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