Connect with us

Business Finance

Guide to creating your own financial model and revenue projections

Published

on

Why is a financial model important?

Setting expectations for customers – and then meeting them – is an important tenant of customer service. Don’t you deserve the same? Building a solid financial model will set expectations for your business and help you meet these expectations. Your model will objectively deliver realistic projections for your income and it will help you stay on track to achieve those projections.

Using your projections model together with an expense model will be important for you as you grow your business. This combined financial planning and tracking effort will be your most powerful self-management tool. Note: The expense model will be discussed in next week’s column.

What is a revenue projections model?

A revenue “model” uses basic assumptions about your business and how your business is conducted in order to project end financial results. In every business you can identify key areas of customer interactions that together all build up to a final closed sale. Your model defines each of these steps and projects how you progress from one to the next.

How do I build my model?

The first step in building a model is to identify each step of your sales process that can be explicitly measured/defined. Models can be very complicated, simple and everything in between. In our example we have developed a simple model for a real estate listing agent. Our model today uses a calendar quarter as a timeframe for measurement, but it is also common to measure by month.

You need to build your model in Microsoft Excel (or another spreadsheet software) and use dynamic formulas to generate your data. Dynamic data allows you to change any assumption in the model and have the rest of your projections automatically update accurately.

Step one: lead acquisition

The first step of our process in this example is the acquisition of a “lead.” From here, the customer lifecycle progresses as follows: a live conversation; a listing presentation; a listing contract; an accepted offer; a closed sale. Each of these steps is a measurable event as you progress towards a closed sale.

Step two: conversion

Next you need to use your experience to project a conversion rate as you progress from one step to the next. In our example we make the assumption that we convert 50% at each step of the process (i.e. 50% of leads turn into live conversations, 50% of conversations turn into listing presentations and so on).

Finally, plugWhen agents seek to own their own franchise, go independent or run a team on their own, what are the biggest challenges?
They just switched careers. Being someone who gets and gets rid of listings is a VERY different job than recruiting and retaining agents (and avoiding lawsuits – which is a brokers main job).
What are the biggest changes? (ex: less sleep, more liability, etc.)
See my answer to 1. Above. The brokerage business they were doing will stop. They will not be able to keep up with the demands of running a team that gets listings once they need agents to help pay their overhead.
What have you seen others fail at? (ex: agent gets broker’s license, sets up shop, has no idea how to generate leads even though she’s great at recruiting)
They are seldom great at recruiting. Most are awful at recruiting. If they were actually good at recruiting they could make the brokerage a success. It is about 10 – 20 times harder than it looks. Maybe 50 times harder?
Should brokers have more stringent educational (and other) requirements?
Depends on their business model.
Would you advise someone to try opening their own brokerage? Why or why not?
If they were a successful agent I would always advise them not to do it. But as most successful brokers WERE agents prior to being brokers it is just the successful agents I would advise against it. What it takes to be a good broker is completely different. in your initial assumption – in our case we believe that we will deliver 25 leads in the 4th quarter of 2011 (Q1 2011) and grow this number by 5 leads each quarter going forward. Once you enter your initial data your whole model will populate, and you will have your revenue projections.

Click to enlarge:

When you first develop your model, you can play with both the initial inputs and your conversion rates in order to accurately capture your business’ true behavior. It is important that you use accurate data and conversion assumptions though, and just don’t plug in numbers that give you your desired results. Only real numbers will give you a valuable management tool.

Changing your assumptions

As you progress you will have more experience and data. Some of your initial assumptions will be incorrect. As you get smarter and have access to this new hard data, update your model going forward. This will allow you to see how your revenue will be affected.

In the two below examples we use the exact same initial lead numbers for initial data. In one we decrease the conversion rate as we progress through steps to 40% and in the final we increase the conversion rate to 60% at each step. Note the dramatic difference!

Click to enlarge:

How do I use my model?

