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2/4/07

BUSINESS PLAN FORMATION PART 7


One thing to keep in mind with your Financial Plan, all of your numbers are speculation. Doing research is vitally important so that everything is accurate, but until you actual purchase something or make a sale, all of your numbers are, for lack of a better word, guesses. However, this does not mean that you should arbitrarily pick a number to include in your Financial Plan. The purpose of me telling you this is to remind you not to second guess yourself too much. You should recheck all of your numbers, and you should do hours of research to find accurate, credible numbers. However, do not beat yourself up if the numbers “do not feel right.” For example, when members of my business family where working on the start-up projection for our Financial Plan, we felt that these numbers were too high. As such, we did more research and more than halved our original amounts. At the pitch, we were told that our original amounts were more accurate and that they in fact were still a little low!

After that brief digression, back to the point. The Pro Forma is a financial document that speculates what your idea/product/concept will make for a set time period. The example below is based on a monthly formula. However, some Financial Plans use a weekly formula, a quarterly formula, or even a yearly formula. The formula you use depends of your idea/product/concept. A word of caution, be careful if you use a yearly formula. The larger the amount of time your Pro Forma encompasses, the harder it is to accurately speculate.

Here is the example. Once again this example is for a restaurant. This example is based on a monthly formula and is for EXAMPLE ONLY! I am only giving you a general format. Do NOT copy and paste this document and expect to have a sound Pro Forma:

As I stated above, your Pro Forma is a time-based document that speculates you much money your idea/product/concept is going to make. In other words, this document shows how profitable your idea/product/concept could be. A couple of points to remember: (1) make the numbers realistic. Do NOT state an amount you know you cannot make; (2) think of all possible expenses associated with your idea/product/concept. The last thing you want is a surprise cost eating away your profits; (3) make sure your Pro Forma has a logical progression. Start with gross revenue and work your way down; and (4) make sure your gross revenue is set on a logical formula.

Do NOT make up a number for gross revenue, create a formula. For example, if you have a product and want to sell it for $5.00, multiply that amount by the number of units you speculated you will sell for your set time period. Gross Revenue = Product Price x Amount Sold During Time Period. Therefore, if you want a monthly formula and believe that you will sell 1,000 units per month, your formula will be: Gross Revenue = $5.00 x 1,000. Therefore, your gross revenue will be $5,000. Keep in mind, “gross” means that no expenses have been deducted from this amount. Therefore, this amount is NOT profit!

If you have a logical progression to your Pro Forma and have done research that supports your speculation, you should have a presentable Pro Forma. Also, learn from my story above. If the numbers do not “feel right,” do not second guess yourself too much. Lastly, make sure your Pro Forma compensates for your Start-Up Projection. If your Start-Up Projection is $1.5 million and your Pro Forma states that you will have profit of $5,000 a month, you may want to rethink your business plan. I doubt your investors and yourself will be happy making less than $60,000 a year each after having invested over a million dollars!

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