Archives for August 2012

Startups and early stage businesses are notorious for coming up with outlandish sales projections that they simply can’t execute.  Typically the problem revolves around building top down projections rather than bottom up projections.  What’s the difference?

Top Down Financial Projections

Top down projections take big numbers like industry sales figures, city populations, comparable business sales figures and simply guess that they can capture 1% of the market. There is no plan or data to backup the claim. The business owner simply thinks 1% of the market sounds easy enough, and uses the number as their sales projection. This is a great way to scare away every potential investor or lender.

Bottom Up Financial Projections

Bottom up projections are built around things like:

• Website Traffic
• Event Attendees
• Street Traffic
• Inbound Leads

Bottom up projections take real data from your specific situation as the base, and build upon that base.

Let’s take a coffee shop as an example. A top down sales financial projection of a coffee shop would look like this:

• There are 100,000 people in our city
• 15% drink coffee every day
• The average sales amount per visit is $3
• That means our annual market for coffee is 100,000 x 15% x $3 x 365 days = $16,425,000.
• If we can just capture 5% of that market we will have $821,000+ in annual sales!

This is great, but it doesn’t help you understand how you will capture your first customer, let alone, your 100th customer.

A bottom up approach for a coffee shop might look like this:

• Our coffee shop is at the intersection of the 2 busiest streets in town with daily traffic of approximately 15,000 vehicles.
• We know that only 15% of people purchase coffee at coffee shops
• All of them already purchase from a different coffee shop, so we will have to convert them as customers
• Because most customers are loyal to their coffee shop we estimate we might be able to convert 10% of the total number of coffee drinkers
• We will start by running local tv and radio commercials as well as placing c0upons in the local newspaper.
• We think these advertising efforts will convince (15,000 vehicles x 15% coffee drinkers x 10% potential customers) 225 customers to try our coffee during the first week.
• Because we are a local store with high quality coffee at a convenient location we believe we can convert 50% of those customers into returning customers.
• So our first month sales we estimate at (225 customers x 50% x $3 x 30 days) = $10,000 in sales month 1.

Notice the different methods and how the second method is more realistic.  Good luck!

As the Client Services Manager at a technology based business incubator I have the opportunity to watch trends in the startup world first hand.  One trend that has been very interesting over the past 6 months is that traditional bricks and mortar businesses are going mobile.  When I say, “going mobile” I am not talking about building mobile apps, instead; they are abandoning the traditional bricks and mortar building for a mobile office, store front, or restaurant.  Here are 3 examples:

1. Mobile IT Company – This company provides IT services but rather than renting an office they purchased an RV and put that office rent toward a loan to buy an RV.  The RV acts as an office with all the tools and equipment needed to fix anything.  This reduces risk because he can find customers anywhere.  If he starts the business in Chicago and it doesn’t work out he can simply move to another city where there is less competition.
2. Mobile Boutique – This is a very interesting company that purchased an old FedEx truck, painted it and turned it into a mobile boutique.  The business model is similar to companies like Mary Kay, where she actually drives her mobile boutique with all the latest in fashion to host homes.  Other women will host and promote the party in exchange for store credit that they can use to purchase a new item.  The business model reduces risk because the business doesn’t require nearly as much overhead costs as a traditional bricks and mortar store.
3. Mobile Food – There are a large number of food trucks in major cities around the world, and they are starting to come to smaller cities as well. The advantages are simple, you can drive where customers are, you don’t have to pay higher rent prices for the most trafficked areas, and overhead costs are much lower for a truck than a full blown restaurant. View our food truck start up financial plan template.

All three businesses are taking advantage of mobile to transform an old model of doing business, into a lean, highly profitable business.  How can you take advantage of mobile to transform your business model?