Part IX--Financial Projections

The first thing you should do when forming a marketing plan isdefine the structure in which it will be presented. The structureof the plan should allow the presentation of strategic informationin a logical and progressive manner. This structure should beprepared in a written outline detailing the progression of topicsand how they will appear in the marketing plan.

The structure of a marketing plan will usually vary according tothe business, its product or service, and the objectives of themarketing plan. Generally, however, each marketing plan willinclude the following information:

Executive summary

Product description

Market analysis

Competitive analysis

Product development

Operations

Goals & objectives

Marketing tactics

Financial projections

Summary

Financial Projections

This section is perhaps the most critical in the whole marketingplan because it will be the one most scrutinized by the reader. Thefinancial projections section will include all the financialinformation relevant to the project. Although each plan differs,most will require you to have a three-year income statement, athree-year cash-flow projection, and a three-year summary of thebalance sheet. You may also want to include an implementationschedule 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 todetermine whether or not they want to fund the proposal, but it isalso important to you because it provides you with yet anothercrucial tool that will aid you in controlling the course of theproject.

A three-year income statement is a month-by-month look atprojected sales, fixed and variable expenses, and profits. Itprovides a quick look at how you believe your project will performover a three-year period. See the sample income statement.

While the income statement takes a close look at sales andexpenses, the cash-flow projection summarizes this information anddisplays the availability of cash on a month-to-month basis. Acash-flow projection is usually divided into two sections: incomeand total expenses. When expenses are subtracted from income, youwind up with your cash-flow excess or deficit.

The cash-flow projection is an important barometer because itshows when you will need additional money to keep the projectgoing. Although we recommend you perform a three-year profit/lossand cash-flow projection, you can generate them for a one- ortwo-year period or for up to five years. The choice is yours. Athree-year period, however, is generally the norm for marketingplans.

A balance sheet is a table of assets and liabilities (i.e.,summary of credits and debits) as well as capital, or owner'sequity, of a business at one point in time. A balance sheet istypically generated when books are closed after a specific periodof time, either monthly, quarterly, or annually. For the marketingplan, we suggest you provide balance sheets on a yearly basis. Youwill be able to generate a balance sheet for year one, year two,and year three. Information for the balance sheet will be availablefrom your profit/loss statement and cash-flow projection.

You may also want to include an implementation schedule in yourmarketing plan. The implementation schedule lists the major goalsand tasks necessary to complete the project and the capital outlayfor each period. You can base your schedule on weekly, monthly orquarterly periods. If your project is a lengthy one withprojections of up to five years, we recommend basing your scheduleon quarterly periods. If it ranges between a year and three years,implement a monthly schedule. If it is a year or less, you may wantto consider a weekly schedule.

Keep in mind while you are forming your projections that marketpotential, sales potential, and sales forecast all mean differentthings when it comes to forecasting. Market potential pertains tothe total potential sales for a product or service within aspecific geographical area over a fixed period of time.

Sales potential refers to the capability of the market to absorbthe volume produced by a specific company in the industry, such asyours. For instance, market potential during the first year for theentire disposable diaper industry is $3.1 billion, but the marketwill only be able to purchase $248 million's worth ofBio-Diapers during that period of time.

Your sales potential, however, is not the same as your salesforecast. Sales forecast is the actual sales you believe yourcompany will generate during the year based on your marketresearch. In the Bio-Diapers example, the sales forecast for thefirst year is $155 million, far short of the $248 millionpotential. Companies don't achieve the total sales potentialwithin a market for several reasons:

*Limited resources

*Margin of return on the investment

*Unforeseeable market factors

Perhaps the greatest reason, however, that companies don'tachieve total sales potential is because of the law of diminishingreturns. This means the more aggressive you are in achieving totalsales potential, the greater your marginal cost will be for eachadditional percentage point above your sales forecast.

For instance, in the Bio-Diapers example, we've forecastedsales of 62 percent of the total sales potential. To achieve thegoal, $15.5 million have been budgeted for marketing. That's$250,000 for each percentage point of sales in the forecast. Toincrease our sales forecast beyond this point and achieve our totalsales potential, we would have to raise the cost per pointaggregately. This may be $300,000 per point, $350,000, or as muchas $500,000. If the cost per point goes up to $300,000, forinstance, you would need a total marketing budget of $30 million.That's almost double the original budget in order to achievethe additional 38 percent. Most companies won't be able tosustain this expenditure, and it is not very good planning to tryto do so. The return on investment will decrease while youroverhead increases. Your break-even point will be extendeddramatically and you won't reach your profit goals. All thishas 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 at5:00a.m. PST.