Market research- The final, and often most expensive, route is market research. Sometimes, this can be done through verifiable 3rd party research, such as industry trade publications( i. e. STR Global for hotel data or RS Means for construction data) or databases, like Factiva and FirstResearch. However, these sources may lack the specificity that you require.
In this case, you might consider hiring a market research firm to do a study, especially for larger ventures into new or unpredictable markets. The most important feature of market research is getting feedback directly from potential customers. So, if you have a question about your financials, hire a market research firm to find customers in your target market and ask them that question.
USCIS is increasingly issuing requests for further evidence( RFEs) for 3rd party studies specifically, further evidencing the need for quality, well-researched, and written support for business plan assumptions.
Three common sense guidelines Check for reasonableness- Do a gut check of the final outputs of your model( analyzing sales, margins, EBITDA, etc.) to see if they are out of place. You may want to alter your assumptions compared to your competition if your business has a more extreme market position, such as a loss leader or a premium brand. For example, if you want to be a premium brand, do not just assume a higher selling price, but also consider lower selling volumes or higher expense levels.
Stay conservative- One important practice of financial modeling is conservatism; when in doubt, you should be conservative with your assumptions in order to avoid bias and prevent extremely negative results. This can include choosing a lower selling price, a lower selling volume, or higher research and development expenses.
Change them!- Our final recommendation is that you update and change your assumptions as you obtain more information. Do not be afraid to admit that your initial projections were wrong and to adopt a more realistic view when you have new insights.
Two practical examples Revenue example— pricing Revenue is, in its most basic form, price multiplied by quantity. This means that your pricing is one of the most important assumptions on the revenue side of your model. For example, if your regional center is building a hotel, and your model calls for $ 175 per night as your base rate, but the customers are only willing to pay $ 135 per night:
• When you go to market, you will have to lower the price to $ 135 per night. This represents a 23 percent price reduction and will negatively impact your margins, and could even mean the difference between profitability and failure.
• OR You might still book stays at your hotel, but at a lower occupancy than you initially projected. If your model assumes that you maintain 75 percent occupancy, and you end up at 50 percent, your financials could become unsustainable.
You should conduct intensive primary and secondary research, perhaps using a third party, to validate the nightly rate and projected occupancy that you use in your model.
Cost example— staffing
For most companies, payroll is the largest single expense. Accurate data on salaries is readily available through many public sources. However, understanding and projecting an effective staffing model is not a straightforward task. Again, using the example of a regional center building a hotel, if you assume one position will handle both marketing and sales, but you end up needing two separate positions:
• You will have more payroll expenses than you projected, which directly cuts into your margins. This is problematic, especially when considering expensive benefit packages and continually rising healthcare costs.
• OR Your team will be under-staffed and you will not be able to drive the projected revenue. If you do not hire the second person, the additional expense will not show up in the SG & A line on the income statement, but this mistaken assumption will negatively affect top-line sales and compromise your model in the long run.
For the most part, good information on staffing models comes from industry insiders. You should consult the relevant trade organization or make sure that you have an industry expert on your team. The bottom line here is: do not make guesses or wing it. Use benchmarks or historical data from an existing, profitable operation.
No model or business plan is perfect, but you can dramatically increase your overall accuracy by doing the detailed work of putting accurate data into your model. This is good for your business, and for your regional center and investor EB-5 applications. When developing assumptions, you should try to incorporate historical data, the opinions of industry experts, and market research. Then, you should supplement these sources by being conservative, checking final outputs for reasonableness, and updating your assumptions when appropriate. Assumptions are the fuel for your financial model and business plan, so if you want to go the distance, don’ t skimp— use the highest octane you can.
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Soyini Coke is managing principal at Annona Enterprises, a strategic advisory firm that provides business planning and investment support for companies with up to $ 100 million in annual revenues. Most recently, Soyini has finished The Perfect Business Plan: A Step-by-Step guide, which captures the methodology she has successfully used with her clients. She began her career at McKinsey after graduating cum laude from Harvard University in 1998 with a Bachelor of Arts in Applied Mathematics and Economics.
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