Imagine if you were pitching a Investor to get funding for your business – what would you tell them about your business model?
What business assumptions would you make about your profitability?
Even though you’re not going to show a Investor your financial model, this is a good exercise to go through no matter what.
Building out a financial model gives you the chance to really think about the details of budgeting, costs, revenues, etc.
Beyond that, it will also help you set expectations, brainstorm new product ideas, and set milestones and goals.
It’s super important to know what your revenue goals are for the next 1-2 years.
That’s it.
Beyond 2 years, it’s basically a black hole… except that you fervently hope and wish that your revenues skyrocket.
Once you have set your 1 and 2 year revenue targets, you need to know how your’e going to get there.
And this is really the key. It’s at this point where you need to justify your revenue target and your business model.
So here’s a little help.
Forget the big revenue target.
Try breaking down your revenue targets into smaller and smaller chunks.
Ask yourself:
- To hit my revenue target, how many clients do I need?
- To get that many clients, how many prospects will I have to reach?
- What will my conversion rate be? e.g from the free beta to paying system? Or from discovery call to signed on, if you are a coach/consultant?
- What will your retention rate be for customers from year to year?
Remember , its much more expensive to find new customers, than to retain old ones.
Ultimately, the questions you ask will depend on your product/service and business model, but your goal is to look at your business as if it was onion, that you were peeling.
The goal is to get deeper and deeper into the details, as you’re peeling the onion.
The inside of your business, like the inside of the onion, is really the heart of the matter.
Going through this exercise of taking a single revenue number and breaking it down will help your business in the long run..