August 12, 2022
Adam Hoeksema
I have been helping entrepreneurs create financial projections for over a decade at ProjectionHub, but it was just recently when I was preparing for a webinar to teach others how to create financial forecasts that I realized that I almost always take 1 of 2 approaches when creating a revenue model for startups.
In this post I am going to outline my two approaches to sales forecasting and then give you 10 examples of popular business models and show you how I would approach each one.
How to Create Sales Projections for a Startup
If you have a stable, existing business, then it is possible that the best approach to creating sales projections is simply to take last year’s numbers and apply a growth rate based on your expectations of growth.
My approach to revenue modeling takes more of a first principles approach. I am going to show you two examples of two different approaches that I often take. First a capacity approach and then a customer funnel approach.
Capacity Based Revenue Projections
These are companies that are pretty certain to have demand for their products or services, and your revenue is more of a function of your capacity. Examples of businesses that I would model sales based on capacity include Trucking, Daycare, Airbnb businesses, and Rental properties to name a few. The idea here is that these businesses operate in an industry with plenty of demand, and your sales projections will likely be determined by your pricing and your capacity. In other words, if you are willing to drop your price low enough, you will be able to reach capacity in these types of businesses.
These tend to be small businesses, not tech startups. Let me outline how I would approach a capacity based sales model for these businesses:
Trucking Sales Projections
For a trucking company I would determine by revenue capacity with the following assumptions:
# of trucks
# of days driven per week per truck
# of miles driven per day per truck
$ amount per mile driven
= Total revenue for a trucking company
Our financial projection spreadsheet for trucking companies is built to help you model this.
Daycare Sales Projections
For a childcare facility I would look to model the following assumptions:
# of classrooms in facility
# of children capacity in each classroom
% capacity filled
= # of children enrolled
# of hours of care per child
$ amount per hour paid for childcare
= Total sales for childcare facility
Our daycare financial model provides some helpful structure to create these projections.
Airbnb Sales Projections
For an Airbnb business I would pull together the following revenue assumptions:
# of properties listed on Airbnb
# of units available for rent per property
= total number of units available for rent
$ price per night per unit to rent on Airbnb
% capacity filled per month
= Total Airbnb revenue
Our Airbnb financial forecast template will make it easy to organize your assumptions:
Rental Property Sales Projections
A rental property business model is similar to an Airbnb model, but you will likely be looking at monthly rent vs. nightly rent, and your vacancy rate will likely be lower in a rental property business. Nevertheless you will need many of the same assumptions:
# of properties available to rent
# of units available for rent per property
= total number of units available for rent
$ price per month per unit
% capacity filled per month
= Total rental property revenue
Our template for rental property projections will make it easy to model your rental business.
Customer Funnel Based Revenue Projections
These are companies where your customer might not even know your product or service exists and might not know that they want it or need it, so you are going to have to really go out and market and sell. You will have leads that convert into customers over time. Your sales projections will be more of a function of acquiring leads, converting leads into customers and retaining customers. Most tech startups fall into this category.
B2B SaaS Revenue Projections
For a B2B SaaS company you will have a number of assumptions that need to be considered to build out your sales funnel. An example set of assumptions is as follows:
Monthly ad budget $
Cost per click to acquire a website visitor $
# of Organic website visitors
% conversion rate of website visitors to customers
# of sales people
# of leads per sales person per month
% conversion rate of leads to customers
Total # of new customers
% of customers who cancel each month (churn rate)
= Total number of active customers
Average monthly spend $ per active customer
= Total $ revenue
Our B2B Saas template will take these numbers and generate comprehensive financial projections.
