Use pro formas to plot your route to success
Running a business is like going on a road trip — and a detailed business plan that includes a set of pro forma financials can serve as a road map or GPS app that improves your odds of arriving on time and on budget. If your plan doesn’t cover the prospective quantitative details in pro formas, expect to hit some bumps along the road to achieving your strategic goals.
What to include
Investors and lenders may require business plans from companies that are starting up, seeking additional funding, or restructuring to avoid bankruptcy. Beyond all of the verbiage in the executive summary, business description and market analysis, comprehensive business plans include at least three years of pro forma:
- Balance sheets (projecting assets, liabilities and equity),
- Income statements (projecting expected revenue, expenses, gains, losses and net profits), and
- Cash flow statements (highlighting sources and uses of cash from operating, financing and investing activities).
Pro forma financial statements are the quantitative details that back up the qualitative portions of your business plan. Pro formas tell stakeholders that management is aware of when cash flow and capacity shortages are likely to occur and how sensitive the results are to changes in the underlying assumptions.
How to crunch the numbers
Unless you’re launching a start-up, historical financial statements are the usual starting point for pro forma financials. Historical statements tell where the company is now. The next step is to ask, “Where do we want to be in three, five or 10 years?” Long-term goals fuel the assumptions that, in turn, drive the pro formas.
For example, suppose a company with $5 million in sales wants that figure to double over a three-year period. How will it get from Point A ($5 million in 2016) to Point B ($10 million in 2019)? Many roads lead to the desired destination.
Management could, for example, hire new salespeople, acquire the assets of a bankrupt competitor, build a new plant or launch a new product line. Attach a “statement of assumptions” to your pro forma financials, which shows how you plan to achieve your goals and how the changes will flow through the financial statements.
Running a company following a business plan that doesn’t include pro forma financials is like going on a road trip with an unreliable GPS app or a bad map: Pro formas help you monitor where you are, what alternate routes or side trips exist along the way, and how close you are to the final destination. We can help you prepare pro forma financial statements, compare expected to actual results and adjust your assumptions as needed.