| One of the most difficult tasks a new prospective | | | | project to open each month. Allow for seasonal |
| entrepreneur faces is the construction of a Sales | | | | variations. Is the widget a summer item, a Holiday |
| Model. Many books devoted to instruction for writing | | | | item? This will determine peak shipping months.The |
| a business plan devote little or no attention to this | | | | next assumption is sell-in levels. How many units of |
| vital exercise. The knowledge needed to assemble a | | | | the widget will a store typically carry in inventory? |
| quantified, qualified and clearly narrated Sales Model is | | | | Competition averages 18 units per store. Is the |
| essential to convey the scope and validity of an | | | | widget going to be promoted, placed on end cap |
| opportunity.The most elemental data point required | | | | display, given a floor stand or presented in a featured |
| to commence assembling a strong sales proposition is | | | | way? These are questions that must be qualified, |
| the Cost of Goods (COG). Knowing with absolute | | | | quantified and narrated to justify the sell-in |
| certainty the all-inclusive COG is the foundation | | | | assumption.If the sell-in assumption is 18 units per |
| number necessary to build the Sales Model and | | | | store, then our next task is creating a retail sales |
| ultimately a strong business plan. Guessing, estimating | | | | turnover. Again, if it is verifiable that the competitive |
| or hoping that the number you slot into your plan is | | | | leader turns goods an average of eight times per |
| accurate will lead to a solid dead end, and very | | | | year, we will be conservative. An inventory turn of |
| quickly.The Sales Model, just like the completed | | | | six times during year one, seven times during year |
| business plan, is written based on a series of | | | | two and eight times in year three is easily defensible. |
| assumptions. These assumptions are then qualified | | | | This will, of course, be average out as stores come |
| (given historical and current market perspective), | | | | on line during monthly new door openings.As we are |
| quantified (COG and sales goals are utilized to | | | | not completing a proper spreadsheet here, reflecting |
| extrapolate a believable sales universe is available for | | | | 12 month flows in our example, let us assume that |
| the product) and narrated (explanation is provided to | | | | year one sales are for stores that have been |
| support the basis on which the assumptions were | | | | carrying the product for a full 12 months. Here is |
| based). The Sales Model is but one section of a | | | | where our Sales Model construction for year one has |
| business plan: however, it is the heart and soul of the | | | | brought us.Doors Opened 2700 (2% of 135,000)Sell-in |
| following financial section so crucial to investors.I see | | | | per Door 18 unitsWholesale Price 4.00Inventory |
| so many business plans that scream "this is | | | | Turnover 6 TurnsSales Year 1 = $1,166,400Perform |
| guesswork"! First year sales are projected at a nice, | | | | the same calculations on the assumptions we have |
| clean round number (so often $1,000,000). Growth | | | | created for years two and three and the results are |
| ramps up too quickly, and to unbelievable numbers. | | | | $3,061,800 and $6,220,800 respectively.The Sales |
| The justifications for these assumptions are based on | | | | Model we have created for our mythological widget |
| mirrors and hope.Let us make a few assumptions | | | | is built on assumptions that we have vetted, checked |
| here to show a basic example of a method to build a | | | | against historical norms and properly support our |
| believable Sales Model. We will assume that research | | | | theorem with logic and a conservative, believable |
| has proven that our COG (remember, including | | | | rationale. The numbers work together and tell a story |
| packaging, shipper, master shipper and freight, | | | | of strong sales traction with a lot of distribution to |
| customs and duties, if any) is $1.00 per unit for our | | | | be gained (after year three we have 92% of the |
| widget.Our next assumption to decide is the | | | | market still not serviced).We now have the top line |
| wholesale selling price: if the item is to be sold | | | | sales number under which we can project a financial |
| through traditional retail sales distribution channels. | | | | picture that will excite potential investors, licensees |
| The nearest competition we can find on the market | | | | and partners. They will know that we are serious, |
| is selling in mass-market distribution stores (Wal Mart, | | | | professional and knowledgeable. This presentation of |
| K-Mart, etc.) for an average of $6.49. Assuming a | | | | a comprehensive plan supported by reality based |
| 37.5% markup, the competitive item is being sold at | | | | assumptions is lacking in so many business plans I |
| wholesale for $4.06 (round to $4.00). Assuming that | | | | read.By definition, a business plan is based on |
| our item has features and benefits that would be | | | | assumptions, and lots of things happen to distort |
| perceived as similar to the competition $4.00 is an | | | | assumptions. Murphy named a law after himself for a |
| acceptable wholesale. A 25% COG is well within | | | | reason. Stuff happens! Nevertheless, business plans |
| industry parameters (based on historical norms).We | | | | that achieve successful results are built on |
| now have our COG, a wholesale sales price and a | | | | assumptions that mitigate the potential for ugly |
| pretty good picture of the retail price that will enable | | | | surprises. A business plan without a well-constructed |
| the item to be competitive and still offer excellent | | | | Sales Model has no chance of overcoming the natural |
| profit potential. The easy part is over. Here is where | | | | cynicism inherent in investors and |
| things get tricky.Our item will be sold in the hardware | | | | decision-makers.Geoff Ficke has been a serial |
| section of stores. After studying industry specific | | | | entrepreneur for almost 50 years. As a small boy, |
| data and researching the hardware product category | | | | earning his spending money doing odd jobs in the |
| we determine that we will have over 135,000 | | | | neighborhood, he learned the value of selling himself, |
| potential store placements if 100% of the American | | | | offering service and value for money.After putting |
| market could be penetrated. This is hard data. Now | | | | himself through the University of Kentucky (B.A. |
| we must leave science and become artful.How many | | | | Broadcast Journalism, 1969) and serving in the United |
| of these 135,000 hardware outlets can we believably | | | | States Marine Corp, Mr. Ficke commenced a career in |
| project to carry our widget in year one of | | | | the cosmetic industry. After rising to National Sales |
| operations, year two, year three, etc? Making every | | | | Manager for Vidal Sassoon Hair Care at age 28, he |
| effort to build our plan on solid assumptions, we are | | | | then launched a number of ventures, including Rubigo |
| going to be conservative. During the first year after | | | | Cosmetics, Parfums Pierre Wulff Paris, Le Bain |
| operations commence, we will open 2% of our | | | | Couture and Fashion Fragrance.Mr. Ficke and his |
| potential universe. Year two will see the widget's | | | | consulting firm, Duquesa Marketing, Inc. ( has assisted |
| distribution add another 2.5% of the hardware outlets | | | | businesses large and small, domestic and international, |
| and year three we will gain another 3.5%. After three | | | | entrepreneurs, inventors and students in new product |
| years we will conservatively projected 8% of the | | | | development, capital formation, licensing, marketing, |
| potential distribution points for a hardware | | | | sales and business plans and successful |
| widget.Another point to consider when building out a | | | | implementation of his customized strategies. He is a |
| distribution model, not all of the stores will be shipped | | | | Senior Fellow at the Page Center for Entrepreneurial |
| at one point in any yearly cycle. It is important to | | | | Studies, Business School, Miami University, Oxford, |
| have a line at the very top of the cash flow section | | | | Ohio. |
| in the Financials that details how many stores you | | | | |