Sans magical divining instrument, how does an entrepreneur approach creating a forecast for a beauty company that doesn’t yet exist? Beauty Independent endeavored to answer that question by speaking to beauty industry insiders to identify key forecasting steps founders should take before they open blank spreadsheets and while they’re making their best guesses at populating cells—and understand why their projections must be revisited and revised regularly.

Are you a former Coty exec or is this venture your first foray into the beauty realm? Is your co-founder a digital marketing whiz? Does anyone on your team understand supply chain management? “Before you spend a dollar, just make sure that you have the experience on your team to know where to spend those dollars,” instructs Nicole Massimi, an ex-Birchbox executive who’s now a strategic growth advisor and market expert to beauty investors. “It always starts with making sure that you have the expertise. I think a lot of people feel like they can wear a lot of hats and that can be a great thing, but be brutally honest about where your strengths are and where you maybe need some additional leverage.” She suggests that, once you figure out your weak spots, put money aside to hire a consultant to help you with those weak spots to avoid costly mistakes.

Production is often a pitfall for new brands and an area where there are consultants to offer a hand. “With production in many cases being 40% of your initial spend or more, depending on how many SKUs you have, it’s a massive risk,” says Massimi. “If you get it wrong, if you have a formula that fails, if you spent a few dollars too much, it’s going to destroy your margins, and it’s going to be a long time before you’ll be able make money. Especially if [you’re launching with] a small pool of money, it goes very quickly, and I’ve seen so many people run out before they even get a real chance to start.”

Roadmap, business plan, whatever you want to call it, make sure you create it before you reach out to a single lab or buy a single component. Massimi suggests approaching it as if you have an investor whether you have an investor or not. “Even if you’re not going out to raise money, pretend that you are and answer the same questions that an investor would ask you,” she says. “Make sure that you are proving out your model in the same way that an investor would expect you to.”

Your roadmap details whether you plan to sell your brand at retail or stick to direct-to-consumer distribution. If you’re taking the omnichannel approach, it will outline what you anticipate the split will be between the two as well as which retailers the brand will be entering and how many doors. Massimi counsels entrepreneurs to be as specific and realistic as possible. “Say, ‘I’m going after Bluemercury, and I want to open with their five top doors,’” she lays out. “It affects your whole plan. It affects your margin because it costs you more to do business there. It affects your inventory levels and when you would go into production for more because, even if it doesn’t sell through, you’re going to ship them a good amount of stock.”

She recommends getting as granular as spelling out that, if the brand were to launch in Bluemercury, it would possibly premiere in May with five doors, and the retailer will take six pieces per door. Explicit assumptions will make it easier for you at the end of the month when you have to reforecast. You can then determine whether your assumptions were unrealistic and adjust accordingly. Massimi says, “Your forecast doesn’t have to be right, but you have to understand your assumptions and how you need to change them each month as you learn. I believe in being as specific as possible, even if you’re wrong.”

Your roadmap will clarify whether you’re aiming primarily for growth or profitability, too. Massimi explains, “If you are trying to be profitable, you’re growing at a smaller pace. Your sales are forecasted down.”

Once you’re ready to fill in your forecast, how do you know how many units you’ll sell each month? If you don’t have any industry experience, you may wonder if you should forecast one or 10 or 10,000 units per month. If you’re already working with retail partners, they can help you build a realistic forecast for your partnerships. “One of the many advantages of having wholesale distribution from the get-go is you can really rely on the retailer,” says Sharifian. “You ask them to provide you a forecast without having any other information and, being a first-time beauty entrepreneur, you can rely on that. It won’t be right because they don’t have a crystal ball, but it will be better than something you come up with.”

If you don’t already have a retail partner, finding comps or companies as close as possible to yours in assortment, price and distribution can be another valuable tactic. You’ll need to access to their sales data, which can be challenging. Massimi advises trying to forge friendships or partnerships with people at comparable companies and see if they’re willing to provide guidance. She says, “If a brand can’t afford to hire a consultant, if they try to make friends and talk to a few people and get some ideas, it will let them know how close they are or how far off.” Talking to salespeople at your target retailer can be helpful, too. Massimi says, “You’re asking them, ‘How many of those lipsticks do you usually sell in a day?’ If you’re forecasting to sell more than Chanel in lipstick, then you might want to adjust your number.”