Your revenue model allows you to understand what you need to do in order to hit your financial goals. If you know that you will convert around 50% of your clients at each step of the sale process, and there isn’t much you can do to improve this number, then your model will tell you how many leads you will need to generate in order to grow the business and hit bigger and bigger revenue goals. From this model, though, it is clear that improving conversion rates will have a significant impact on revenue so you may decide to pour energy into improving your process to convert more clients at several steps of the sales lifecycle. If you have success increasing conversions here, update your model going forward and your projections will increase accordingly. The key though, is that you accurately capture what is happening in your business in the model. If you do, you won’t be in for any surprises and you’ll know exactly what you need to do in order to hit your projections.

If you have business partners (or investors) you can also use a model to set expectations for them – and track progress. At CondoDomain.com, we provide investors with a robust quarterly report package that includes detailed revenue and expense models as well as historical data on how well we’ve done against past projections (we’ve surpassed projections for four quarters running, btw). If you have a track record of hitting your projections in the past, you gain a lot more credibility when you make aggressive projections for the future.

I still say, though, that a financial model is most important for internal (or personal) planning. Didn’t you hear? Data is cool now!

Hoyt David Morgan is an entrepreneur, angel investor and business strategy leader. He is an investor and/or adviser to a handful of exciting and high growth companies, and has been a part of several high-value exits. He is passionate about customer experience, smart business and helping innovative companies grow... and sailing.

Continue Reading
Advertisement
1 Comment

1 Comment

  1. Pingback: Create your own expense model and projections - how and why - The American Genius

Leave a Reply

Your email address will not be published. Required fields are marked *

Business Finance

Weed greed: Some states are raking in the tax dollars on cannabusinesses

(FINANCE) The tax profits from weed sales in these states just may be enough to push politicians toward legalizing the drug cross-country.

Published

on

Weed leaves.

States are making bank on weed taxes

The Marijuana Policy Project makes the case to legalize cannabis with its recently released report. According to the report, as of December 2021, states that legalized adult-use cannabis brought in a combined total of $10.4 billion in tax revenue since 2014. This tracks the 18 states where marijuana is legalized for recreational use. It does not include medical marijuana, which would dramatically increase the figure. The figures also don’t include local tax revenue, just tax revenue at the state level, nor does the report include any licensing or business fees that are generated by the industry.

Which states are bringing in the money with cannabis taxes?

Eighteen states have legalized marijuana for adult use. In some of those states, the laws were just approved, so tax collections have not begun or not yet available. Here are some of the figure’s from the MPP report.

State Tax collection in 2021 Total taxes received since cannabis was legalized
Colorado $367+ million (thru November) $1,791,138,715 (2014)
Washington $480+ million (thru September) $3,051,390,820 (2014)
Oregon $138+ million (thru September) $635,512,128 (2016)
Alaska $24+ million (thru October) $95,004,906 (2016)
Nevada $471+ million (through September) $471,544,647 (2017)
California $976+ million (through September) $3,123,477,637 (2018)
Massachusetts $205+ million (through November) $384,529,750 (Nov. 2018)
Michigan $188+ million (through November) $271,129,649 (Dec. 2019)
Illinois $387+ million (through November) $562,750,974 (2020)
Maine $11+ million (through November) $13,063,204 (Oct. 2020)
Arizona $121+ million (through October) $121,463,757 (2021)

 

Most states have legislation that puts the tax revenue toward specific initiatives. In Illinois, 20% of the revenue goes into mental health services. In Michigan, many of the funds have been put toward schools and transportation. California directs its revenues toward local non-profits that benefit “people adversely impacted by punitive drug laws,” and invests a portion of the money in environmental programs.

Marijuana is profitable

The Hustle reports that Denver generated over $237 million and West Hollywood in California has generated $2.2 million in one year from 6 dispensaries in less than 2 square miles. The Tulsa World reports that Oklahoma, which has only legalized medical marijuana, collected over $55 million in 2019. With more Americans leaning toward decriminalizing marijuana and making it legal, the profits to be made from marijuana sales may push politicians toward legalizing weed.

Continue Reading

Business Finance

Get outstanding invoices paid to you by following these 7 steps

(FINANCE) For a freelancer, it’s more important than ever to bring up the issue of getting paid on time. Here are 7 tips to get your money.

Published

on

Handing over card representing getting paid.

For many, an awkward topic of conversation revolves around getting paid. Whether asking for a raise or asking to borrow money, people often feeling uncomfortable when talking money.

