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Guide to creating your own financial model and revenue projections

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.

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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.

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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, 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!

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Written By

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.

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

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