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How to Start a Successful Food Startup – From Farmer’s Market to Food Empire

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Food StartupFood startups are booming.

According to a TechCrunch article from mid 2014, VC’s were investing in food related startups at a record pace in the last 12 months.  Food is an interesting market simply by its massive size.  Food is one of the 3 basic needs (food, shelter, clothing) so it is no surprise that entrepreneurs are jumping into the food industry to revolutionize and improve our current food system.

There are many food related businesses that are really software companies, or distribution companies, or some other variation of a startup.  For those companies I would suggest the “How to Start a Startup” Lecture Series at Stanford which is available for free online.

In this blog post I want to help the entrepreneur who is selling a food product at a Farmer’s Market learn how to grow from a Farmer’s Market to a Food Empire. 

A Farmer’s Market Food Startup

If you are currently selling a food product at farmer’s markets but you want to grow, I think you should be focused on 3 things while selling at the farmer’s market:

  1. Perfecting your product – when you are selling at the farmer’s market you want to perfect the recipe of the product.  Before you spend significant dollars to try to mass produce the product, you want to make sure that you have the product perfected.
  2. Building a following – You should start right away to build a following of social media fans and brand advocates.  The best way to grow is to have your current customers share how much they love your product with their network.  Focus on delighting your customers and then giving them easy ways to share your product.
  3. Securing repeat customers – Finally, you should be keeping track of your repeat customers.  That is what makes food an appealing market for entrepreneurs.  Humans eat 3 times a day or more so there is a lot of opportunity for repeat buyers.  The lifetime value of one loyal customer can be thousands upon thousands of dollars.  So focus on getting customers to come back and increase the number of times per week/month that they consume your product.  This customer data will be helpful when you are trying to get your product into retail stores.

Selling Food Products Online

Once you perfect your product, build a following, and have some repeat customers, you should start to offer the ability to order online.  This greatly expands your market potential.  Now those loyal customers don’t have to come to the farmer’s market every week to be able to enjoy your product.  This also allows you to start selling in a larger geographic region.  Now you will have some potential challenges to face with selling food online.

  1. How will you package the food?
  2. How long will the food last?
  3. How much will shipping cost?  You can get an estimate on shipping costs using this tool from UPS.

It may not always be feasible to sell your food product online depending on the answers to these 3 questions.  But if at all possible, even if it is more expensive for the customer I would encourage you to sell online.

Getting into Retail

  1. Customer Demand – One of the primary reasons that you should attempt to sell both online and in farmer’s markets is because it allows you to build up a customer base that will prove to retailers that they should take a risk and carry your product.  If no one is already a customer or fan of your product in the retailer’s location, then it is going to be a hard sell to get your product in the door.  Another reason it is important to build a following for your product early on is because having customers ask their retailers to carry your product is a great way to help your cause when you are trying to secure shelf space.  You may be surprised, but this actually works.  When customers or fans call, email, and ask store employees if they carry your product, retailers will start to take notice.
  2. Packaging – In order to get into retail stores and succeed in retail stores you must have good packaging.  The big food companies don’t have to worry quite as much about packaging because they have already built the retail relationships and have brand recognition, but when you are introducing a new product into a competitive market like food, you must have great packaging.  Miller Branding Agency is an expert in food packaging design.  Of course there are 100’s of designers with expertise in food packaging, but if you are serious about building a food empire, you will need to be serious about your brand/design/packaging.
  3. Pricing –  You need to understand the economics of selling through retail stores.  If you were selling your product for $2 per unit at the farmer’s market, and it cost you $1 to make it, you might be thinking that you are doing great because your margins are 100%.  Here is the problem though, you are selling direct to consumer.  When you introduce more middle men into the sales process something will have to change.  You should expect to sell your product for no more than half the retail price to the retailer.  Retailers are going to want to charge 100% more than what they are paying for the product.  So if the retailer wants to keep the price at $2 per unit like you were selling at the farmer’s market, then you should expect to sell to the retailer for $1.  That is a problem though right?  It costs you $1 to make.  So you will either have to drive down costs to produce, or increase your retail price which may not be possible.

So the hint for those of you selling at farmer’s markets – don’t settle for 100% margins, when you are selling direct to consumer you should probably have 300% margins or more so that you set your pricing right for adding new middlemen to the process and still be able to retain margin for yourself.

Of course this is not the only path to building a food empire, but the hope is that this is a good outline to help food entrepreneurs understand the realities, pitfalls, and strategy for building their food startup into a large, profitable business. Interested in other food startup templates? View our food truck template, brewery sales forecast template and other restaurant templates with ProjectionHub.

Crowdfunding Success Requires a Basic Financial Model in Order to Set Goals

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Crowdfunding CrowdAccording to CNN, at one point 84% of Kickstarter projects shipped later than projected.  Some high profile projects even raise hundreds of thousands of dollars on Kickstarter and raise additional investment capital elsewhere and never complete the project at all, like myIDkey.  So what is the trick to raising money through crowdfunding and successfully delivering as promised?

I believe that success relies primarily on setting the right minimum AND maximum campaign goal.  

