locations, population census data, or industry reports (when they are available).
Cost of Sales - If you know the cost of each item you sell, it is easy to compute cost of sales by multiplying the number of items sold by the cost per item.
If you have a large mixture of products the most common way of estimating cost of sales is by developing an average. For example: If you expect to average 35 cents profit for every dollar of sales, your average cost is by definition 65 cents. This 65 cents also represents 65% of every dollar of sales. Therefore, you can multiply the 65% times the total sales dollars and estimate what your total cost of sales will be.
$100,000 Total Sales times 65% = $65,000 Total Cost of Sales.
It may require some trial and error before you are satisfied with your estimate for the percent used for cost of sales. In addition, it should be noted that some businesses will break their sales down by different departments and calculate different costs of sales for each department. There are other, more detailed methods for calculating cost of sales and you may wish to examine these methods in depth.
Advertising - Begin by making some assumptions about what sources you will use, e.g., radio, newspaper, television, direct mail, etc. You can always estimate expenses for the first three by contacting them and getting quotes. Using direct mail or other types of advertising may require more investigation. For example, you may have to check with printers to determine the cost of producing your direct mail literature. You would then want to check with the post office or other delivery services to find out how much it will cost to get the literature to the prospective customer. In conjunction with this you will have to make an estimate of how cost-effective each advertising method will be in producing the revenue you desire.
Insurance - Decide on the types of insurance coverage you will need (e.g,. liability, theft, property & casualty) and contact local insurance providers for quotes. If you will have employees, workers' compensation insurance should also be included. Get more than one quote, and remember that premiums may be reduced if you increase your deductible.
Interest - Interest expense on any funds you anticipate borrowing can easily be calculated if you have an amortization schedule. If an amortization schedule is not available an estimate can be made by multiplying the expected interest rate times the total amount to borrow.
Example: $60,000 Borrowed times 9.5% (.095) Rate = $5,700 Interest Expense.
The actual expense will be somewhat lower than the amount calculated and you can make final adjustments once an amortization schedule is obtained.
Rent - Once you have decided upon a site and come to an agreement with the landlord, rental expense will be known. If a site has not been selected write down a description of the type of facility you will need. Then do your own searching or check with a local realtor for possible quotes.
Repairs & Maintenance - Start by listing the types of repairs that might be expected over the first twelve months. Of course, you will want to factor in whether you will be obtaining new or used equipment for your business. You might then want to contact local repair shops for quotes on hourly repair rates. Manufacturers can be contacted for estimates of the cost of service contracts you anticipate.
Salaries - Prepare a work schedule as if you had already started the venture. You can then multiply the estimated hourly wage times hours worked for each potential employee. Add to this total any wages for salaried employees.
Payroll Taxes - If you are unsure of this expense, a good amount to start with is 15% of the total salary and wages you estimated earlier.
Utilities - If you have no comparable data you might want to take the square footage of the business facility and compare it to your residential costs. For example, if the business facility is 1.5 times larger than your residence, start your estimate by multiplying 1.5 times your residential utility costs. It would probably be a good idea to add 20% to 25% more to this estimate for a business.
Municipal and other local utilities may be able to provide some useful guidelines for making a projection for this expense.
Other Expenses - Specific examples are not used for every possible expense category you may need to consider. Do not overlook these items; simply use a logical approach in developing estimates for each expense item you expect to have in your business.
Miscellaneous Expense - It is wise to budget some amount of money each month for the unexpected. This is usually shown in the projection as "miscellaneous expense." Depending on how confident you are of the other expense estimates you have made, the estimate for miscellaneous might range from $50 per month to $200 or more per month.
Final Suggestion
If you are still not comfortable with your projections, it is a good idea to estimate what will happen if your revenues/sales are not as great as you anticipated. Example - what will be the result if sales are no more than 75% of what you expect? or no more than half of what you expected?
With this guide we have tried to give you some ideas you may use in developing a projection for your proposed venture. The main idea is that you search out available information and then make logical assumptions based on that data.
If you are still unsure about how to project some of the items, do not despair!! Help is available. Some of the sources are listed below.
Other Entrepreneurs: Talk to owners of similar businesses. Choose some that operate outside of the geographic area in which you plan to operate so they know you will not be a competitor. They can be the best source for sales and expense estimates.
Local Libraries: Many of the state's local libraries are able to access census data that may be useful. They also may have resources that contain financial information about businesses in your industry. This data is very useful as you prepare your projection since it provides a benchmark for comparison of your estimates to typical industry financial performance. Look for such books as Risk Management Association Annual Statement Studies and Dun & Bradstreet's Industry Norms and Key Business Ratios. Both are published annually and list financial statement data on a wide variety of business categories. In addition, your local library may have several reference books on your industry.
Local Chambers of Commerce: Some local chambers of commerce may have their own business libraries, which may have helpful information.
Business Associations: Most businesses are in industries that have one or more associations whose purpose is to promote the welfare of the industry. Membership in an association of businesses in your industry may give you access to a great deal of information that will be helpful in completing your projections. The Small Business Sourcebook has a very good compilation of associations for all types of industries. Your library may have a copy of this book.
UALR Arkansas Small Business Development Centers: The regional offices will have the RMA statement studies book, the Small Business Sourcebook, and other types of information that may be of use to you. The lead center in Little Rock has an extensive library with industry-specific information for almost any industry.
