The Key to Sound Financial Modeling for Your Business Plan? Market Research

1. The Key to Sound Financial Modeling for Your Business Plan? Market Research When writing your business plan you will need to utilize Financial Modeling to create your financial projections. One of the most important aspects of putting together your financial modeling is having sound numbers to input. The best way to determine realistic numbers that should drive your financial modeling is through thorough market research. Market research will inform your financial modeling in a number of key ways. Choosing Your Price – Through your market research you will identify the competitors in your market. Part of this competitor analysis will include looking at what they charge for products or services similar to yours. While there will be several variables that will factor into your pricing, competitor pricing should absolutely be one of them. What you will charge for your products is the building block to all revenue assumptions that will go into your financial modeling. If you have to change your prices too much after opening, due to inadequate market research, this will quickly impact your future Financial Projections – often in the form of your budgets and forecasts. Determining Demand – Market research covers a wide array of external factors that will influence your business. One thing that it will uncover is how much of a market – as a simple example this could mean how many people – exists that may be willing to purchase your product. In order to generate revenue projections, you not only need to know how much you’ll charge but, have an idea of how much you’ll be able to sell. You will rarely have a definitive idea of demand, especially if your business is not running yet. Instead, your market research gives you a realistic range of demand you can expect. You can then test out numbers within the range through your financial modeling. Through viewing the results of your financial modeling scenarios, you will be able to finally arrive at the financial projections.

2. Estimating Expenses – The opposite side of determining your projections is knowing your expenses. Just as money comes in, it must go out. The question is how much money will need to go out? Yet again, market research helps you arrive at this answer. Through the process, you will learn things like the avg. cost per sq. foot for a commercial lease or average salaries for certain types of positions. After your market research allows you to estimate your key and major expenses, those numbers will start to be applied in your financial modeling. Combined with the aspects already mentioned above, you are now able to start to fully piece together the basics of your key financial statements such as the Profit & Loss – also known income – statement. This is only a sampling of how Market Research will play into your financial modeling. The connections are expansive and deep and should not be underestimated. It’s easy to think of market research as a completely separate part of the business planning process but, that’s simply not the case. Like all other aspects of a business plan – and strategic business planning in general – they all play an important part in a much larger whole. If you want to conduct bulletproof financial modeling, make sure you have current and thorough market research.