Monday, February 24, 2014

How to Estimate Income When Starting a New Business

How to Estimate Income When Starting a New Business

 
When you are starting a new business, it is important to estimate your expected cash flows. Without an idea of how much money your business can generate, it is impossible to accurately plan for the future. Predicting income is not an exact science, but you can estimate your first year revenues to give yourself a rough idea of how much money you can potentially earn.
Step 1  Estimate your maximum number of sales. You should start by looking at maximum sales you can expect, according to the authors of "Entrepreneurship: Successfully Launching New Ventures." For example, if you are a manufacturer, estimate your revenues based on maximum number of products you can produce; if you run an accounting firm, estimate your sales based on the maximum number of billable hours.
 
Step 2 Estimate the local demand and re-evaluate your estimate. Contact potential clients and customers either through direct contact or with a mailed survey to gather market data. Estimate how much demand exists for your product or service and adjust your estimate sales. If the demand is greater than your capacity, then you don't need to make a change.
Step 3  Estimate the appropriate price for your product or service. Ask questions in your survey about the price that customers are willing to pay and look at how much your competitors are charging. You should aim to price your product or service at a level that is competitive compared to others on the market and within the price range that is acceptable to consumers, according to Donald F. Kuratko and Richard M. Hodgetts, authors of "Entrepreneurship: Theory, Process and Practice," .
 
Step 4  Multiply the price of your product or service by the expected sales. If you have multiple products, perform this calculation for each one and add up the total. This will give you an estimate of your revenues.
 
Step 5  Estimate the cost of producing or purchasing the products that you expect to sell. Contact suppliers to get an estimate for materials or products that you will need.
 
Step 6  Subtract the estimated expenses from the estimated revenues. This will give you your expected revenues for the first year.

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