Mobile App Sales Forecast
A mobile app sales model can be even more complex than a typical B2B SaaS model because there are more potential revenue streams than simply SaaS revenue. Assumptions could include:
Monthly ad budget $
Cost per click to acquire a website visitor $
# of Organic website visitors
% conversion rate of website visitors to active users
Total # of new active users
% of active users who leave each month (churn rate)
= Total number of active users
Average monthly spend $ per active user on subscriptions
Average monthly spend $ per active user on in-app purchases
Average monthly ad revenue $ per active user
= Total $ revenue
This Mobile app excel template will help you use these assumptions to make reliable projections automatically
Ecommerce Revenue Forecast
An ecommerce customer funnel follows a similar pattern. The assumptions that you might need include:
Monthly ad budget $
Cost per click to acquire a website visitor $
# of Organic website visitors
% conversion rate of website visitors to customers
Total # of new customers
% of new customers that become repeat customers
Average # of orders per month per active customer
Average order value $
= Total $ revenue
Easily create a financial forecast for a new ecommerce business using this ecommerce forecast template
Customer Funnel + Capacity Based Sales Forecasting
Then there are some businesses that have an element of both approaches. Restaurants and dental offices are good examples of financial models that have components of both approaches. For example, a coffee shop projection might be driven by regular customers that come to get their daily coffee and you need to advertise to acquire those regular customers and you need to retain them like the customer funnel approach. But at the same time your coffee shop has capacity constraints, so even if you could acquire 10,000 regular customers, you simply don’t have the capacity to meet that demand. So your sales projections will hit a wall, your capacity. Some examples below:
Restaurant Sales Projections
In order to create sales projections for a restaurant I would look at the following assumptions:
# of seats in the restaurant
# of hours open per day
# of days open per week
Average # of minutes spent at restaurant per customer
= Total number of potential customers you can serve
% capacity filled (in order to estimate your capacity filled you might want to use a customer funnel approach as well to estimate how much ad spend you will have to do in order to drive customers to the restaurant)
= # of actual customers
Average customer order value $
= Total revenue
Restaurant assumptions can very greatly so using this restaurant financial projection template will help make sure your projections are reliable and profitable.
Dental Office Revenue Forecast
For a dental office I often mix both customer acquisition through advertising and a capacity based approach based on the number of dentists in the practice. Assumptions can include:
Monthly ad spend $
Cost to acquire 1 new patient $
= New patients from ads
# of new patients per month from word of mouth
= Total # of new patients
% of current patients that leave the practice each month
= Total active patients
We would also model the capacity of the practice for active patients based on # of dentists or # of rooms available etc. You might model something like this:
# of visits per year per active patient
# of active patients
= Total number of patient visits
# of dentists
# of patient visits per dentist per month
= Total capacity for patient visits
Then you need to make sure that your projections for patient visits don’t outnumber your dentist capacity.
Once you have these numbers, you can have financial pro formas ready in no time once you plug them into this dentist office projection template.
Are my Sales Projections Realistic?
Once you have created your sales projections you need to take a step back and try to determine whether your revenue projections are reasonable. I have a couple of tips for you in this regard:
Realistic sales projections for small businesses
For most small businesses like restaurants, medical offices, child care facilities, trucking companies, salons and other popular small businesses the easiest thing to do is simply Google how much does the typical business XYZ generate in revenue? This will almost certainly provide you with some good intel. See the example below:
Now if your salon sales projections are 4x the average you might need to revisit your projections or you will need to have a good justification for why you are going to generate so much more revenue than the average business in your industry.
Use our free salon sales calculator to predict your salon revenue.
Realistic sales projections for tech startups
It is much more difficult to know what is “realistic” for a tech startup. Most tech startups will fail, so that alone makes it a difficult question. We teamed up with StarterStory to study 234 tech startups and we were able to pull together some really useful revenue data to try to answer the question - how much revenue does a tech startup generate. In the graph below you can see actual revenue data for 4 different types of tech startups in different stages of their business. You can use this as a guideline.
Again, if you are multiples above or below what other similar businesses have generated, then you might need to revisit your projections.
My hope is that this article has provided you with the framework and tools you will need in order to create a set of realistic sales projections. If you have any questions, contact us today!