Setting the Right Minimum Crowdfunding Goal

It is well documented that setting a minimum goal that allows you to fulfill your commitment is an important step in the crowdfunding process.  Some projects have a much more complex financial model than others.  For example, it is much more complex to project the costs related to manufacturing a product than it is to project the costs of shooting a documentary.  Manufacturing costs tend to have a stair step financial model where you might need a certain piece of equipment to manufacture 1,000 units within your timeline for delivery.  Let’s say that equipment costs $50,000.  Whether you sell 1 unit or 1,000 units the equipment fixed costs will be $50,000.

You need to then price your product at a level people are willing to pay, but then also raise enough money to cover the fixed costs of the $50,000 equipment.  When setting a minimum campaign goal I would go through the following exercise:

  • How much are customers willing to pay for your product?
  • What are the fixed costs to produce even 1 unit?
  • What are the variable costs to produce each additional unit?  (make sure to include the variable cost fee that the crowdfunding platform will likely take from each dollar that you raise)

Now your breakeven calculation should be:

(Fixed Costs + (Variable Costs x # of Units Sold)) – Price per unit x # of Units Sold = 0

This process and equation should help you determine your minimum campaign goal.  If you accept any less, then you need to know that you are setting yourself up to lose money.  Also, remember that you should always build in a contingency  on any project because there is one thing you can be certain about with financial projections.  They are wrong.

Setting the Right Maximum Crowdfunding Goal

Setting the minimum goal is important, and most people get this right, but I actually believe another risk that isn’t talked about is setting a maximum goal.  If you are developing software, a movie, music, or a video game, it probably doesn’t drastically impact your fixed costs whether you sell 100 or 100 million copies.

But when you are selling a product your fixed costs change drastically based on the volume of product you need to sell.  The equipment, warehousing, systems etc that you will need to manufacture 1,000 units versus 50,000 units will vary drastically in many cases.  For example, let’s say you are going to sell Organic Beef Jerky, and maybe there are 3 levels of equipment that you could buy:

  1. Starter – $10,000 cost – Can produce 5,000 units per month
  2. Intermediate – $250,000 cost – Can produce 100,000 units per month
  3. Ultimate – $1,000,000 cost – Can produce 1,000,000 units per month

So in this example, your worst nightmare might be to sell 600,000 units.  It would take you 6 months just to produce the product with the Intermediate equipment, but it is unlikely that you would be able to afford the $1,000,000 equipment.  You are stuck in no man’s land.  You probably would have been better off to close the campaign at 300,000 units sold so that you could produce within 3 months.

The problem is that with Kickstarter it doesn’t look like you can set a maximum goal, so when your campaign starts going viral there is nothing you can do to stop it and risk selling an amount that just doesn’t work with your financial model.  You may want to look for crowdfunding platforms that allow  you to set a maximum raise if your financial model is similar to this.

If you set your minimum and maximum goal correctly, you are well on your way to protecting your company during a crowdfunding campaign.

About the Author:  Adam Hoeksema is the Co-Founder of ProjectionHub which is a web application that helps entrepreneurs create realistic financial projections for potential lenders and investors

Auto Repair Shop Projected Financials for First 3 Years

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Auto Repair Shop ProjectionsAccording to a report by the Georgia Small Business Development Center, there are nearly 175,000 businesses in the US that are classified as Mechanical Automotive Repair Shops.  There are thousands of new auto repair shops that start each year.  The challenge is that many new owners are great mechanics, good with cars, and assume they can run a successful business.  Just like a good cook is not always a good restaurant owner, a good mechanic is not always a good auto repair shop owner.

In this article, I am going to walk you through the process of creating financial projections for the first 3 years of business as an Auto Repair Shop.  To open your shop you are probably going to need to get a loan or investment to get started.  The purpose of this article is to help you create a set of financial projections that will help you secure a loan or investment to start your shop.

The hardest part of creating financial projections for an auto shop is creating a sales projection model. So I am going to create an auto repair shop financial template that you can download.  Just look for the Auto Repair Shop revenue projection template.

Lets get started.

Sales Projections for New Auto Repair Shop

In my opinion, sales for an auto repair shop rely on your number of repeat/loyal customers.  According to the Georgia SBDC report, there are 10 general services that the average auto shop will provide.  The following table shows the 10 services, the average number of jobs per week of that service, and the average price for that service.

Auto Repair Shop Revenue Projections

So in order to create realistic projections for your startup, you can’t just assume that you are going to start out from day 1 doing the average.  You are going to have to win those customers, and then find ways to get them to come to you for all of their auto service needs.  So I am going to go through the process that I would go through if I were starting an auto repair shop in a community.

Step 1 – Potential Market

So first I would start with determining your market potential in terms of customers.  Actually, you might look at each customer as a vehicle.  So how many vehicles are there within the geographic area that you can serve?  Maybe customers would potentially come 20 miles to your shop, so your potential market is the number of vehicles within a 20 mile radius of your shop.

Step 2 – Initial Marketing Budget

Once you get an initial base of customers you might be able to grow and sustain the business based on word of mouth and referrals, but initially you are going to have to do some marketing and advertising to get a base of customers who can then hopefully help spread the word.  You will probably have to run some cheap deals to get customers to try your shop, they won’t likely switch for nothing.

