SCORE

Written by Mike Gordon, Certified SCORE Mentor

In any new business start-up, we need to begin by projecting an income.  To do this we need to make some assumptions about our business and its projected revenue, to make a more informed decision on whether our business idea will be profitable. So, we create what is called a “Pro Forma Income Statement.”  It’s an assumption of what our “Business Idea” will look like in the future.  In other words, a pro forma statement is a look at a “what-if scenario”.  It's a tool business owners and their investors can use to examine hypothetical conditions. And it’s a tool to also compare assumptions to actual business, once it is up and running.  But in this article, we going to discuss just the projected income.

Merriam-Webster defines “hypothetical” as "involving or being based on a suggested idea or theory." Put another way, pro formas use information that can vary substantially from actual data. So, while it is extremely helpful as a starting point, they’re to be taken as only well-informed “guesstimates”.  They are truly only as good and as thorough as the research put into them.

This same process you will use when creating your typical income statement, and for the cash flow statement and balance sheet as well.

To start a new business hypothetically, we need to reverse engineer our revenue source.  How do we do this?  

  1. We start with a price for our product/s or service/s.  Several pricing theories can apply. But I suggest using research to analyze your competitors’ actual pricing as a start.
  2. The next step is come up with a “guesstimate” on an average customer count. This is a hypothetical starting point.  The customer count is also used as a starting point for your “Marketing Budget”.     

Creating a Simple Customer Count Guesstimate Using Demographics

  1. 10,057 population of Morro Bay. * (obtained from Siri give or take few, or use the census)
  2. 15 Coffee Shops. (*obtained from Google Advertising
    10,057/15 = 670 customers a day if equally distributed: If 100% of people wanted coffee each day
  3. If you Add a New Coffee shop into Market

    10,057/ 16 = 628 X.*50% = 314

    *(Obtained by Google Coffee Consumption: Over 50% of Americans over 18 years of age drink coffee every day. This represents over 150 million daily drinkers. 30 million American adults drink specialty coffee beverages daily; which include a mocha, latte, espresso, café mocha, cappuccino, frozen/iced coffee beverages, etc.)

    *(Google, 79% of Americans prepare coffee at home. According to a survey conducted by the National Coffee Association (NCA), Americans tend to drink coffee at home. Only 36% of respondents said they'd had a cup of coffee away from home the previous day)

  4. 314 (customers per day) X .36% = 113 a day guesstimate of shared market in Morro Bay (some have more and some less) at 100% equal share market

Creating a Daily, Monthly and Yearly early Income Guesstimate

  1. 113 X $2.70 (*average coffee price) = $ 305.10  a day,  X 30 days = $9,153.00 a month , X 12 months= $109,836.00  yearly revenue from coffee per year with equal market share, open 7days a week.  (* average price of coffee obtained from Google).

  2. This exercise does not consider donuts or pastry, which may be another $3.50.  113 X $3.50 = $396.00 a day,  X 30 days =$11,865.00,  x12 months= $142,380

  3. Add the two together and $109,836.00 + $142,380.00= $252,216.00  guesstimate. “Thus, a Projected Income for a year”.

About the Author(s)

Michael Gordon

As I was transitioning from the full time military to military reserve I started and operated a retail art, portrait art and art framing business. During this time I was completing a MBA program with emphasis industrial training and also working as an outside salesman for a wine company.

Woman in striped shirt using a calculator in one hand and phone in the other