242 ENTREPRENEURSHIP
The right side of Figure 6.4 shows the sales requirements, that is, the estimated vol-
ume of sales needed to cover costs and provide a return to the entrepreneur and
investors. The entrepreneur estimates the fixed asset (capital) costs of operation and the
one-time start-up costs, then forecasts fixed and variable operating expenses. This should
include the required return on investment for the financiers. The conclusion of this exer-
cise is a break-even analysis that illustrates sales levels and margin requirements to make
the company financially sustainable.
After completing these analyses, the forecaster factors in competitive reactions, mar-
ket growth, cost increases, and competitive strategies, and compares the market poten-
tial with the sales requirements. Dividing the market potential figure by the sales
requirement number gives the estimate of market share. What are the possible out-
comes?- If the venture requires a very large percentage of the market, the business model
needs to be revised by reviewing the target market and the trading area. - If the venture cannot break even without capturing a heroic share of the market,
revise the operating plan: Can expenses be curtailed? Can margins be raised? Is the
company operating at the best scale—should it be bigger to generate economies of
scale or smaller to save operating expenses? - If the market potential is a relatively large factor of the sales requirements, the busi-
ness is financially feasible, and it is time to prepare forecasts for most likely, opti-
mistic, and pessimistic scenarios.
Other Techniques
Entrepreneurs can use other techniques to forecast sales. In fact, it’s a good idea to use
multiple methods. Most are beyond the scope of this book, but a few possibilities
include:- Find benchmarks for similar start-ups in similar circumstances. What are typical
estimates for sales per square foot, sales per employee, sales for invested capital? - Estimate product/service capacity. At a given scale, how many units can be pro-
duced? How many customers served? What percent of capacity is the venture like-
ly to use? Optimistic case? Pessimistic? Levels of capacity utilization can provide a
sales forecast. - Build the forecast from the ground up. If there are four products and three related
services, estimate each separately. How many sales are likely per day? How many
customers per hour? What is the yield from sales calls? Internet hits? Aggregate
from the specifics and adjust for reality (such as diminishing marginal returns). - Prepare multiple forecasts under different scenarios. Consult other industry partic-
ipants about these forecasts, then adjust them as needed.
SUMMARY
Marketing and entrepreneurship relate in a number of ways, and marketing is critical to
the success of any new venture. It is important for a new venture to take a total market-