| One of the most difficult tasks a new prospective | | | | operations commence, we will open 2% of our |
| entrepreneur faces is the construction of a Sales | | | | potential universe. Year two will see the widget's |
| Model. Many books devoted to instruction for writing a | | | | distribution add another 2.5% of the hardware outlets |
| business plan devote little or no attention to this vital | | | | and year three we will gain another 3.5%. After three |
| exercise. The knowledge needed to assemble a | | | | years we will conservatively projected 8% of the |
| quantified, qualified and clearly narrated Sales Model is | | | | potential distribution points for a hardware widget. |
| essential to convey the scope and validity of an | | | | Another point to consider when building out a |
| opportunity. | | | | distribution model, not all of the stores will be shipped at |
| The most elemental data point required to commence | | | | one point in any yearly cycle. It is important to have a |
| assembling a strong sales proposition is the Cost of | | | | line at the very top of the cash flow section in the |
| Goods (COG). Knowing with absolute certainty the | | | | Financials that details how many stores you project to |
| all-inclusive COG is the foundation number necessary | | | | open each month. Allow for seasonal variations. Is the |
| to build the Sales Model and ultimately a strong | | | | widget a summer item, a Holiday item? This will |
| business plan. Guessing, estimating or hoping that the | | | | determine peak shipping months. |
| number you slot into your plan is accurate will lead to a | | | | The next assumption is sell-in levels. How many units |
| solid dead end, and very quickly. | | | | of the widget will a store typically carry in inventory? |
| The Sales Model, just like the completed business plan, | | | | Competition averages 18 units per store. Is the widget |
| is written based on a series of assumptions. These | | | | going to be promoted, placed on end cap display, given |
| assumptions are then qualified (given historical and | | | | a floor stand or presented in a featured way? These |
| current market perspective), quantified (COG and | | | | are questions that must be qualified, quantified and |
| sales goals are utilized to extrapolate a believable | | | | narrated to justify the sell-in assumption. |
| sales universe is available for the product) and | | | | If the sell-in assumption is 18 units per store, then our |
| narrated (explanation is provided to support the basis | | | | next task is creating a retail sales turnover. Again, if it is |
| on which the assumptions were based). The Sales | | | | verifiable that the competitive leader turns goods an |
| Model is but one section of a business plan: however, it | | | | average of eight times per year, we will be |
| is the heart and soul of the following financial section | | | | conservative. An inventory turn of six times during |
| so crucial to investors. | | | | year one, seven times during year two and eight times |
| I see so many business plans that scream "this is | | | | in year three is easily defensible. This will, of course, be |
| guesswork"! First year sales are projected at a nice, | | | | average out as stores come on line during monthly |
| clean round number (so often $1,000,000). Growth | | | | new door openings. |
| ramps up too quickly, and to unbelievable numbers. | | | | As we are not completing a proper spreadsheet here, |
| The justifications for these assumptions are based on | | | | reflecting 12 month flows in our example, let us |
| mirrors and hope. | | | | assume that year one sales are for stores that have |
| Let us make a few assumptions here to show a basic | | | | been carrying the product for a full 12 months. Here is |
| example of a method to build a believable Sales Model. | | | | where our Sales Model construction for year one has |
| We will assume that research has proven that our | | | | brought us. |
| COG (remember, including packaging, shipper, master | | | | Doors Opened 2700 (2% of 135,000) |
| shipper and freight, customs and duties, if any) is $1.00 | | | | Sell-in per Door 18 units |
| per unit for our widget. | | | | Wholesale Price 4.00 |
| Our next assumption to decide is the wholesale selling | | | | Inventory Turnover 6 Turns |
| price: if the item is to be sold through traditional retail | | | | Sales Year 1 = $1,166,400 |
| sales distribution channels. The nearest competition we | | | | Perform the same calculations on the assumptions we |
| can find on the market is selling in mass-market | | | | have created for years two and three and the results |
| distribution stores (Wal Mart, K-Mart, etc.) for an | | | | are $3,061,800 and $6,220,800 respectively. |
| average of $6.49. Assuming a 37.5% markup, the | | | | The Sales Model we have created for our |
| competitive item is being sold at wholesale for $4.06 | | | | mythological widget is built on assumptions that we |
| (round to $4.00). Assuming that our item has features | | | | have vetted, checked against historical norms and |
| and benefits that would be perceived as similar to the | | | | properly support our theorem with logic and a |
| competition $4.00 is an acceptable wholesale. A 25% | | | | conservative, believable rationale. The numbers work |
| COG is well within industry parameters (based on | | | | together and tell a story of strong sales traction with a |
| historical norms). | | | | lot of distribution to be gained (after year three we |
| We now have our COG, a wholesale sales price and | | | | have 92% of the market still not serviced). |
| a pretty good picture of the retail price that will enable | | | | We now have the top line sales number under which |
| the item to be competitive and still offer excellent profit | | | | we can project a financial picture that will excite |
| potential. The easy part is over. Here is where things | | | | potential investors, licensees and partners. They will |
| get tricky. | | | | know that we are serious, professional and |
| Our item will be sold in the hardware section of stores. | | | | knowledgeable. This presentation of a comprehensive |
| After studying industry specific data and researching | | | | plan supported by reality based assumptions is lacking |
| the hardware product category we determine that we | | | | in so many business plans I read. |
| will have over 135,000 potential store placements if | | | | By definition, a business plan is based on assumptions, |
| 100% of the American market could be penetrated. | | | | and lots of things happen to distort assumptions. |
| This is hard data. Now we must leave science and | | | | Murphy named a law after himself for a reason. Stuff |
| become artful. | | | | happens! Nevertheless, business plans that achieve |
| How many of these 135,000 hardware outlets can we | | | | successful results are built on assumptions that |
| believably project to carry our widget in year one of | | | | mitigate the potential for ugly surprises. A business plan |
| operations, year two, year three, etc? Making every | | | | without a well-constructed Sales Model has no chance |
| effort to build our plan on solid assumptions, we are | | | | of overcoming the natural cynicism inherent in investors |
| going to be conservative. During the first year after | | | | and decision-makers. |