Part 3: Projections and Forecasting

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For any financial projections or forecasts, there are 3 variables at play

  1. Revenue
  2. Expenses
  3. Anticipated growth percentage


  1. Revenue

Revenue is price multiplied by estimated demand.

  1. Estimated demand:

Demand can be estimated as a percentage of the target market. It is a best practice to consider numerous estimates to generate multiple demand scenarios .

Example:

It is estimated that the platform will convert at least 2% users in the first year (ie 300k users), 3% in the second year (ie 750k users) and grow at 5% on a year on year basis for another 3 years, with a loss of 25% of customers on a yearly basis. (Calculation for this can be found in Table 1)

  Table 1

Particulars Year 1Year 2Year 3Year 4Year 5
User Calculation
Estimated growth % of total pets 0%5%5%5%5%
Possible usersA1,50,00,0001,57,50,0001,65,37,5001,73,64,3751,82,32,594
Assumed % of Registered UsersB2%3%5%5%5%
Assumed Registered Users [A * B]C3,00,0004,72,5008,26,8758,68,2199,11,630
Assumed loss of users 25% [C * 25%]D075,0001,18,1252,06,7192,17,055
New users added every yearE3,00,0002,47,5004,72,5002,48,0632,60,466
[C yr2 – C yr1 + D yr 2]      
  • Pricing:

Pricing the product or services is one of the most difficult tasks. There has to be a magical number which is feasible enough for the consumer and yields maximum profit at the highest demand. Three variables all going in opposite directions.

Example:

As per our estimate the platform can generate 10% of the anticipated $20 per user ie $2 per customer per year and grow by 50 cents every two years. This is a highly conservative assumption. (Calculation for this can be found in Table 2)

  1. Expenses
  1. Cost of goods sold (COGS)

COGS is the  major chunk of cost, which is dependent on the sales. For a product, it may be the cost of manufacturing and shipping the goods to a site for selling purposes. For services, the cost per hour of the person offering her/ his services is a part of COGS.  The COGS is generally known while making any estimates.

Example:

There is no cost associated with every advertisement premium received, hence COGS in case of The PETBOOK is zero.

  • Administrative expenses

Administrative expenses include salaries of senior executives and costs associated with general services, for example, accounting and information technology.

Example:

The PETBOOK’s administrative expenses would be server cost and maintenance, rent for office space, accounting and bookkeeping etc. Check the computation sheet found in Table 2.

  • Marketing and selling expenses

Any expenditure incurred to make a sale or spread awareness for the products or services offered is called marketing and selling expenses. The cost of customer acquisition is also included in this.

Example:

The social media platform is unlike the goods or services. There is a customer acquisition cost, to attract and drive traffic to the platform till the time the platform becomes famous enough to get customers on its own or through referrals. The estimated customer acquisition cost of the social media platform is $3 per enrolled user growing with an inflation of 2.5% every year. 

Kindly note this is a one time cost, and not incurred on a year on year basis. (Calculation for this can be found in Table 2)

  • Interest expenditure

Interest on loans availed for short term and long term is computed. If your expansion project or startup is from your own savings or funded by equity investors, then the interest cost will be zero.

Example:

The PETBOOK’s founders will likely go for venture capitalist funding for exponential expansion and hence the interest cost for long term capital is zero. However, they are likely to avail a line of credit, which is likely to cost them 8% p.a. (Calculation for this can be found in Table 2)

  • Other expenses

Expenses which are petty or cannot be foreseen while making plans are considered in other expenses. Generally, these other expenses are taken either as a percentage of sales of cost.

Example:

The PETBOOK is considering 5% of the total expenditure incurred as other expenses. (Calculation for this can be found in Table 2)

Below is the summary of a sample financial projection of The PETBOOK for 5 years

  Table 2

Forecast
Revenue      
Approximate revenueF$ 2.00$ 2.50$ 2.50$ 3.00$ 3.00
Total estimated revenue [C * F]G$ 6,00,000$ 11,81,250$ 20,67,188$ 26,04,656$ 27,34,889
       
Expenses      
Cost of goods sold (COGS)H$ –$ –$ –$ –$ –
Administrative expenses      
Server costI$ 18,000$ 24,000$ 36,000$ 45,000$ 54,000
Rent for office spaceJ$ 18,000$ 24,000$ 36,000$ 45,000$ 54,000
Accounting, compliances and other administrative expensesK$ 7,500$ 7,688$ 7,880$ 8,077$ 8,279
Employee costL$ –$ 2,50,000$ 3,50,000$ 5,00,000$ 5,00,000
Marketing and selling expenses      
Customer acquisition cost per new userM$ 3.00$ 3.08$ 3.15$ 3.23$ 3.31
Customer acquisition cost [E * M]N$ 9,00,000$ 7,61,063$ 14,89,261$ 8,01,409$ 8,62,516
Interest expenses      
Line of credit availedO$ 1,00,000$ 1,00,000$ 1,50,000$ 1,50,000$ 2,00,000
8% interest p.a. [O * 8%]P$ 8,000$ 8,000$ 12,000$ 12,000$ 16,000
Other expenses      
Assumed at 5% of total expense [(H+I+J+K+L+N+O+P)*5%]Q$ 47,575$ 53,738$ 96,557$ 70,574$ 74,740
       
Total estimated expenses [H+I+J+K+L+N+O+P+Q]R$ 9,99,075$ 11,28,488$ 20,27,698$ 14,82,059$ 15,69,534
       
Total estimated Profits/ (Losses) [G – R] $ -3,99,075$ 52,763$ 39,490$ 11,22,597$ 11,65,355

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