Step 3 – Cost to Acquire 1 New Customer

Initially you need to know the cost to acquire 1 new customer so that you can set an adequate startup marketing budget.  You need to have enough money set aside for initial marketing to be able to secure a core of repeat customers.  So maybe you send out mailers with coupons for a $10 oil change.  You will need to estimate how much it will cost to send out each mailer and what percentage of people who get the mailer will actually come in.  That represents your cost to acquire a new customer.

Step 4 – % of New Customers that Turn Into Repeat Customers

Now out of these new customers what percentage will turn into repeat customers?  Maybe 25%?  You will have to make an educated guess here.  You can be sure that every new customer will not turn into a repeat customer, the question is what is that percentage.

Step 5 – % of Customers that Recommend your Service

Once you build that initial base of repeat customers, some percentage of them will share about your shop.  It is very common for people to ask each other where they take their car when it has a problem.  Not everyone is going to share, maybe it is just 5%, but those 5% can be very powerful.

Step 6 – Average Number of People your Customers Share your Service with Each Month

Now that you assume 5% will share with other people, you have to estimate how many people they will share with each month.  Maybe they only share once every 4 months, so you would estimate that they share with .25 people each month.

Step 7 – What % of those Shared With Actually Become Customers

Next you need to determine what percentage of those people that they shared with will actually come to the shop as a customer.  Then again you are back to the same question, what percentage of those new customers will become repeat customers.

Step 8 – Total Customers per Month

Finally, you will get to your total customers per month.  So in this model that I am building, this number represents your repeat customers.  This is not asking how many actually come to the shop each month, just how many people would you consider to be on your repeat customer list. Maybe it is 2,000 vehicles.  Of course not every customer comes in every month, but we will address that with the next step.

Step 9 – Average Revenue Per Customer Per Month

So rather than try to estimate what percentage of your customers will come in each month, it might be easiest to just estimate an annual dollar amount that the average vehicle will cost an owner each year in repairs and maintenance.  Maybe that number is $1,000 per year for the average car.  So then all you have to do is divide $1,000 by 12 months and you end up with your average revenue per customer per month.

Step 10 – Total Revenue

Finally, you will take your average revenue per customer per month and multiply by your number of active repeat customers.  Those 1 time customers will also help you generate revenue, but it might be likely that you are offering such steep discounts to get them in the door, that you don’t make any profit on those jobs.  You should still show the revenue for 1 time customers, but your focus should be completely on those repeat, loyal customers.

Cost of Goods Sold for an Auto Repair Shop

First, let me define Cost of Goods Sold for you.  Your cost of goods sold is any expense that you incur when your provide a service.  Essentially you have 2 primary cost of goods sold categories.

  1. Material Cost – These are the costs for purchasing parts or materials for a customer’s vehicle.  So if you buy parts for a customer’s vehicle and then add 30% to the cost of the part to charge to the customer, then your cost of goods sold would essentially be 70% of your parts and materials sales.  This is not quite accurate, but probably close enough for your projections.
  2. Labor Cost – This is actually a tough question.  First, do you pay your staff the same amount whether there is a full day of work or not?  Or do you pay them directly based on the specific jobs that they completed that day?  If you pay based on the jobs completed, then you have labor costs.  Let’s say you charge $100 per hour to the customer for labor, and you pay your mechanics $15 per hour, then your labor cost should be between 15 and 25% probably.  Why wouldn’t it be 15% flat?  Because you should consider taxes and benefits that you pay to mechanics as well.  If you just pay by the hour, then it might not make sense to enter in any labor costs in your Cost of Goods Sold section and just enter in Salaries/Wages in your Operating Expenses section.

According to BizStats, the average Cost of Goods Sold for an Auto Repair Shop is 46.72% of your total sales.

Operating Expenses for Auto Repair Shop

The easiest way to estimate your operating expenses for your auto shop is based on industry data provided by sources like BizStats.  The following categories and expense percentages are taken directly from BizStats:

Officers Comp. 7.40%
Salary-Wages 12.86%
Rent 6.64%
Taxes 3.21%
Advertising 1.18%
Benefits-Pension 1.28%
Repairs 0.94%
Bad debts 0.11%
Other SG&A Exp. 11.55%
Amort. & Dep. 0.00%
Interest Earned 0.01%
Interest Expense 0.59%
Other Income 0.52%
Net Profit 6.58%

All of these operating expenses are expressed as a percentage of sales.  So first you will need to create your sales projections and then you should be able to apply these percentages to your sales.

Startup Expenses for an Auto Repair Shop

According to an article by AppointmentPlus, the average startup costs are as follows:

  • Lift with Installation – $4,000
  • Insurance Cost per Year – $4,000
  • Tools – $15,000
  • Diagnostic Machine – $5,000 to $10,000
  • Rent – $1,500 to $15,000 per month

Your startup costs could range between $25,000 and $75,000 especially if you are planning on keeping some reserve funding to pay rent and other operating expenses during the first several months before you are at a breakeven point.

