Something that seems to scare most entrepreneurs is figuring out how to do pro forma financial projections. It’s scary stuff — you really don’t know what the costs are going to be, what your sales are or how exactly you’re going to have the cash flow to make payroll even before you start. All you know is that you have a product idea, and maybe costs or the right price point. Beyond that, you’re really not sure.
I’m not a finance wizard, but I’ve pulled several pro forma financials together for various businesses. The long and short of it is, every investor/bank wants to see the same stuff — sales, cost of goods sold, expenses, net profit, etc. It’s not altogether difficult, but the process can be very intimidating.
I have some things that I’ve followed along the way below the fold . However, to get you started, I’ve developed a starter template that I’ve used on several projects (albeit with some significant edits) that you’re free to download (FinancialsTemplate.xls – 118kb). This should help get you started, but realize that it’s only a template and I don’t take responsibility for your final version.
Thoughts and tips are below the fold…
First, pulling together a beginning pro forma is absolutely essential. From a business standpoint, it helps you to figure out whether or not your product idea is viable in the first place. From an investor standpoint, it helps to get a general idea of what the business opportunity is. I’ve seen many entrepreneurs go years before doing rudimentary calculations like this (needless to say, it wasn’t until they took this step that any Angel/VC took them seriously). This is not to say that these projections can take the place of something a CPA can pull together (In Pittsburgh, my personal favorite is Wilke & Associates in Carnegie, who I’ve used several times), but it makes sense to hold off on spending the money until you have a better idea of where your business stands or when a serious investment prospect asks to take this step.
Second, your pro forma projections will constantly change as you get a better idea of costs and revenue potential. It’s not unusual to game out several scenarios with multiple changes given certain factors. The best way to save time is to create an assumptions page where you place most of your data. That way, if you’re changing your numbers, you can adjust them in one cell on one sheet, and the rest of the sheets will automatically update with your new information.
Third, I suggest linear cost structuring (i.e. pick one number and stick with it). In one business plan I saw, an entrepreneur created a rather complicated cost of sale function that curved downward. When I saw this, I asked the entrepreneur if she had perfect foresight to determine what the beginning marketing costs would be, on which the curve was based. She responded that she did not and, in fact, the number was pretty much out of thin air. She changed her projections to something far simpler, which in turn led to fewer questions from her potential financiers.
Finally, do some serious market research before you create a pricing model. While this is good advice in general, a bad pricing model (Chris Dixon speaks very well to cost/pricing here) can make your top-line revenue unnecessarily low, which will make your business less attractive.
Good luck with your projections and feel free to ask questions or let me know if there are errors in the sheet.