Finance: Estimating Revenues (GCSE)

One of the hardest tasks an entrepreneur faces with a start-up business is coming up with a realistic estimate of revenues.

The main problems concern the uncertainties about:

The size of the available market – how much do customers already spend in the market? Not every market is well researched, particularly those which do not involve retailing or which are not covered by official statistics.

The price that customers will be prepared to pay for a new product. A new business will often assume that customers will pay a higher price than they actually will. A new product into a market often has to be offered at a discount (lower price) in order to encourage customers to buy for the first time

The timing and source of sales: where will customers buy and which methods will they use (e.g. from a physical store, marketing leaflet or online store?)

The effectiveness of marketing activities – by definition, new businesses start without an established customer base. Launch marketing activities often do not generate the excitement and customer buzz that is intended!

The response of competitors – how will they respond to a new challenger entering the market? A start-up business cannot expect to enter a market without a challenge from the existing operators.

In general, experience shows that start-ups tend to overestimate their expected revenues in the first year or two.