Part IX--Financial Projections
The first thing you should do when forming a marketing plan is define the structure in which it will be presented. The structure of the plan should allow the presentation of strategic information in a logical and progressive manner. This structure should be prepared in a written outline detailing the progression of topics and how they will appear in the marketing plan.
The structure of a marketing plan will usually vary according to the business, its product or service, and the objectives of the marketing plan. Generally, however, each marketing plan will include the following information:
Goals & objectives
This section is perhaps the most critical in the whole marketing plan because it will be the one most scrutinized by the reader. The financial projections section will include all the financial information relevant to the project. Although each plan differs, most will require you to have a three-year income statement, a three-year cash-flow projection, and a three-year summary of the balance sheet. You may also want to include an implementation schedule and balance sheet.
Through your research and from the body of the marketing plan, you should already have solid numbers to base your projections on. Your financial information is not only important to investors to determine whether or not they want to fund the proposal, but it is also important to you because it provides you with yet another crucial tool that will aid you in controlling the course of the project.
A three-year income statement is a month-by-month look at projected sales, fixed and variable expenses, and profits. It provides a quick look at how you believe your project will perform over a three-year period. See the sample income statement.
While the income statement takes a close look at sales and expenses, the cash-flow projection summarizes this information and displays the availability of cash on a month-to-month basis. A cash-flow projection is usually divided into two sections: income and total expenses. When expenses are subtracted from income, you wind up with your cash-flow excess or deficit.
The cash-flow projection is an important barometer because it shows when you will need additional money to keep the project going. Although we recommend you perform a three-year profit/loss and cash-flow projection, you can generate them for a one- or two-year period or for up to five years. The choice is yours. A three-year period, however, is generally the norm for marketing plans.
A balance sheet is a table of assets and liabilities (i.e., summary of credits and debits) as well as capital, or owner's equity, of a business at one point in time. A balance sheet is typically generated when books are closed after a specific period of time, either monthly, quarterly, or annually. For the marketing plan, we suggest you provide balance sheets on a yearly basis. You will be able to generate a balance sheet for year one, year two, and year three. Information for the balance sheet will be available from your profit/loss statement and cash-flow projection.
You may also want to include an implementation schedule in your marketing plan. The implementation schedule lists the major goals and tasks necessary to complete the project and the capital outlay for each period. You can base your schedule on weekly, monthly or quarterly periods. If your project is a lengthy one with projections of up to five years, we recommend basing your schedule on quarterly periods. If it ranges between a year and three years, implement a monthly schedule. If it is a year or less, you may want to consider a weekly schedule.
Keep in mind while you are forming your projections that market potential, sales potential, and sales forecast all mean different things when it comes to forecasting. Market potential pertains to the total potential sales for a product or service within a specific geographical area over a fixed period of time.
Sales potential refers to the capability of the market to absorb the volume produced by a specific company in the industry, such as yours. For instance, market potential during the first year for the entire disposable diaper industry is $3.1 billion, but the market will only be able to purchase $248 million's worth of Bio-Diapers during that period of time.
Your sales potential, however, is not the same as your sales forecast. Sales forecast is the actual sales you believe your company will generate during the year based on your market research. In the Bio-Diapers example, the sales forecast for the first year is $155 million, far short of the $248 million potential. Companies don't achieve the total sales potential within a market for several reasons:
*Margin of return on the investment
*Unforeseeable market factors
Perhaps the greatest reason, however, that companies don't achieve total sales potential is because of the law of diminishing returns. This means the more aggressive you are in achieving total sales potential, the greater your marginal cost will be for each additional percentage point above your sales forecast.
For instance, in the Bio-Diapers example, we've forecasted sales of 62 percent of the total sales potential. To achieve the goal, $15.5 million have been budgeted for marketing. That's $250,000 for each percentage point of sales in the forecast. To increase our sales forecast beyond this point and achieve our total sales potential, we would have to raise the cost per point aggregately. This may be $300,000 per point, $350,000, or as much as $500,000. If the cost per point goes up to $300,000, for instance, you would need a total marketing budget of $30 million. That's almost double the original budget in order to achieve the additional 38 percent. Most companies won't be able to sustain this expenditure, and it is not very good planning to try to do so. The return on investment will decrease while your overhead increases. Your break-even point will be extended dramatically and you won't reach your profit goals. All this has to be considered when forecasting sales.
In the final installment of our Marketing Plan series, we'll be covering the Summary. Tips are updated daily at 5:00a.m. PST.
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