If you work through this process and present your plan to a potential lender or investor, you will be more sophisticated than many auto repair shops right off the bat.  If you need any help as you are creating your financial projections, feel free to reach out to me at adam@projectionhub.com

Creating a Startup Budget for a New Church Plant

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Church Startup BudgetAccording to the Christian Post, approximately 4,000 churches are planted in the US each year.  Surprisingly churches have a much higher survival rate than the average startup business.  The article estimates that by year 5, 70% of new churches achieve self sufficiency.

So if you want to set up your new church for success, you should spend some time creating a startup budget and a financial model that you can use to plan for the first few critical years of the church plant.

In this article I am going to walk you through the steps of creating a set of financial projections for your church using our web app – ProjectionHub.

You can either use our app to create your own set of projections, of use the Excel template that I am creating through this process by downloading our Startup Church Financial Projection Template.

New Church Income

When starting a new church you have a few different possible sources of income, and depending on your model of church plant, whether you have a sponsoring church or denomination, or if you are simply a group of people getting together in a home, your sources and amount of income could vary dramatically.  There are 3 primary sources of income for a new church:

  • Tithes and Offerings
  • “Mother” Church Support
  • Denominational Support

So the first step in creating a financial model is to estimate income for each month.  You will need to make a number of assumptions, so I will walk you through those now.

Key Income Assumptions

Tithes and Offerings

1.  # of Giving Units – First you need to know how many “giving units” your church will start with.  A giving unit can be defined as a person or family that gives to the church.  This is more accurate than estimating giving per person.  For example, a large family may have 8 church members, but only be 1 giving unit.  So if you are spinning off a new church from an existing church you might have the luxury of bringing some core members with you.

2.  Average Income per Giving Unit – This is going to be based primarily on the demographics of the county or city that your church is located in.  You can find the average household income for a family in your community from Census.gov.

3.  Average Tithe % – Unless you have a very generous congregation, you should probably stick with the national average tithe of about 2.5% of income.

4.  One Time Gifts/Year End Gifts – Also remember from a cash flow perspective that your income may not come in evenly throughout the year.  Many people will make one time year end gifts as part of tax planning.  So maybe the safest thing to do is estimate a 2% tithe throughout the year and then a larger tithe at the end of the year.

Mother Church Support

If you are a daughter church, you can probably expect some financial support from the mother church. For example, a church in Orlando, Florida that has planted several churches and will commit to providing $25,000 per year for 3 years.  Typically, you should plan on trying to reach self sufficiency within 3 years.  Within 5 years 70% of new churches successfully reach self sufficiency.

Denominational Support

It is also possible to get national support from your denomination.  It is hard to estimate what to expect here, this is completely dependent on your denomination, so you will just need to do some research.

Income Projections

Once you have all of your assumptions and data put together it is time to enter your income projections into ProjectionHub.  Here is a screenshot below. You will notice that I applied a growth rate to the Tithes and Offerings category because hopefully  you are adding new people to your congregation.  The growth rate depends on a variety of factors, so I am just going to assume a 4% monthly growth rate for the first year and then going down to 2% and 1% monthly for years 2 and 3.

Church Income Projections

Also, in this particular template that I am creating, I am assuming 25,000 per year from the mother church spread out over 12 months, and a $500 a month stipend from the national denomination.

Church Operating Expenses

Next you will need to estimate your general operating expenses which vary dramatically depending on the specific details of your church plant.  So rather than try to give you estimates for each category, I am simply going to list categories of expenses that you might have, and let you make these estimates based on things like cost of living in your location, whether the pastor is full time or part time, whether you meet in a home or rent a facility, etc.

I am going to throw in some estimated expenses into the template for a church plant in the mid west United States.

Example Church Expenses

Pastoral Expenses

  • Salary
  • Benefits
  • Housing

Office Expenses

  • Accounting
  • Staff Salaries
  • Legal
  • Insurance
  • Print materials
  • Maintenance
  • Telephone
  • Travel
  • Internet
  • Utilities

Program Expenses

  • Youth Group
  • Nursery
  • Worship/Music
  • Sunday School

Giving

  • Missionary Support
  • Congregation Support
  • Denomination Fees

Other

  • Building Fund
  • Contingency Fund

Church Plant Startup Costs

Starting a church can range from a thousand bucks in startup costs to tens of thousands of dollars in startup costs.  Again this all depends on your model of church plant.  I am simply going to list some of the startup costs that you may need to consider depending on your model.

Required Startup Costs

There really aren’t many required startup costs.  All you really “need” to do is incorporate in your state, and then secure non profit status.

  • 501c3 Filing – In order to accept tax deductible donations from the congregation you need to have 501c3 status.  If you have an attorney in your congregation, great!  Otherwise you might want to check out a service like StartChurch who can handle this process for you.
    • Cost Estimate $1,800

Optional Startup Costs

Although there aren’t many required costs, there are a lot of optional expenses that you may need to consider depending on your church plant model.

