As you dive into your intricate multi-worksheet revenue model, consider the following 15-point checklist to help you strengthen the quality of your projections and reduce the number of annoying and often costly iterations. You may want to revisit the checklist regularly as your venture develops and you gain more in-depth knowledge of your business environment. This checklist applies mainly to software companies, as it does not address some of the particularities of other industries.

1. Rule # 1: Avoid picking revenue projection figures from thin air, ie. figures that show cosmetically appealing trends and magnitudes but lack substantiation as discussed in this checklist. An approach that is based on picking numbers from thin air can be easily detected by investors and damaging to your credibility.
    
2. Market: The size of your addressable market, current and projected, imposes a range of upper boundaries on your revenue projections. These boundaries are a direct function of palatable market shares for similarly situated companies in your space. Protect the integrity of your model by implementing automated sanity checks which trigger colorful alerts when your projections surpass certain pre-imposed market share thresholds. For example, if you have conditional formatting in your spreadsheet program, you can color your revenue cells in red when your market share exceeds X% (a threshold market share), warning you that you have stepped outside the palatable zone.
    
3. Product Plan: Do you have a product plan describing which products you will be completing over the horizon of your financial plan, their features and release dates? You need to have such a plan on hand prior to developing your revenue model, since your revenue projections for a specific period will be derived from sales of the various products available for use by paying customers during that time. By referring to your product plan, you can prevent certain pitfalls such as projecting revenues for version 3.0, while version 2.0 is still supposed to be in development.
    
4. Competition: Find out who your competitors are, what products they are selling, how they are selling them, and for what price. If you decide to go with a radically different approach than your competition, you should be prepared to justify why it will lead to results that are more effective, profitable and sustainable. And while we're on the subject of competition, please stay away from the claim that you don’t have any – investors don’t like to hear this!
    
5. Customers: The preferred way to build your revenue model is to rely on solid market and product validations you have performed with prospects prior to developing your product. In the March 10, 2004 issue of Propel Your Venture, Didier Moretti shares a great approach of how he achieved such a validation for Annuncio Software. By using a list of actual prospects, corresponding budgets for your solution, expected time of purchase, and probability of closing the sale, you have a pretty good shot at building a referenceable, and therefore plausible, revenue model.
    
6. Sales Cycle: How long is your sales cycle? One month, 3 months, 6 months? Given your selling resources and your sales cycle, there is an implied upper limit to your revenues from new customers - unless you reduce the sales cycle, increase your selling resources, or do both.
    
7. Inside/Outside Selling: Will you be using an inside sales force to sell your products, or will you be relying on outside resources such as strategic partners, OEMs, distributors, or outside sales representatives to do the selling for you? Each method will impact your projections from a number of angles involving expectations, results, control, and costs.
    
8. Selling Resources: Each selling resource, whether inside or outside, can achieve results within a certain performance range measured in dollars or number of customers. For example, if an inside salesperson is expected to close between 3 and 5 new customers or between $150,000 and $250,000 in new contracts per quarter, your revenue projections should reflect, at best, $250,000 in revenues from new customers for a specific quarter for each salesperson you have on staff.
    
9. Marketing & PR: You will undoubtedly plan some marketing and/or PR activities to promote your offering: trade shows, advertising, and press releases, to name a few. The booster effect from such efforts on your projected revenues should be timed in relationship to when these activities occur.
    
10. Up-Sell/Cross-Sell: Your revenue projections need to reflect up-selling of higher end solutions to some of your customers, and cross-selling of related products and services such as installation, training, support, consulting, etc., whenever such solutions, products and services are available and/or applicable.
     
11. Attrition: Some of your customers will invariably leave your solution for a variety of reasons (go to competition, develop an in-house alternative, switch to another process, go out of business, etc.). While it is difficult to predict your rate of attrition in the early phase of your venture, you need to factor in some reasonable rate that you can then adjust when historical data becomes available.
     
12. Licensing Revenues: Do you plan on licensing your intellectual property to strategic partners? This may represent an additional source of high margin revenues. Unfortunately, this type of licensing revenues remains difficult to forecast until you have entered into a number of such agreements and established a pattern of contractual terms, which then become easier to predict. In the meantime, it would be wise to adopt a very conservative set of projections in this category or ignore these types of revenues altogether.
     
13. Other Revenues: There's a multitude of “other revenue” sources that could be applicable to your venture: design, consulting, joint venture, referral fees from partners, etc. These too may be hard to predict initially, so the same comment applies in this case as for licensing revenues mentioned above.
     
14. Growth: How fast will your revenues grow in comparison to your addressable market or your competition? Even if you have a disruptive technology, or a uniquely compelling solution which supports the claim for a considerably faster growth rate, it would be hard to defend a model projecting a dizzying revenue growth from say $1M in year 1 to $50M in year 3. So, always subject your projections to a rigorous reasonableness test. Consider using an alert similar to the one described in point 2, which is triggered when your revenue projections display a growth exceeding Y times (a threshold multiple) that of your addressable market.
     
15. Consistency: As you tie your financial plan (which includes your revenue model) in with your business plan, you need to insure that there is consistency in the approach, data, and assumptions between the two documents. Revisions to one plan should be promptly reflected in the other.