A key component of any business feasibility analysis is the financial projections. The projections will reveal the financial feasibility, scale, and investment required to get your business going. A common mistake is to create these projections from the top-down, rather than bottom-up. A flawed approach, top-down projections are made when the entrepreneur takes a percentage of the whole market without justification. For instance, a top-down revenue projection might say that by capturing 2% of a billion dollar market, the company’s revenue will be $20 million per year. This is the wrong way to go about it. Instead of guessing a percentage based on the total market size, build your case from the ground up. With a bottom-up approach, each sale must be justified and tied to a business activity. You can tie sales to traffic to your site, a sales team, joint ventures, or advertising spend. To project the revenue of a sales team, for example, calculate how many calls a salesperson can make in a day, the percentage of those calls that result in sales, and the resulting number of sales made in a month. Multiply this total by the number of salespeople and you have successfully completed a bottom-up sales projection.
Anytime you’re projecting into the future, build your case from the bottom-up and you’ll have a solid and realistic foundation to stand on.