  • Facility – This is only a startup cost if you purchase a facility.  If you are renting, then rent will be part of your monthly operating expenses.
  • Computer – The pastor will likely need a computer to research and develop sermons.
  • Projector and Screen – Do  you plan to project music or sermon slides on a screen?
  • Bibles – Many churches have Bibles available for visitors
  • Chairs  – The congregation will want to be able to sit
  • Sound Equipment – In a small church and small facility, you may not need microphones and speakers right away
  • Instruments – Will the church own the instruments, or the musicians?
  • Coffee Maker – Coffee often helps create an inviting atmosphere
  • Printer – Will you print Bulletins or Newsletters
  • Initial Supplies – You will probably want some initial office supplies
  • Business Cards – The pastor and even congregation may want to pass out cards to invite people to church
  • Telephone – The pastor may need a cell phone
  • Website – It might be a good idea to set up a very basic website with contact info, service times, what the church believes, etc
  • Operating Capital Fund – Depending on how you want to create your model, it might make sense to have an operating capital fund as part of your startup costs.  This fund could cover the first 6 to 12 months of rent and pastor salary.  It seems wise to have some operating fund set aside to make sure that you don’t rely on a certain level of tithes and growth right off the bat.

So once you add up all of your startup costs for your particular model, you will need to enter those on the Startup Costs page in ProjectionHub as a Use of Funds.  You will also need to enter an equal amount for Sources of Funds.  So will your Mother Church make an initial cash investment to cover these startup costs?  Or will you raise funds from individual members?

Reaching Self Sufficiency

Once you complete the Excel template or work through the ProjectionHub app you will be able to see a monthly breakdown of your income statement, cash flow projection and balance sheet for the first 3 years of operation.  You should be looking for the month on your cash flow projection where you start to regularly bring in more cash than goes out.  You should at least try to plan to reach this point by the end of year 3, or have a clear plan to reach self sufficiency shortly thereafter.

Hopefully this article was helpful in walking you through the thought process you should go through when creating a financial model and budget for a new church.  If you have any questions, or would like me to review your projections, don’t hesitate to reach out to adam@projectionhub.com

3 Financial Projection Scenarios Every Startup Should Run for 2015

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Most startups and small businesses don’t bother creating a budget, or forecasting their financial results for the upcoming year, but I think there are a number of reasons why you should spend some time at the beginning of the year and create some forecasts for the year ahead.

Here are just a few ways that financial projections could be helpful for your business in 2015:

  1. Allow you to estimate when you will need additional funding from a lender or investor
  2. Help you know when you will need to hire that extra staff member
  3. Determine at what volume of sales will you need to move to a larger facility
  4. When will you be able to leave your day job and work on your startup full time
  5. What would happen if you lost your largest customer
  6. What would happen if you signed on that new customer
  7. When will you breakeven for the year

These are all questions that you as an entrepreneur should be able to answer (if they apply to your situation).  If you can’t answer these questions, then it is time to spend some time using ProjectionHub or another budgeting tool to create at least 3 financial projection scenarios for the 12 months ahead.

1.  Most Likely Case

The easiest thing to do is to start with what you did last year.  Last year is probably the best predictor of the next 12 months.  Or if you grew 5% per month last year, you may just assume that same growth rate continues for the next 12 months.  Another great way to project the future is signed contracts for the upcoming year.  If you already have contracts signed with customers for the next 12 months, use that as your most likely scenario.

If you are brand new startup, then you are simply going to have to make a bunch of assumptions about your sales and expenses.  Do your best to use industry data from a source like BizStats to get an idea of what others in your industry are doing.

2.  Best Case

Next, you should dream big and come up with a best case scenario.  This should show you your sales projections if everything goes your way over the next 12 months.  If you are able to retain current clients, and you are able to secure that new large client, or strike that business development deal.  This scenario should still be based on data, and should still be realistic.  A good example is if you are a SaaS company and you are currently experiencing a 90% retention rate each month, the best case scenario could assume that you bump that up to 95%.

Another example could be, your website currently converts 25% of visitors to sign up for an account, but you are planning on making some changes to the landing page which you hope will improve that conversion rate to 35%.

3.  Worst Case

Finally, it is important to plan for the worst case scenario.  This is similar to stress testing at banks.  Banks conduct stress tests to determine what would happen if a certain % of their portfolio defaulted.  Could they still survive if 10% of loans went bad?  20%?  30%?

Likewise, you should stress test your business so that you know what would happen if:

  • You lost your largest client
  • Fuel prices doubled
  • You lose an important employee
  • You Google rankings decrease dramatically

By conducting these tests you will be able to better mitigate these risks and avoid the worst case scenario.

So if you haven’t completed financial projections for 2015 yet, spend some time with ProjectionHub now and get this important planning process off your list in the new year.

Financial Projections Prove Self Storage is a Great Business – If Managed Well

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Storage UnitsThe self storage business can be a relatively simple and lucrative business.  The business lends itself to business owners who want to operate a passive business, which means they don’t need to be active in the business on a day to day basis.  You may be able to hire a facility manager and spend your time elsewhere.

Successful self storage businesses can earn a hefty return. The average Return on Investment for a successful facility is around 30% annually.  This is an incredible return, but make no mistake, this level or return won’t come without hard work.

