We have been
developing comprehensive pro-forma financial statements from “scratch” for
more than ten years. We do
not use “fill-in-the-blank” software with its many limitations.
We mold working
papers to fit your business.
We begin creating financial statements by developing the revenue
forecast. It’s the top
line of the income statement and forms the basis for other activities
discussed in the business plan. The
revenue forecast is the one line in your financial statements that will
attract the most attention. You
must be prepared to discuss your assumptions.
If you are selling more than one product and/or service, we
create the revenue assumptions by product and service mix. If you are selling to different channels that have materially
different pricing and distribution strategies, we will create the
revenue assumptions by product/service mix by sales channel.
Once we have drawn
the revenue picture, we identify direct cost of sales to establish gross
profit. We then begin to
focus on the operating expenses (those expenses that will be incurred
regardless of sales – facility rent and utilities, for example).
Our next step is
developing the balance sheets. What
capital items must you purchase to set your business in motion, does
starting your business require prepaid expenditures, do you have
intangible assets to capitalize? Will
you have accounts receivable, inventory, or other assets?
Will you have accounts payable and other liabilities.
With an understanding
of the elements described above, we can begin forecasting cash flow and
by running several iterations, evaluate how much cash you must have on hand to
begin or expand your venture. We can
now determine your total cash need (for purchases, prepaid expenditures,
on hand). The final step is to include in the financial
statements the loan (and/or investment) and the payback proposal.
Assuming you make a reasonable profit and can demonstrate to your
lenders how they will be repaid, your financial statements will be
complete. We normally
prepare financial projections by month for the first twelve months and
by year for the four years thereafter.
must hang together. There
are specific relationships between income statement and balance sheet
accounts. The trained
reviewer can immediately spot statements that do not hang together, and
that is generally the end of the review process for those statements.
Financial projections prepared by The Business Plan Store clearly
demonstrate the ties between the income statements and balance sheets.
Our cash flow statements begin with operating profit because all
transactions from the sales transaction to that point are clearly
defined in the income statement. We
then make the adjustments for depreciation expense (a non-cash
transaction) and changes in operating accounts on the balance sheet
(e.g., inventory, accounts receivable, accounts payable) to arrive at
Cash from Operations before Interest and Taxes.
We then adjust for interest, taxes, debt payments (or additional
borrowings), and changes in other non-operating accounts (e.g., owner
equity). We then reconcile
the net change in cash to the change in the cash balances on your
beginning and ending balance sheets – proof certain your financial
statements hang together. We
guarantee financial projections we prepare will hang together.
A few words about
detail: too much detail can
obscure the financial picture making it difficult to follow and leading
the reader to believe the developer has done a marvelous job at
mastering computerized calculations but wondering whether or not there
is any substance behind the numbers.
Too little detail leads to a loss of credibility and questions
about the underlying assumptions that may not be answerable.
The selection of the right amount of detail is a key element in
getting a plan accepted. To
achieve credibility, a plan must be understandable without being
confusing or appearing thoughtless.
The Business Plan
Store puts just the right amount of detail into your financial
projections while providing you with all the underlying detail so that
you are prepared to answer any question that may be asked by the reader.
Every small business
should prepare a set of financial projections at least once each year.
They will tell you where you are going and how to get there.
Mid-sized businesses should do them at least quarterly, with
three-month historical and nine-month forecast, the “3 + 9” review.
The “3 + 9” review not only establishes goals and budgets,
but also enlists the support of staff to achieve the numbers for which
they are responsible.
If you have a need
for financial projections for your business, call us.
We have the expertise to do them correctly!