A company’s business plan is the road map used to guide the company through its different stages of growth and change. When a company is run properly, nothing happens by chance because it is all planned out in the business plan. Most lenders require a business plan to help fund any start-up, and every smart business updates its business plan each year to keep the company on the right path.
The business plan is a projection of how things will happen in the coming year, or years. There will be sales plans and marketing programs the company expects to use to grow revenue. All of the new product developments and the major company changes such as expanding operations are in the business plan. Behind all of these future actions is the pro forma financial statement. This is the projected financial statement for the year that helps the company to make important decisions as each new challenge is met.
Pro Forma Revenue
If you are creating a pro forma financial statement for a start-up, then you will have to use current industry data and your own business plans to project how much revenue you will make in your first year. If you are an existing business, then you can use last year’s real financial statements to help create next year’s projections. The primary factors that will help formulate pro forma revenue include:
<li>Performance of company investments</li>
<li>Changes in employee compensation</li>
<li>Changes in overhead costs</li>
<li>Changes in product costs or the cost of raw materials</li>
<li>Projected increases or decreases in sales</li>
Pro Forma Expenses
Projecting expenses for the coming year requires the use of much of the same data that was used to calculate revenue. The major cost factors that are considered significant expenses include:
<li>Repairs and maintenance to company equipment and vehicles</li>
<li>Interest on company funding</li>
<li>Insurance and other non-revenue generating cost factors</li>
A pro forma financial statement looks exactly like a certified financial statement that charts real activity. All of the categories and numbers are the same, but a pro forma statement looks to the future where a certified financial statement is considered a historical document. Each department manager creates their individual budgetary needs, and the executive team puts together expense and income projections for the general operations. All of that data is brought together to create the pro forma financial statement.
A pro forma financial statement is used to apply for funding from lenders, entice investors to take interest in the company and help the company to make important spending decisions. A pro forma statement is usually updated quarterly to reflect any changes in the company’s overall business plan and any changes in the industry as a whole.
Jim Treebold is a North Carolina based writer. He lives by the mantra of “Learn 1 new thing each day”! Jim loves to write, read, pedal around on his electric bike and dream of big things. Drop him a line if you like his writing, he loves hearing from his readers!