In this article I want to walk you through the process of creating financial projections for a startup self storage facility.  There is an Excel template that I have created, and will be using for part of this process.  You can download the Self Storage Revenue Projection Template here, and follow along.  So here is the process:

Revenue Projections

1.  Identify Your Potential Market

Your potential market of customers is probably based on geography.  Customers are likely to choose a self storage facility near their home or business.  If your proposed facility is in the country, you might be able to attract customers from a 15 or 20 mile radius.  If you are in the heart of a city, you may only be able to attract customer from a 1 or 2 mile radius.  Based on your proposed facility location, identify how many people or businesses are located within a radius that customers would be willing to drive.  This gives you your total potential market size.

2.  What Percentage Require Self Storage

Out of your potential market, only a certain percentage would even consider using self storage.  According to the Self Storage Association, 9% of American households rent a self storage unit.  So you might take your total potential market size of X,XXX Households and multiply by 9% to find the number of potential customers in your market.

3.  Identify Target Market

Now just because you know that only 9% of households will use self storage facilities, those households are not posting a sign in their front yard that says, “I am interested in self storage”, so you are going to have to do your best to guess how to find these potential customers.  Of course you can advertise online, in the newspaper, and through billboards, but you might also be able to do some creative advertising to try to target your potential customers.  For example, maybe there is a large housing development of homes without basements.  You could send a mailer/post card to that housing addition to promote your facility for the items they wish they could “put in the basement”

4.  Convert Target Market to Customer

Your marketing efforts should lead to a successful conversion of some of your target market into customers.  You are going to have to estimate conversion rates.  As a general rule of thumb you are going to convert less than 1% of leads for an unsolicited ad like a post card etc.  For someone who visits your website because they are searching for self storage, you might convert 5% to 10%.

5.  Cost to Acquire a Customer

This is not part of  your revenue projections, but it is really important to know the cost to acquire 1 customer.  Did you have to send out 200 post cards to get 1 customer?  If so, your cost to acquire a customer through this medium is the cost of the 200 post cards and the postage to deliver.   If you put up a billboard and you know that it drove 3 new customers each month and you paid $600 per month for the sign, then your customer acquisition cost would be $600/3 = $200.

6.  How Long Does the Average Customer Stay

One of the most important pieces to your revenue projection puzzle is how long does a customer stay a paying customer?  I think this is what makes the self storage business a strong business – happy customers may stick around for years and years – which makes the life time value of a customer huge.  The easiest way to implement this into your projections is to estimate a percentage of customers who leave each month.

7.  Total Current Customers

Then add your recurring customers to your new customers and you will get your total current customers.

8.  Average Rent Per Month Per Customer

Finally, estimate how much space each customer will rent on average and the rate they will pay per square foot to come up with the average rent per month per customer.  Multiply by total customers and you will get total revenue.

Expense Projections

1.  Labor

You will likely have to pay 1 full time person to manage the facility, sign up new customers, collect payments, etc.

2.  Mortgage

Unless you can pay cash for the facility,  you are likely going to have a mortgage on the property.  You can use Bankrate’s Amortization Calculator to estimate a monthly payment.

3.  Property Tax

One of your major expenses will be property tax.  You should be able to estimate this pretty accurately based on your area’s property tax rates and the appraised value of your property.

4. Insurance

You will also need a good insurance policy to cover your facility and your tenants valuables.

5.  Utilities

You will want to have good lighting at the facility at night which will probably be your primary utility cost.

6.  Security

Because your facility is home to many tenants valuables, security is incredibly important.  You will have an up front cost for the equipment, and then an ongoing monitoring cost.

7.  Other Expenses

Of course you will have other expenses like accounting, legal, phone, etc.

Breakeven Estimate

Now that you have your revenue and expenses projected, you can estimate what occupancy rate you must have in order to breakeven.  In order to calculate your breakeven use the following equation:

Price per Storage Unit x Storage Units Sold  = Fixed Costs + (Variable Costs x Storage Units Sold)

When managed well, you should be able to generate a 30% Return on Investment when you have a 90% occupancy rate at your storage facility.

Startup Costs

The purpose of this article is to show projections for operating a self storage facility.  The startup cost estimate is dependent on a number of variables, you can go to our website and choose a template that will help you with the estimation process.

Now that you have done all of the leg work, if you need to complete a 3 year financial projection for a potential investor or lender, you can use our ProjectionHub web app to complete a 3 year Income Statement, Cash Flow Statement, and Balance Sheet projection.

3 Reasons to Create Financial Projections Before Borrowing from Friends and Family

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Sign LoanBankrate notes that according to Asheesh Advani, chief executive at Virgin Money, there are some $89 billion in loans made between friends and family each year in the US alone.  A significant percentage of these loans are business related loans used to help a company launch or grow.  Small businesses and startups should resist the urge to borrow on a handshake or be willing to risk losing the relationship.  As we approach the holidays there are going to be a lot of awkward Christmas parties where entrepreneurs have to face their family after falling behind on payments or failing to repay a loan entirely.

There are many reasons why you should take borrowing from friends and family very seriously and make sure you get things in writing with a standard loan agreement from TrustLeaf or another reputable source.  One way to show that you are serious, and to protect both parties, is to create a set of financial projections to share with your lender before you sign on the dotted line.

