Lecture 5

Building Your Pro Forma

Financial Statements
Common mistakes entrepreneurs make
Underestimating
time to
secure
Not financing Top-down
understanding versus
the revenue bottom-up
drivers forecasting
Reduced
survival
chance

Underestimating Lack of
costs comparables

Underestimating
time to generate
revenues
 Financial
Statements

Statement
Income Balance
Of
Statement Sheet
Cash Flows
 FINANCIAL STATEMENTS

SOFTBYTE, INC.
Income Statement
For the Month Ended September 30, 2005
Revenues
Service revenue $ 4,700
Expenses
Salaries expense $ 900
Rent expense 600
Advertising expense 250
Utilities expense 200
Total expenses 1,950
 $ 2,750
Net income
 FINANCIAL STATEMENTS

SOFTBYTE, INC.
Balance Sheet
September 30, 2005
Assets
Cash $ 8,050
Accounts receivable 1,400
Supplies 1,600
Equipment 7,000
Total assets $ 18,050
Liabilities and Owner’s Equity
Liabilities
Accounts payable $ 1,600
Owner’s equity

R. Neal, capital 16,450

Total liabilities and owner’s equity $ 18,050

Assets = Liabilities + Owners’ Equity

FINANCIAL STATEMENTS
SOFTBYTE, INC.
Statement of Cash Flows
For the Month Ended September 30, 2005
Cash flows from operating activities
Cash receipts from revenues $ 3,300
Cash payments for expenses (1,950)
Net cash provided by operating activities 1,350
Cash flows from investing activities
Purchase of equipment (7,000)
Cash flows from financing activities
Sale of common stock $ 15,000
Payment of cash dividends (1,300)
Net cash provided by financing activities 13,700
Net increase in cash 8,050
Cash at the beginning of the period –0–
$ 8,050
Cash at the end of the period
BUILDING YOUR PRO FORMA FINANCIAL
STATEMENTS

Build-up Method

Comparable Method

Building Integrated Financial Statements

Final Steps
 BUILD-UP METHOD

Revenue
Projections Revenue Worksheet

COGS COGS Worksheet

Operating Operating Expense Worksheet

Expenses

Preliminary
Income Statement
COMPARABLE METHOD

Choose industry metrics

Benchmark other companies

in the industry

Compare your projections to other

companies and industry average
BUILDING INTEGRATED
FINANCIAL STATEMENTS

INTEGRATED
FINANCIAL STATEMENTS

Statement of
Income Statement Balance Sheet
Cash Flows

Monthly forecasts Consider

for years 1 and 2 Accounts Receivable

Adjust monthly forecasts Show outflow and

according to seasonality depreciate PP&E

Annual forecasts Consider

for years 3-5 Accounts Payable
 PUTTING IT ALL TOGETHER

2-3 page explanation of your

Financial Spreadsheets

Discuss the Discuss the Cash Discuss the

Income Statement Flow Statement Balance Sheet
Talk about revenue drivers Focus on major infusions of cash Talk about major asset
categories, and any
Talk about seasonality Describe
describe the
the nature
nature of
of your
your Liabilities that aren’t
Accounts receivables and payables clear from the previous
Discuss the expense categories accounts receivables and payables discussion
Mention PP&E expenses
Mention PP&E expenses