Projecting People’s Purchases Properly

As I mentioned before, the big hump for me in starting to have momentum is projecting revenues for the music store. Not that momentum is completing, but without it there is no completion.

So how does one decide how to project sales?

We found some data about local household spending from Peoria right at the Bradley website. But it was from 2006, which was before the economy crashed. But it did give us a sense of the market size from eight years ago. We also found some national data from 2005 and 2013 showing that the rebound from the recession had returned, nationally, from $7.7B in 2005 to $6.8B in 2013. So 2013 was roughly 90% of the 2005 peak for the music supply category.

So we assumed a baseline for 2014 of 90% of the 2006 Peoria metro sales. In 2006 Musical Instrument retail store sales in the Peoria metro area was about $6.2M. So our 2014 baseline for the total market size for musical instrument retails stores was $5.57M, and then assumed a 3% growth for 2015 to $5.73M.

“But that’s market size…not projected sales…how does that help?”

Here’s where the tricky part starts, but remember it’s a business plan, not a historical sales record.

We decided that we thought we could achieve, by the end of year 1, 8% of the overall market in musical instrument retail. So on a monthly basis, starting with 0% of the market in January, and getting to 8% of the monthly average ($5.7M/12) by December, we projected out a maximum of $272,000 in sales for the first year. It’s kind of a dicey projection, but when figuring in that $272k as a max, we projected a portion of that to be instruments, a portion to be accessories, and some to be lessons and repairs, based on a guess of our own customer base, and what we wanted to emphasize.

It’s still in large part a guess, but as I look at the quantity numbers over the year it looks like a realistic goal. So based on my projections we would, if it worked out, have (in our first year):

  • 6,431 beverages sold in our beverage bar
  • 110 musical instruments sold
  • 7.625 total various musical accessories sold
  • 2,235 hours of music lessons and other classes
  • 150 instrument repairs

Total projected sales, $245,000 and a net loss for year 1 of $89,000. That’s not counting additional startup costs.

Assuming we could hit 10% market share in year 2 we would turn a profit in year 2, and at 12% of share in year 3 we would just break even over three years including startup costs.  That’s all using the numbers so far…there’s still some work to be done on cost estimates.

So in theoretically in year four we’d be able to start paying back dividends to the investors easily while retaining a good strong cash and profit position, even without expanding our market share any further.

Or if the projections are wrong some investors would lose a bunch of money.

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