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Creating Pro Forma Documents
William L. Dougan Irvin L. Young Professor of Entrepreneurship Professor of Management UW-Whitewater
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Six pieces Revenue Model Profit and Loss (P&L) Cash Flow Balance Sheet
Startup Capital Notes
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Order of Importance Cash Flow Revenue Model Notes Startup Capital
Profit and Loss (P&L) Balance Sheet
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Order of Construction Revenue Model Startup Capital Cash Flow
Profit and Loss (P&L) Balance Sheet Notes
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Business Plan Software
Placed in a spreadsheet or a Business Plan model Business Plan Pro Business Mentor PitchThenPlan Kauffman Template
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Revenue Model Your story about how you will sell your products/services Based on monthly quantities Depends on Units or Dollars or both Boat Manufacturer Units Retail store Units are a problem Multiple Products Add effects of each product Additive Linear Model
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Additive Linear Model Month 1 2 3 4 5 6 7 8 9 10 11 12 Prod 1 Units 15
15 21 25 35 45 60 90 100 150 Price 1000 1500 TOTAL 10000 15000 21000 25000 35000 45000 90000 135000 150000 225000 Month 1 2 3 4 5 6 7 8 9 10 11 12 Prod 2 Units 50 75 90 100 120 140 180 220 300 450 Price 80 TOTAL 5000 7500 9000 10000 12000 12600 16200 19800 27000 36000 Month 1 2 3 4 5 6 7 8 9 10 11 12 TOTAL 15000 22500 30000 35000 47000 57600 106200 154800 177000 261000
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Revenue Model Factors Discrete, linear decomposition of a multiple, interacting components Separate effects of multiple products/services Startup delay Production/Sales Ramp-up Diffusion Learning Seasonality
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Sales on Account Not all Sales are cash sales
Large Durable Goods like boats and Heating Systems Most Corporate Sales are on Account SO…….. we need a model for how Sales are Made and Paid Total Sales – Cash Sales (as %) = Sales on Account = Accounts Receivable for first month Accounts Receivable for first month - % paid first month = Accounts Receivable for second month Accounts Receivable for second month - % paid in second month = Accounts Receivable for Third month (OR Bad Debt Expense)
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Startup Costs List and numerical equivalent of “stuff” you need to start business Land/building Equipment Operational Office Vehicle Furniture Professional Fees Accountant Lawyer Consultants Raw Materials/Supplies Insurance Liability Building Bonding Life/Key person Health Membership Fees Advertising/promotions Reserve for Wages/Salaries Banking Line of Credit Account Initiation Loan Initiation
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Cash Flow Checkbook/Cigar box model
Sources/Dispersements and Balance of Cash by Month Documents Inflows and Outflows Big rule CASH BALANCE CAN’T BE NEGATIVE
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Cash Items SOURCES: Cash Sales Collections from AR Loan Proceeds
(Different than Sales on account) Collections from AR Loan Proceeds Equity contributions Cash Capital Goods Interest Grants Prizes Paid–in Taxes
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Cash Items DISPERSEMENTS
OPERATING EXPENSES Cost of Materials Wages Salaries Income Tax FICA Benefits Sales Taxes Insurance Utilities Advertising Bank Charges Dues and Subscriptions Licenses and fees Marketing/Promotions Meals and Entertainment Office Expenses Professional Fees Property Taxes Rent Maintenance Shipping/Delivery Utilities Telephone Training Travel Vehicle CAPITAL COSTS Capital Purchases Estimated Tax Payments Reduction of Principal Interest Payments Owners Draw
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General Form Cash Flow + Cash In from Sources
Opening Cash Balance Month 1 + Cash In from Sources - Cash Out for Dispersements = Ending Cash Balance Which Becomes (for next month) Opening Cash Balance Month 2 + Cash In from Sources - Cash Out for Dispersements = Ending Cash Balance Which Becomes (for next month General Form Cash Flow
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Profit and Loss Uses much of the same information as Cash Flow
Major exceptions Depreciation Inventory Receivables Payables
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Profit and Loss Net Sales Gross Profit Operating Profit (EBITDA) EBIT
- COGS Gross Profit - Operating Expenses (See List from Cash Flow) Operating Profit (EBITDA) -Depreciation - Debt Amortization EBIT - Interest EBT - Income Taxes + Interest Income + Royalties NET INCOME
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Balance Sheet Metaphor of Balance A L + E
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Balance Sheet A L + E
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Balance Sheet Issues Balance Sheet is Snapshot, Cash Flow and Income Statement are Time Exposure Assets – Liabilities = Equity (plug Figure) CAN’T HAVE NEGATIVE EQUITY Can have negative retained earnings, but need paid-in capital to balance it If Equity is Negative, you need more capital or lowered liabilities CAN’T ADD ASSET BALANCES FROM MONTH TO MONTH
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Notes These provide the justification for values on the other sheets
Act as a source of information about the assumptions used in creation of the other documents Don’t have to be elaborate, just have to show a short justification for why each number is the way it is
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Resources Real Estate Cost Salaries www.salary.com
Salaries Utilities call utility companies Mortgage Calculator All over internet Insurance call agent Industry RMA Statement Studies + Value Line + Associations Unlimited (for Industry info)+ Dunn and Bradstreet General
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