This is equally, or possibly even more so, true for freelancers who are solely in charge of their finances. Without a system of weekly direct deposit, freelancers have to work overtime to keep their earnings in order.

The issue with this is that clients also have a lot on their plates, and something as simple as a freelancer’s paycheck is common to fall through the cracks. This causes freelancers to have to work friendly reminders into their repertoire.

However, freelancers may not always be knowledgeable of the best ways to keep their finances in check (no pun intended). Below are seven ways to enhance payment methods.

  1. You have to be willing to make billing a priority. Due to the fact that money is awkward to talk about, as aforementioned, many let this fall by the wayside. The best way to do this is to keep up to date with your invoices and send them as soon as they are done. Making a calendar specific for billing can help with this idea.
  2. This second bit dates back to when we were young and learning our manners: it is crucial to be polite. Not only is it the right thing to do, but it also increases speed in payment. Using “please” and “thank you” in invoicing emails are said to get you paid 5% faster.
  3. It is best to try and keep a complicated concept like finance as simple as possible. Make sure you are creating specific due dates. This will help to signify importance of payment.
  4. Now that virtually anything can be done online, it would make sense to use electronic payment verses an old-school check. Accepting online payments will get a user paid, on average, eight days faster as opposed to a check.
  5. This is an important notion to keep in mind for any aspect of your business life: be professional. Invoices are often seen by many eyes so it is best to include your business’s logo on said invoice. This has been found to increase chances of being paid on time by 10%.
  6. Specificity is urged again in the form of transparency. Make sure you are giving detailed descriptions on each invoice so that anyone looking at it knows exactly what you are being paid for. By doing this, you are 15% more likely to be paid on time.
  7. While you may be invoicing month by month, try to avoid sending on the 30th or 31st. Being that everyone, generally, sends their invoices in on these dates, it takes 10 – 20% longer to be paid. With everyone sending it at the end of the month, it has a tendency to back up payroll.

The most important thing to remember is that while the topic of money may be awkward, it is your money. If you let a few invoices fall behind because you are uncomfortable reminding your client, this has a way of adding up. Be sure to keep on track with your finances to earn what you are working for.

Continue Reading

Business Finance

Why you will pay more to live in larger metros: job opportunities

(BUSINESS NEWS) Small to mid-sized metros offer higher adjusted salaries, but don’t pack your bags just yet because your job may not be there

Published

on

small metros cheaper house

When I told my parents how much my partner and I would be paying for rent at our new apartment, they quickly pointed out that I could purchase a home for that kind of money in my hometown.

My parents are right, I could literally buy a home for the amount of money I pay in rent every month to live in a large metro area. But the equation that determines where I and many other workers should live, is more complex than salary minus housing.

These areas are cheaper to live in, in part, because they may not offer the kind of job opportunities, and therefore social mobility, you see in larger metro areas. Sure, I could make my money go further in my hometown, but the chances of me finding a job in my industry there are smaller.

Your field of work does matter when considering whether or not the “small-city advantage” could work for you. If you work in tech or finance, two traditionally high-paying fields, then this advantage doesn’t apply.

“Before adjusting for living costs, typical technology salaries are 27% higher in two-million-plus metros than metros with fewer than 250,000 people. Even after adjusting for those costs, tech salaries are still 5% higher in the largest metros than in the smallest ones,” finds Indeed.

If a huge tech company offering thousands of high-paying jobs moved into a smaller city on the map, over time, it would get more expensive to live there.  It’s the hamster wheel that is currently driving income inequality in some of America’s largest major metro areas.

Finding the right place to call home is never going to be a single factor decision. Yes, salary is a huge factor, as is the cost of living, but there are also lifestyle factors to consider. What kind of opportunities would you have in this city? How much will it cost to move there? How will this affect the other members of your household?

It’s nice to play the ‘ditch the corporate world and buy a country house’ fantasy after a long day at work, but the reality is far more complex.

Continue Reading
Advertisement

Our Great Partners

The
American Genius
news neatly in your inbox

Subscribe to our mailing list for news sent straight to your email inbox.

Emerging Stories

Get The American Genius
neatly in your inbox

Subscribe to get business and tech updates, breaking stories, and more!