In earlier posts I have given tips on building credible financial models that in essence communicate to potential investors the business vision in numeric format. However, I have been getting a lot of questions about how to create an accurate forecast for those businesses that have no similar competitors.
For start-ups, the financial forecast is an educated guess on what you think will happen with the key drivers of your business. For example:
Company: Social media game software development company
Key Business Driver:Number of downloads of its free app
Key Revenue Driver:Percent of customers that upgrade to the premium model for a fee (i.e. the conversion rate)
The key success driver of this business is downloads but the key revenue driver is the ability to convert. Only when you understand both drivers of your business can you being the financial forecasting process. Using the example from above, the game developer could look at other public companies information to build key driver assumptions for its forecast for conversion rates as well as cost benchmarks. For companies that have no similar competitors, you must take each key driver and find companies or segments of companies in different industries that best fit that driver and use that information to build your key assumptions.
Once the business is launched you will have actual data to more accurately forecast.
Feel free to send us your questions regarding financial modeling at [email protected] and we will post our answers on this site. Visit our start-up financial modeling page to learn more about Loftis Consulting.