Entrepreneurship, Second Edition

8.4. Build-Up Method

Scientific findings suggest that people make better decisions by decomposing problems into smaller decisions. If you think about the business planning process, you are going through a series of questions that help you answer the big question: Is this an attractive opportunity? Thus, you evaluate the industry, the competition, the customer, and so forth. Based upon that analysis, you decide whether to launch the business or not. Constructing pro-forma financials is part of this process. In the build-up method, you look at the revenue you might generate in a typical day. You then multiple that day times the number of days you're open in a year to come up with your yearly revenue. You then do a similar exercise for costs. Doing your revenues and costs on a daily basis helps you come up with more realistic annual projections.

Figure 8.2. Financial construction checklist

The place to start is the income statement; the other two statements are in part derived from the income statement. First, identify all your revenue sources (usually the various product offerings). Second, identify all your costs. Once you have the business broken down into its component parts, the next step is to think about how much revenue you can generate in a year, but we can decompose this estimate as well.

8.4.1. Revenue Projections

Instead of visualizing what you will sell in a month ...