Budget Planner - Tips for Building a Revenue Budget

18.08.2019
Brooks Keret Financial Management
1. Start-ups work to develop innovative solutions with unique features in diverse fields. Therefore, in building a revenue model, there is a very wide range of parameters that can affect revenue. The above variances do not allow for a single uniform model for calculating revenue. Therefore, almost every company needs to develop its own model with unique characteristics for their field. In light of this, we will focus primarily on our attention to the common parameters and considerations that are required.

2. In order for a revenue model to be believable to investors and executives, it must be simple and transparent, so it is important that the numbers are based on reasonably detailed and auditable estimates and assumptions. The bottom-up budget must be built basic assumptions and using simple formulas.
 

3. Developing a revenue model is a complex task. Many times a company can choose from several different possible models. We recommend building a revenue model while brainstorming and consulting with professionals who can help raise questions and guide you to find the best fitting model for the company's activities.
 

4. Along with the revenue calculation table, there should be a table for calculating the cost of sales / services. This table should summarize the direct and indirect costs required to provide the service / product. (Direct costs - costs that are directly dependent on revenue. Indirect costs - costs required to build or maintain the infrastructure that enables service delivery.)
 

5. Sometimes the company's product or service is relevant to many fields and markets and it can be highly tempting to expand into each one all at the same time. Expanding too fast can be very risky from a developmental, operational and budgeting perspective. Therefore, the work plan should focus and prioritize using the budget, which markets and areas of activity you should start operating in, and from there develop an appropriate expansion plan.
 

6. In preparing a work plan and a budget based off of it, you need to choose the potential markets; among other things, which populations are most suitable. Is the product/service a "must have" or is it a "nice to have". Is the service specific to one single country or is it relevant to many countries.
In the event that it is suitable for many countries. Many questions arise, among other things, which countries are most relevant and suitable due to, easy entry, low costs, high chances of success, regulatory difficulties, etc. What is the infrastructure required to establish activity in a new country? What is the best way to enter a new country (through a subsidiary, local sales representative, franchisee, etc.)?

7. It is necessary to check whether the service is relevant to a single field of activity. Or through adjustments and updates can the service be relevant to other areas of activity as well. It is extremely important to prioritize the areas in which you wish to work.
 

8. You need to adjust your customer billing policy pursuant to the sales and investment (in terms of sales and cash), such that there will not be a gap in the cash flow and thus endanger the company.
 

 The revenue model requires, inter alia, the following components:

 

a. The relevant general market shares for service / product.

b. Market share that the company is trying to obtain

c. The number of customers that the company is targeting, taking into account customer characteristics. (size, field of activity, private / business, and more)

d. Types of products / services offered

e. The prices being charged to customers for the various types of products / service.

f. The company's share of income in relevant cases (revenue sharing) or the commission rate expected to receive / pay from the total income.

 
 Examples of parameters to consider:

 

A. The relevant general market share for service / product. (Countries, fields of activity, product type)

1. The relevant market shares for service by countries / field of activity. (Data from market research or online Data)

2. Market share in countries where the company intends to operate during the budget period.

3. Plan of development of phases during the budget period and expansion to other countries. (The plan must be feasible and take into account the resources required to penetrate the country, both financially and in terms of manpower that the company has.)

4. Market share of the relevant areas of activity during the budget period. Development plan for expansion into other markets. (Sometimes the service provided is specific for on field and requires adjustments in order to expand into other markets. The company should select a main field and gradually expand into different markets)

5. If there are several relevant markets of activity or several countries in which to operate, it is generally advisable to build a separate table of calculations for each separate market or country The market share for the different product types: premium, professional, regular. Define the relevant populations for use of the product or service.
 

B. For the purpose of estimating customers

 

1. A realistic target of market share that the company expects to achieve over a period of time. A logical growth rate from 0 to the target. (See that marketing and other activities are budgeted to support the goal)

2. Check that the number of new customers acquired is reasonable and the technology / company can handle the amount without compromising the service.
- Join rates
- Abandonment rates

3. Many times the service offered to customers will be significantly different depending on the size of the company. Because of the variance, we recommend separating and calculating the expected number of customers / transactions by size: large, medium, small. When the variance is not large, average data cannot be split and simplified.

4. Many times when purchasing licenses even within large customers there is a purchase that develops over time. (Start Pilot and Increase)

 

C. Sales

 

1. Penetration Pricing

2. Price adjustments (raising/lowering) during the period by customer/service

3. Market prices for similar products or services or substitutes

4. Examining parameters that affect prices in specific markets (such as seasonality, market options for payment, prices vary by quantity)
 

D. Direct and indirect costs for providing the service

 

E. Income recognition policy. Return Policy. Sales and collection policies.

 

It should be noted when the company is considered to be providing the full service and responsibilities to the customer from which it can recognize budget revenue.

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