There are 3 key reasons why financial projections are important when borrowing from friends and family:

1.  Can You Realistically Pay the Loan Back?

First, the process of creating a set of detailed financial projections will force you to take a realistic look at whether or not you will be able to pay back the loan, and in what time frame.  Many entrepreneurs have optimistic ambitions of paying back the loan quickly, but the challenge is that most early stage companies need all of the cash they can get  in order to grow, so an aggressive payback term is potentially very damaging to the business.  The simple rule of thumb is that it is better to say it might take you 10 years to pay back the loan, and instead you pay it back in 5 rather than projecting a 5 year payback and stretching it out to 10.

2.  How Much Room for Error is There?

Creating a set of financial projections also allows you to determine how much room for error there is with regard for your ability to pay back the loan.  Do you have multiple sources of repayment?  Or does everything rely on securing that one huge Wal-Mart contract?  It is important for the lender to understand how much risk is involved with the loan.  Maybe you have a day job and you could pay back the loan from your salary if the business didn’t take off as expected.  Or maybe you have a personal savings account that you could tap into if you absolutely needed to.  If your projections show that everything has to go exactly right for you to be able to pay off this loan, you must share this with your lender ahead of time so that they understand what they are signing up for.

3.  An Accountability Plan

Finally, your financial projections can serve as an accountability plan.  Without projections it is going to get really old each month when you have to email your lender and say that you can’t pay this month, or that you are going to be late this month.  The lender is going to assume you are just ripping them off.  If you had a clear plan with projections from the start, then you can clearly show where your projections differed from reality and easily explain why you can’t repay this month.  This protects you and the lender from hard feelings.

So before you ask for that business loan this Christmas, create a set of projections first, and do it the right, professional way to preserve relationships and friendships.

You can get started with financial projections for free using the ProjectionHub app.

About the Author:  Adam Hoeksema is the Co-Founder of ProjectionHub which is a web application that helps entrepreneurs create realistic financial projections for potential lenders and investors

Startup Wins Funding To Predict Your Chances of Securing a Business Loan

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Anderson, IN – December 17th, 2014 – ProjectionHub, a web app that helps entrepreneurs create financial projections for potential lenders and investors, secured a $5,000 investment from the Grand Rapids, MI based seed fund – Start Garden.  The investment is to be used to conduct a 90 day experiment which then leads to a chance for a $20,000 investment.

Adam Hoeksema, Co-Founder of ProjectionHub, says, “this investment validates the pain point that ProjectionHub aims to solve, creating realistic financial projections is tough for startups, but by utilizing the web we can help simplify the complex process of projections like TurboTax did for tax prep.”

ProjectionHub will have until February 26th to conduct an experiment that can help the company learn and improve the tool.  Then in February the ProjectionHub team will present the results of the experiment in a 3 minute pitch at the Start Garden facility in Grand Rapids.  A panel will then decide whether or not to award ProjectionHub an additional $20,000 in investment.

“We are excited about the opportunity to conduct this experiment.  We plan to survey our past users who projected that they would secure a business loan, and we will ask whether they were successful or not.  Based on those responses we believe we will be able to help future users predict the odds of securing a business loan based on the data in their projections.”  Adam Hoeksema goes on to say, “We may also be able to help ProjectionHub users determine what aspects of their business and their projections need to improve in order to increase their chances of securing a loan.”

The $5,000 investment will help ProjectionHub execute the survey and analyze the results over the next couple months.  Hoeksema said, “The investment by Start Garden is not only an investment in ProjectionHub, but it is an investment that holds the potential to help millions of startups create more realistic financial projections, and ultimately build stronger businesses.”

About ProjectionHub 

ProjectionHub is a web application that helps entrepreneurs create financial projections for potential lenders and investors.  Started in 2012 by brothers Adam and Brandon Hoeksema, the company has helped 10,000 users create more realistic financial projections through the app.

Contact

Adam Hoeksema

adam@projectionhub.com

765.667.5323

How to Create Financial Projections for a 2 Sided Marketplace

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2 Sided MarketplaceTwo of the hottest startups in the world right now are 2 sided marketplaces – Airbnb and Uber.  We know that marketplaces can create incredible value when they reach scale (think ebay, Amazon, Uber).  But we also know that 2 sided marketplaces are incredibly difficult to reach scale.

The reason it is so difficult to start a 2 sided marketplace startup is because it is essentially like starting two different businesses.  You  have 2 different customers.  You must have buyers and sellers at the same time.  This is why many marketplace businesses start with very narrow niche industries.  For example, eBay started with Pez dispensers.  As you grow you will likely need to subsidize one side of the marketplace.  For example, sellers might be willing to pay for more buyers.  There is a great Harvard Business Review article on 2 sided marketplaces that discusses subsidization of one side of the marketplace.

There is likely some very complicated math that would tell you what percentage of your users need to be buyers and what percentage need to be sellers.  Every marketplace is going to be different.  Here is a Quora Question and Answer that identifies some of the key questions that determine what percentage of buyers vs. sellers you will need on your platform.

As an example, let’s look at a seller on eBay and a “Seller” on Uber.

A seller on eBay might have 200 units of a given product in stock.  Each buyer might only need one of those products, so a given seller on eBay might be able to support 200 buyers at a time.

Uber on the other hand is quite different.  A “seller” which is the driver in this case can only drive 1 or 2 buyers around at a time.  It is likely that you might need a higher percentage of sellers on Uber than on eBay.

