Pro FOrma for Jinkies Restaurant
Outline of Chapter 10 Pro Forma Financials
Assumptions Sheet
An assumptions sheet is an explanation of the most critical assumptions that your financial statements are based on
In many instances, the assumption sheet references earlier portions of the business plan
Although the assumption sheet is only meant to comment on the most critical numbers used to prepare the financial statements, it’s impossible to overemphasize the importance of conveying that your statements are built on good data
Pro Forma Financial Statements
The pro forma financial statements are the heart of the financial section of a business plan
If your plan has been built in the manner described in this book, most of the hard work, such as projecting sales and creating a marketing budget, has already been done
A firm’s pro forma financial statements are similar to historical statements except they look forward rather than track the past
Most experts recommend three to five years of statements, with the first two years for the income statement and the cash flow statement completed on a monthly basis
If the company you’re writing your plan for already exists, include three years of historic financial statements
Pro Forma Income Statement
The pro forma income statement reflects the projected results of the operations for a firm for a given period of time
It is often referred to as a “profit and loss” because the pro forma income statement records all projected sales and expenses for a given period and shows whether the firm will be making a profit or experiencing a loss
There are three numbers that receive the most attention when evaluating an income statement: net sales, cost of goods sold, and operating expenses
In demonstrating anticipated year-to-year increases in expenses, you can use the constant ratio method, where general expense items are expected to increase at the same rate as sales if the actual numbers are not known
One ratio of particular importance in evaluating a firm’s pro forma income statements is a firm’s projected profit margins, or return on sales (ROS), computed by dividing net income by net sales
Pro forma income statements don’t provide an indication of a firm’s cash position; a firm can show excellent sales numbers and still run out of cash despite glowing income statements
Pro Forma Balance Sheet
A pro forma balance sheet is a projection of a firm’s assets, liabilities, and owner’s equity at a specific point in time
Assets are listed in order of their “liquidity,” or the length of time it takes to convert them to cash
Liabilities are listed in the order in which they must be paid
A balance sheet must always “balance,” meaning a firm’s assets must always equal its liabilities plus owner’s equity
The major categories of assets listed on a pro forma balance sheet include current assets, fixed assets, current liabilities, long-term liabilities, and owner’s equity
Balance sheets are somewhat deceiving in that firms spend money on many things that never show up on their balance sheets, intangible assets are not recognized on the balance sheet, and property must be valued at the purchase price instead of the current value
When evaluating a pro forma balance sheet, the two primary questions are whether a firm will have sufficient short-term assets to cover its short-term debts and whether it is financially sound overall
Overall financial soundness is assessed by computing a firm’s overall debt ratio
Debt ratio is computed by dividing total debt by total assets
Pro Forma Cash Flow
Many readers of your business plan will consider your pro forma cash flows to be the most valuable of your financial statements
The cash flow statements provide an indication of whether a firm will be able to maintain a sufficient cash balance to get up and running successfully
To capture items in an organized manner, the cash flow statement is divided into three activities: operating activities, investing activities, and finance activities
It’s important that all of a firm’s pro forma financial statements be prepared as accurately and realistically as possible
Another financial instrument that is often used is the break-even analysis
Pro Forma Ratio Analysis
The most practical way to interpret a firm’s historical or pro forma financial statements is through ratio analysis
Your readers will instantly recognize the general picture that a particular ratio conveys
A valuable use of a firm’s ratios is to compare them to industry norms
The three most common categories of financial ratios are profitability ratios, liquidity ratios, and overall financial stability ratios
