Transcript:

The future is unknowable.

Unless, of course, you have a time-traveling DeLorean and some plutonium handy.

I've got neither of those things, and since you're listening to this, I'm assuming you don't either. What we do have as business owners is access to data from the past that can inform our decisions about the future. This data can be incredibly useful in understanding what our future expenses may be.

Still, accurately projecting and forecasting something as fickle as future sales figures can feel like throwing darts with a blindfold on.

With the right data, a forward-looking mindset, and a better understanding of how your business brings in customers, you might be able to peel back the fabric of the universe and take a peek at what's to come.

Welcome back to The Profit Plot, a podcast where we help small business owners unlock the story behind their profitable business by unpacking one complex financial topic at a time. I am your host, Jeremy Millar.

If you're anything like me, you thrive when you have a plan of action and confidence in the direction of your business. Looking ahead into the future isn't a luxury; it's a necessity that precedes every step taken.

One of the most aggravating parts of scaling any business is that sales figures are notoriously difficult to project.

New business owners often chart their course by making big assumptions, setting their sights on the horizons of a brighter future. But unless you can get sales consistently coming in, the future won't be looking too bright.

Even businesses that are scaling from $500k to $5 million in revenue often find themselves in a similar pickle. Money might be coming in now, but is it going to continue? Will it be at a higher rate consistent with what you're projecting?

Every business relies heavily on being able to sell; to convert a product or service into cash in the bank. Without this fundamental ability, you can't exist as a business.

The problem is that sales figures can be incredibly inconsistent for many small business owners.

But, why is that?

Well, the rate at which your business can actually move a product or service is dependent on a myriad of outside factors: the economic environment at large, customer demand, technological limitations... even the changing seasons!

These external factors have always existed and will continue to affect every business in the market. There is no stopping them; you can only adapt and improvise.

While external factors do play a role in how your business generates its revenue, these factors are largely out of our control. Instead, we need to turn our focus internally and understand the key factors in our own businesses that may need to change.

We need to consider three factors before making any kind of revenue projections. First, we need to define our expectations around what a forecast entails. Second, we must understand our financial history. And third, we have to be internally adaptable. Let's dive in.

Whether you're setting them or not, a signature part of being human is having expectations.

We get upset when we express a need to our business partner that goes unmet. We like to make assumptions or predictions about what will happen by the end of a good book. We think that our business will be successful according to our projections because of our unbridled skill.

Plot twist: that's not the case.

Inherent to making a forecast of any kind, an assumption of any kind, is what's called a presupposition. Presuppositions are internal expectations that exist before having started something, whether it's a project or some other kind of endeavor.

We pre-suppose, meaning that we assume before, in all kinds of situations.

When I interview a new candidate for a job, I suppose I've done a good job of weeding out the bad eggs. I'm assuming that the person I'm about to go into a meeting with is a good candidate based on my experience with their resume, or perhaps by reading their cover letter, or even just meeting them via email.

These presuppositions aren't necessarily bad; in fact, they help guide many facets of our lives and the ways that we think. That said, if they're not acknowledged beforehand, they can interfere greatly in any aspect of life.

I've seen far too many business owners or budding entrepreneurs who've whipped up obscenely generous forecasts and projections based on what they thought they knew.

Your brand new machine learning software that doesn't exist yet is going to capture 1% of a multi-billion dollar market within its first year?

Your family mortgage brokerage is planning on expanding aggressively and closing on hundreds of purchase loans in a bear market?

Your accounting company is going to burst out onto the scene and immediately be successful without any kind of existing client base in an antiquated industry that AI is going to make extinct in a decade?

When you make budgets and forecasts, you need to clearly define exactly what you're assuming going into the process in order for it to be successful:

Are you going to be seeing the same kind of growth rate you've seen within the past 3 months?

Are you assuming that a new marketing campaign will massively pay off, allowing you to bring in far more leads than before?

Perhaps you've been working with your sales team to increase their closing percentage - are you planning on that increase happening immediately?

Creating a projection for your business is an art; you're blending the dark magic of high expectations for your business with some mad data science to create an outcome that allows you to glimpse into a potential future.

If you're not clear about your assumptions; if you're not weeding out the presuppositions that you're carrying into a forecast; if you're not relying on well-documented information, your flux capacitor might blow up in your face, Doc.

That brings us to my second point. You've got to endeavor to understand our financial history.

When I was completing my MBA, I had a professor who... was eccentric. He held a Master's in Business Administration from Oxford, a Juris Doctor, was a practicing lawyer, engineered and designed his own products, and had a PhD in Historiography.

Naturally, he was my favorite.

If you haven't heard of it, Historiography is the study of the methods of historians in developing history as an academic discipline, the methodologies that historians use to record and evaluate history.

I have met no one else in my life with more specific knowledge about a wide assortment of vaguely interconnected topics.

