Creating Pro Forma Documents

William L. DouganIrvin L. Young Professor of EntrepreneurshipProfessor of ManagementUW-Whitewater

Six piecesRevenue ModelProfit and Loss (P&L)Cash Flow Balance SheetStartup CapitalNotes

Order of ImportanceCash Flow Revenue ModelNotesStartup CapitalProfit and Loss (P&L)Balance Sheet

Order of ConstructionRevenue ModelStartup CapitalCash Flow Profit and Loss (P&L)Balance SheetNotes

Business Plan SoftwarePlaced in a spreadsheet or a

Business Plan model◦Business Plan Pro◦Business Mentor◦PitchThenPlan

http://www.pitchthenplan.com/homepage.htm

◦Kauffman Template http://www.bizstartsmilwaukee.com/BizFil

es/TemplatesForms/FastTrac_MyFinancialPlanV6.xls

Revenue ModelYour story about how you will sell

your products/servicesBased on monthly quantitiesDepends on Units or Dollars or

both◦Boat Manufacturer Units◦Retail store Units are a problem◦Multiple Products Add effects of each

productAdditive Linear Model

Additive Linear ModelMonth 1 2 3 4 5 6 7 8 9 10 11 12

Prod 1 Units

0 0 10 15 21 25 35 45 60 90 100 150

Price 0 0 1000 1000 1000 1000 1000 1000 1500 1500 1500 1500

TOTAL 0 0 10000 15000 21000 25000 35000 45000 90000 135000 150000 225000

Month 1 2 3 4 5 6 7 8 9 10 11 12Prod 2 Units

0 0 50 75 90 100 120 140 180 220 300 450

Price 0 0 100 100 100 100 100 90 90 90 90 80

TOTAL 0 0 5000 7500 9000 10000 12000 12600 16200 19800 27000 36000

Month 1 2 3 4 5 6 7 8 9 10 11 12TOTAL

0 0 15000 22500 30000 35000 47000 57600 106200 154800 177000 261000

Revenue Model FactorsDiscrete, linear decomposition of a multiple, interacting components◦Separate effects of multiple products/services

◦Startup delay◦Production/Sales Ramp-up Diffusion Learning

◦Seasonality

Sales on AccountNot 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)

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/

promotionsReserve for

Wages/Salaries◦ Banking

Line of Credit Account Initiation Loan Initiation

Cash Flow Checkbook/Cigar box modelSources/Dispersements and

Balance of Cash by MonthDocuments Inflows and OutflowsBig rule CASH BALANCE CAN’T

BE NEGATIVE

Cash Items SOURCES:Cash Sales

◦ (Different than Sales on account)

Collections from ARLoan ProceedsEquity contributions

◦ Cash◦ Capital Goods

InterestGrantsPrizesPaid–in Taxes

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

General Form Cash Flow

Opening Cash Balance Month 1

Opening Cash Balance Month 2

+ Cash In from Sources

- Cash Out for Dispersements

= Ending Cash Balance

Which Becomes (for next month)

+ Cash In from Sources

- Cash Out for Dispersements

= Ending Cash Balance

Which Becomes (for next month

Profit and LossUses much of the same

information as Cash FlowMajor exceptions

◦Depreciation◦Inventory◦Receivables◦Payables

Profit and LossNet Sales

- 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

Balance SheetMetaphor of Balance

LA +E

Balance Sheet

LA

+E

Balance Sheet IssuesBalance 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

NotesThese provide the justification for

values on the other sheetsAct 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

ResourcesReal Estate Cost

◦www.wisconsinhomes.com◦http://www2.bizjournals.com/bizspace/milwauke

e/

Salaries www.salary.comUtilities call utility companiesMortgage Calculator All over internetInsurance call agentIndustry RMA Statement Studies + Value

Line + Associations Unlimited (for Industry info)+ Dunn and Bradstreet

General http://library.uww.edu/