Pro Forma Financials

One of the most difficult parts of completing a feasibility analysis is creating pro-forma financials. The Portable MBA in Entrepreneurship as edited by William D. Bygrave and Andrew Zacharakis provides an excellent check list that will help in this process. I’ll discuss elements of that checklist here.

What are your sources of revenues and how much income will you have? What is your product mix? What are the retail prices of each of your products and how many of each product can you sell daily? How many people can you expect in your retail location daily, how many of these customers will make a purchase, and which product will they likely purchase?

How much will it cost to sell your product? What are your costs of goods sold (COGS) for a single day of business? How much does it cost to produce each item of your product mix? Revisit how many of each product you expect to sell during a day, and use that number to determine your COGS. If you are not sure at this point how much producing a product will cost, assume that you will mark up your product  100% for retail. For example, if Sweet Cream Cupcakery were to sell a single medium cupcake at $2.00; that cupcake would probably be about $1.00 to produce (including ingredients, packaging, etc.).

Note – You have just calculated your revenues and costs for one day. When creating your pro forma financials, you will need to multiply this for the number of days you will be open during the time period analyzed. If you are using the 6-month time period suggested in the previous post, you will figure out how many days you will be open in each of those 6 months. Make sure the assumptions you make here are validated by research. Talk to people that own similar businesses. Look at the annual reports of any competitors that may be public. Be as realistic as possible.

What are your operating costs? Beyond the costs of producing the product you must consider how much it will cost to operate your business, including rent, licensing, marketing, and administration costs. You can estimate these costs based on whatever time period you plan to use for your pro forma financials.

How do you document all of this? Investors will expect an income statement, balance sheet, and cash flows statement. When conducting your feasibility analysis, you’re at a preliminary phase; but creating these three statements will be a helpful first draft for your future.

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