Yet, his entire personal history was interconnected by various inflection points. He understood where he'd been and had a firm grasp on the trajectory of the rest of his life.

For small businesses, accounting is the detailed account of all financial activity in a business. Some accountants make a great effort to ensure that your financial information is communicated clearly and concisely, whereas others choose to put in minimal effort.

When it comes to understanding financial history, the methods that have proven time and time again to be most effective are the ones that involve clear, concise accounting. Without it, your history becomes muddled and difficult to understand. With it, the doors to the future begin to open up.

The deepest understanding of financial history requires a concisely organized P&L and an accurate Balance Sheet, at the very least.

These tools allow you to deeply understand your business's performance during specific periods of time. You can look back at a month or a year and identify trends and patterns. You can see changes over time compared to prior periods. You'll see areas in which your business can improve and change.

Pursuing a deeper understanding of your business's financial history allows you to understand your past so that you can confidently plot a path for the future.

This deep understanding of your past ultimately informs the presuppositions that you have about your business going forward - it allows you to more closely align your expectations with reality, more effectively limiting the potential for outlandish or unrealistic expectations.

With a deeper understanding of the assumptions you're making in your financial forecasts and your financial history to guide you, there's really only one aspect to making accurate sales predictions left.

While perhaps the most important component of projecting revenue in your business, this can either be the easiest or the hardest part.

You and your projections must be flexible. Oriented toward success, but malleable.

When we make goals, we desperately want to achieve them. We project clear, fixed numbers that we think we can hit. They're clearly defined, hard-set markers that reaching will result in our victory.

For the good of your business, your sales figures cannot be fixed.

Instead, in order to accurately project sales, you have to think in terms of incremental goals and your lead velocity.

If your small business needs to make $50,000 per month in order to keep the doors open, the floor for your sales operation is going to be $50k per month.

Given this floor, you can start to dive into the average number of customers that you need to bring in.

Let's say on average your customers pay you $5,000 per month. Your sales team needs to bring in at least 10 customers in order for the business to break even.

If your team converts, on average, 30% of the leads that they talk to, 10 customers means that the business need to bring in about 33 leads just to break even.

Remember that sales is fickle; it's constantly changing due to a hundred outside factors that you can't control. Boiling your figures down into manageable numbers like this allows you to identify the things that you can control.

You're a small business and generating leads is likely a common component of what you're already doing. Leads come from effective networking, referrals, or marketing. To control the lead flow of your business, you can adjust these other areas!

Need to achieve your revenue goals faster? In many circumstances, you can nominally raise the prices of the goods and services you offer and see a massive increase in revenue.

In creating revenue projections, flexibility is crucial. Sales figures are not fixed; they fluctuate due to various external factors. Adjust your goals based on your business's past performance and present capabilities, and be prepared to adapt to changing circumstances.

Let's say your business aims to bring in $75,000 per month.

We know that your baseline is $50,000 with just 10 customers. In order to hit $75,000 per month, you'll need to bring in 15 new customers, or 50 leads instead of 33.

If you were to raise your prices by 15% to $5,750, that number changes from 15 new customers to 13, and 43 leads instead of 50.

Perhaps you need more staff to support a higher volume of customers. Maybe a small percentage increase over your break-even figure is a better goal for the next quarter than a 50% increase to your revenue.

Maybe you're loaded with cash and are ready to start deploying that money to scale up your business rapidly. In that case, your flexible sales goals might be a multiple of your break-even figure.

Or, maybe your revenue forecasts need to stay at a break-even level for now while you reorganize and adjust your internal operations.

Strategic adjustments, like raising prices or scaling up operations, can help meet higher revenue goals. However, these should be carefully considered based on your current financial standing and your ability to support an increased volume of business.

The point of flexibility in making revenue projections is to ensure that your business doesn't get stagnated with unrealistic goals and expectations.

You can find a goal based on the history of your business's performance and your current ability to turn a product or service into cash. These projections can change and adapt to your circumstances and situations rather than being set in stone.

When you choose to approach your revenue projections by understanding the assumptions you're making and your company's financial history, you can create a culture of success-oriented flexibility.  

Remember, predicting revenue is less about having a fixed number goal; you don't need to go 88 miles an hour and have 1.21 gigawatts of electricity.

It's about setting achievable targets based on well-informed data and allowing room for adjustments as needed.

Forecasting sales is a practice of adapting your business around what's possible and plotting a course for the bright future you know you can achieve.

And that brings us to the end of today's episode.

Make sure that you're subscribed to The Profit Plot podcast on Spotify, Apple Podcasts, or wherever else you get your podcasts from. If you found today's episode particularly insightful, please share it with a small business owner in your life so that other entrepreneurs can benefit from this valuable information. The more knowledge we can share with one another, the better off we'll all be.

Join us again soon as we venture to unlock the financial story behind your profitable business. Looking forward to having you here with us next time, on The Profit Plot.