The spreadsheet below is a sample of a realistic forecast for an independent brand with an average retail price of $50 entering a small beauty chain store with three stockkeeping units. This forecast is assuming a retail margin of 50%. Kelly St. John, founder of KSJ Collective and former VP/DMM of beauty at Neiman Marcus, shares specialty retailers like Anthropologie and Space NK typically command margins of 60%. “Sometimes, if a brand picks up the cost for shipping, the retailer will come down,” she says. Department stores like Neiman Marcus and Saks Fifth Avenue typically command margins of 50% to 55%.

The sample forecast assumes a cost of goods sold at 10% of the retail price, which Massimi pegs as the industry standard for skincare. She cautions, “If you’re outside of that window, you should be really sure that you know how to make money or that the volume will be so big that you’ll be able to make up for it.”

From the total gross profit, a brand will have to allocate for several variable and fixed costs, including, but not limited to, those outlined below.

Massimi, who’s analyzed hundreds of beauty brand business plans for investors, says most founders miss the mark on predicting their brands’ sales and the cost of those sales. “People are not accurate about who their target is. They think their product is for everybody. It can do everything and wash your car,” she says, adding, “They overestimate the size of their target market, and they underestimate how much it costs for them to reach that person.” These errors lead to brands producing too much and spending money unnecessarily. Massimi reemphasizes the importance of creating a roadmap to circumvent wasting precious cash.

If you’re forecast is wrong, you’re not alone. Massimi reports almost everyone is far off with their forecast, either wildly over or occasionally wildly under. She laments, “I can’t tell you how many people think they’re going to sell 10,000 pieces of something or that they’re going to blow through their first 5,000 units. So, they’re making up to 7,500 when in reality they’re going to maybe sell a few hundred.”

Sharifian recommends evaluating the level of risk you’re comfortable with when deciding how ambitious to make your forecast. “If you are a risk taker, you might choose to have an aggressive forecast, but you have to keep in mind that you need the cash to support that,” she says. “Some of the best practices in life are also best practices in business. Here it would be living below your means because the worst thing that can happen to you is that you run out of cash.”

Sharifian proposes planning your forecast and cash in a way that meets your personal and business goals, and is in line with your personality. She says, “If you are a risk taker and you want to push yourself and you’re comfortable with having a certain forecast, a certain sales projection and investment associated with that, then that’s what you’re going to do.”

Massimi and Sharifian were adamant about entrepreneurs reviewing and revising their forecasts regularly, if not every month, at least every quarter, based on actual sales. “You adjust what you forecasted by putting in what your actual sales were,” says Massimi. She notes a revision can be positive or negative. No matter what direction the revision, it provides critical information on how to move forward. “If you’re on track to sell out a month sooner than you forecasted, you need to jump into production or else you’re going to be air freighting everything in and blowing 20% of your margin,” says Massimi. “Many people don’t understand how long it takes to get product.”

By having as clear a picture as possible of the money coming in, you can better manage the money heading out. Sharifian says, “There are going to be fixed costs to your business and variable costs to your business. The fixed costs, the overhead, you want to try to keep low. The variable costs are going to vary with your sales and, hopefully, you’re set up in those arrangements in a good way, but it’s overhead that can really kill you.” Fancy office rentals underpinned by a forecast of $100,000 a month in revenues could be big trouble if you don’t hit the lofty goal.

Skipping forecast revisions can be detrimental to the business. Sharifian warns, “If you wait too long before revisiting your numbers and revisiting your forecast against actuals, you may have missed the window to pivot without running out of cash or you miss an opportunity with a new retailer because you spent too much money over here and, now, you can’t build your inventory for them.”

Will your company be profitable in its first year? “Don’t expect it,” declares Sharifian. “So many people will say, ‘I’m going to be the next Glossier,’ and I’m like, ‘I think that’s awesome, but you know that they just last year became profitable?’ That blows people’s minds. If you don’t have the money Glossier has, you don’t get to do that. I definitely say it is a marathon, it’s not a sprint, and it takes time to build a brand.”

Profitability isn’t generally expected in the second year of a beauty brand either. The general rule of thumb is that, in the third year of business, a beauty brand can break into the black. However, there are wide discrepancies in the extent and speed of profitability. “I’ve seen brands spend very little and get profitable fairly quickly. I’ve seen brands spend a ton and not get profitable quickly. It varies across the board,” says Sharifian. “Be patient. Be disciplined.”

In beauty, building brand equity is more crucial than in almost any other consumer packaged goods segment. “It’s an emotional connection that consumers have with the product that’s truly unique to beauty,” says Sharifian. “People buy your product because they expect it to do what it says it does, but more because they’ve connected to your brand, and brands aren’t built overnight.”