When it comes to business forecasting, many first-time entrepreneurs will make grossly exaggerated assumptions regarding the potential income and growth of their business. Here is the typical scenario:
We plan to sell cigarettes to the Chinese. There are one billion Chinese in China. If we could sell to just 1% of those Chinese, then our market would be 10 million. Multiply one pack a day at $5 each and our potential gross revenue would be $50 million per day times 365 days per year and our annual revenue is expected to be $18 billion, 250 million. Nice.
Obviously, this is not a realistic budgeting or forecasting model. But, you wouldn’t believe how many business planners actually express their numbers this way. No venture capitalist or investment banker would ever accept these assumptions.
Instead, you need to reverse your way of thinking. Instead of working from the outside in, you need to work from the inside out.
Our tobacco farm is five acres. This will result in enough tobacco to produce one million cigarettes. Likely, we will lose 10% of our crop to nicotine-addicted beetles. We will lose another 10% to the tobacco poachers. We will also give away 10% to the Chinese politicians and 10% to the Chinese sex symbols. That will leave us with 60% of a million cigarettes, or 600,000. We can sell each cigarette for 25 cents, regardless of whether it is in China, India, or Indiana. So, if we are blessed with good sun, rain, and fortune, we expect to generate $150,000 in the first year. In order to generate more revenue, we need to either increase our land or the efficiency in which we bring cigarettes to market.
An investment banker or venture capitalist would buy these set of assumptions more more easily than the first set of assumptions.
Editors Note: We apologize in advance if anybody was offended by our business scenario or choice of images. This is intended to be a ridiculous hypothetical scenario. We are, in no way, making any political or social statements. Tobacco kills millions of people every year. We do not endorse smoking nor do we endorse contributing to the deaths of any person on this earth regardless of race, color, sex, sexual preference, national origin, religious preference, or political affiliation.