New Product Income Projections
While many inventors would love to be able to predict right from the start, how much money their inventions will bring in, realistically, it is not possible to predict this until much further into the process of bringing the product to market. Income projections depend on many aspects which will only fall into place at a later stage, and result from an invention being viewed as part of a business, or an enterprise.
Income Projection for LicensorsIf you license your invention to a manufacturer or another company, your ‘business’ as an inventor is that of licensor, and your income will consist of royalties from the licensee. This is potentially the most hassle-free route, once you are over the substantial initial ‘humps’ of developing the invention, securing your intellectual property, and negotiating the licence agreement.
Depending on your contract, your sole expenditure thereafter may be paying to renew your patents and other intellectual property. In some cases, in fact, the company which licenses the invention from you may also undertake to pay for patent maintenance, since it will want to protect its investment as well as possible, and will most likely already have teams of patent attorneys on retainers. If you are offered this, you will probably have to agree to sell a small equity stake in the IP to the licensee, since the company will have to have a material interest in the IP in order to defend and maintain it.
What this means, though, is that income projections from your point of view are very simple: the income you receive from royalties, minus any patent renewal or maintenance contributions, minus any administrative overheads you might also have. Your income will be dependent on the percentage royalty you have negotiated with the licensee and how many units are sold by the manufacturer or retailer. In many cases, the percentage royalty changes with certain production levels or period elapsed, but assuming you can obtain sales projections from the licensee, you should be able to predict your income fairly accurately.
Income Projection for go-it-alone InventorsFor inventors who’ve ‘gone it alone’ in terms of bringing products to market independently, income projections are more complex, since so many factors come into play. Your invention business may now be a manufacturing, retailing and R & D business, and your finances will be correspondingly involved.
In simple terms, a business’s income projection statement is usually a projection of the difference between sales (or other) revenue and expenditure for a given period of time — perhaps month-by-month, over a year, in order to take account of seasonal demand and staffing changes. For most businesses, there are far more types of expenditure, from salaries, rent, advertising, tax, patent maintenance, insurance and so on, than sources of revenue.
The best way to start is to set the projected ‘cost of sales’ for each month against the projected revenue from those sales. If your product costs you £15 per unit and sells for £40, then your net revenue from each sale is £25. Predicting the number of units that will be sold is, of course, unlikely to be especially accurate initially, unless you are in an industry where you can produce to order from buyers. But general month-by-month sales trends are available for different market sectors from market research organisations, so (for example), consumer electronics retailers know that they will receive 30% of their annual revenue from products sold in the run-up to Christmas. Once you have sales data for the first year, you can apply your own seasonal trends to next year’s projections — always bearing in mind that while some expenditure can be varied seasonally (e.g. advertising costs), other expenditure (e.g. rent) will be a fixed amount every month.