As a startup you probably aren’t going to know the perfect mix of buyers vs. sellers, so you are going to have to make a hypothesis.  You can then advertise to secure a critical mass of buyers and sellers in a particular market.  In just about any marketplace business, it is important to dominate a niche market initially, and then grow from there. (Zero to One by Peter Thiel is a good read on this topic)

Ok so let’s get into the financial model now.  I am going to assume that you have figured out/or made a hypothesis to estimate the breakdown of buyers vs. sellers that you should have.  And for this revenue projection, we are going to focus on the buyer side of the market.

You can download the Marketplace Financial Projection Template that I created, and follow along.

Let’s get started:

Step 1 – Estimate your Market

Start by estimating the size of your market.  Let’s say you are starting a platform for employers to find graphic designers straight out of college.  So graphic design students would create a profile and employers would pay to be able to view the profiles and contact students that they might like to interview.  You could say that your total market is all employers that need graphic designers, and all graphic design students.

Step 2 – Narrow Down to a Target Market

You should probably start with a target market first.  Maybe your target market is only graphic design students in San Francisco, and the target employers are tech companies in silicon valley.

Step 3 – Estimating Leads

So if your marketplace is a web based platform, then your leads are website visitors.  You will need to estimate how many people you think you can get from your target market to visit your website.

Step 4 – Conversion of Leads to Users

Some percentage of those website visitors will turn into users.  You will need to estimate a conversion rate.

Step 5 – Retention of New Users

Once you estimate new user signups, you will need to estimate how many of those new users will just drop off and never use the platform, and how many will continue on as active users.

Step 6 – Average Purchase $ Amount

The next step is to estimate the average dollar amount per purchase.  Are users purchasing $25 Uber rides?  Or $2,500 Airbnb vacation rentals?

Step 7 – # of Purchases Per User Per Month

How often will an active user purchase?  An active user of Airbnb might purchase once a year while an active user for Uber might purchase once a week or even everyday.

Step 8 – Flat Fee Charge Per Purchase and/or % of Purchase Price Charged as Commission

Now we are finally getting to platform revenue.  Typically marketplace platforms will charge a flat fee per transaction, a % of the purchase price, or both.

This process will give you a base model to get an understanding of your financial potential.  It will also help you understand the economics of the platform, how many users you might need in an area to breakeven, etc.

Once you have your base revenue projections complete you can complete the rest of your financial projections using our ProjectionHub platform.  Please feel free to reach out if you have any questions – adam@projectionhub.com

How to Project Revenue for a Franchise Business Model

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Franchise MapIf you have a successful business model that you are thinking of franchising, or you already have a small franchise business and want to grow but need to develop financial projections in order to raise money through a loan or investment, then the following post should help you work through the process.

I have also created an Excel template that you can download to create your own revenue projections for your franchise business model.

Step 1 – Franchise Inquiries

The first step is to estimate the number of franchise inquiries you will receive each month.  You might need to do some math before this depending on where your inquiries come from.  If they come from advertising, then you will need to estimate your advertising budget first and then estimate the number of inquiries that will generate.  Or if you generate inquiries through your website, you might start with traffic and then estimate what percentage of traffic will turn into inquiries to open a franchise.  Another possible source of leads could be FranNet.  FranNet provides local advisors who help match individuals who want to get into franchising, with the right business opportunity for their particular situation.  A FranNet advisor might be able to give you some idea of the number of leads they could provide on a regular basis.

 Step 2 – Conversion Rate % from Inquiry to Sale

Next, you will need to estimate your conversion rate, in other words what percentage of people that inquire about open a franchise actually do?  If you are just starting up and don’t have any data on this yet, you are going to have to make your best guess.  To give you a frame of reference I would expect a very low conversion rate from someone who is just asking about your franchise, to the point where they write a check to purchase a franchise, maybe between 1 and 3%.

 Step 3 – Growth % of Conversion Rate

Hopefully over time you will improve your conversion rate from lead, to franchise operator.  If you are following along in the spreadsheet template I created, you will be able to add a % growth rate for the conversion rate we estimated in step 2.

 Step 4 – Current # of Open Franchises

Next you will just need to list the number of franchises that you currently have open and operating if you have any at all.

Step 5 – Revenue Earned per Month per Franchise

Then you will need to estimate the revenue earned per month per franchise.  Keep in mind that as you add new franchises they may not reach maximum revenue right away it will take time, so you may want to reduce your estimated revenue per month per franchise just slightly to compensate for new startup franchises.  Also, note that you should estimate revenue based on the revenue from your initial business location.

Step 6 – % of Revenue for Franchise Commission

Here you will need to estimate the average % of a franchise’s revenue that you will take each year as a commission.

Step 7 – Franchise One Time Fee

Finally, most franchises charge an upfront fee to purchase the franchise.  Estimate what your projected franchise fee will be.

That’s it.  Now you should be able to complete your projected revenue for your franchise business.

If you want to complete a full set of financial projections, try our tool – ProjectionHub – where you will be able to input your new revenue projections and complete a full projected income statement, balance sheet, and cash flow projection.  Good luck!