Easy Pro Forma Income Statement Tutorial New vs Existing Businesses

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Learn the simple steps to create a pro forma income statement for both new and existing businesses. • Small Business Startup Costs (Fundera): https://www.fundera.com/blog/business... • http://getpoindexter.com - Poindexter is the easiest way to produce Pro Forma financial projections and budgets. No background in finance or MS Excel required. • Transcript Notes: • A pro forma income statement is simply a future version of an income statement. • It’s how we want our business to perform in the future. • How we calculate the pro forma income statement is going to depend upon two different considerations. • It's going to matter whether you're doing this for an established business versus a new business. • The benefit of existing businesses is that you already have financial data being generated by the company. So, you should already have an income statement. • With that benefit of already having the data in hand, all we have to really do is decide when in the future we are looking to establish an outcome for the pro forma. • Then we focus on revenue, and we establish some benchmark we'd like to achieve with revenue. • An increase of 20% let's say. So, $1,000 plus 20% is $1,200. That's generally how we reach our revenue forecast for the pro forma. • That's, good that we have a timeline and a goal, but what does that tell us about what we need to do each day to achieve this goal? • I like to convert the revenue forecast into something more tangible. So, if we say for instance, we're selling each product for $10, that would equate to 120 sales. • 120 sales is a lot easier to grasp as far as how many customers need to come through the door. Then we can start backing into how many new leads we need to generate from marketing channels. • It provides a clearer picture of what we need to do to realize that increase of 20%. • Now we can start to focus on the costs. Typically, most tutorials are going to tell you to create a common size format. • This means we're converting costs into percentages based on revenue. • If we look at revenue itself, that is 100% of the common size income statement. So when we look at costs, it is simply a factor of dividing costs by revenue to arrive at some percentage. • That way everything is translated into terms of revenue. • Typically, you would want to look at this common size format over a certain number of periods to get an average. • Then you take the average, multiply the new revenue by this common size amount, and you arrive at some number based on the growth in sales. • It's almost treating all of these costs as if they grow in line with sales when you do it this way, which I don't really like that much. • It's often helpful to consider which of these costs are going to be fixed and which are going to be variable. • Fixed costs are going to stay pretty flat, but variable costs are really the ones that are going to grow along with revenue. • A lot of the times variable costs sit heavily in the cost of good sold section, but they're also in the SG A section as well. • I would identify which line items are fixed versus variable and forecast them appropriately. • So now we're going to talk about creating a pro forma for a new business. • We don't have historical data, so I recommend approaching things from a bottoms up perspective • What are the actual activities you're going to be doing that drive revenue? • We have a lot more control over what the revenue drivers are versus what the actual dollar amount of revenue will be. • Once we get an idea of whether we want to forecast revenue based on marketing activities, or maybe cold calling, we can start to look at what the transaction looks like. • This is the monetization model. It's the when in time we monetize customers and the how much they pay. • Once we get a sense of when these factors start to take place and how they take place, then we can get a sense of our revenue. • Next, we can start to look at what the costs are. This is going to be very different depending upon your business model, industry etc. • We need to start googling the startup costs for this business, or startup cost budget etc. • Then you're going to group these costs into two different categories. The first is cost of goods sold. These are the direct costs of producing revenue. • The second is the cost of running the business or operating expenses. Things that support the general running of the business. • Once we get those costs grouped into two different areas, we can start to look at what the variable costs are versus fixed costs. • Variable costs are going to be a lot more important going forward. Fixed costs are going to matter more in the beginning because it's going to comprise a higher percentage of overall costs, but your variable costs are going to affect the scalability of your business model. • In the early stages especially, you're going to want to identify what those variable costs are and forecast them according to the growth in revenue.

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