BUILDING YOUR PRO FORMA FINANCIAL STATEMENTS CHAPTER 8 Bygrave & Zacharakis, Entrepreneurship, New York: Wiley, ©

Common Entrepreneurial Mistakes  Underestimation of these factors:  Time to secure financing  Costs  Time to generate revenues  Revenue drivers  Lack of Comparables  Top-down versus bottom-up forecasting Reduced survival chance

Bygrave & Zacharakis, Entrepreneurship, New York: Wiley, © Financial Statement Components Balance Sheet Cash Flow Income Statement Financial Statements Assets Liabilities & Equity Operating Investing Financing Gross Margin Operating Margin Growth Rate

Bygrave & Zacharakis, Entrepreneurship, New York: Wiley, © Building Process Build-up method Comparables method Integrated financial statements Final steps

Bygrave & Zacharakis, Entrepreneurship, New York: Wiley, © Understanding Your Revenue Drivers Revenue drivers Customer visits Advertising Store location Up-selling Sales associates

Bygrave & Zacharakis, Entrepreneurship, New York: Wiley, © Build-Up Method

Bygrave & Zacharakis, Entrepreneurship, New York: Wiley, © Comparable Method Choose industry metrics Benchmark similar companies in industry Compare your company to industry average and other companies

Bygrave & Zacharakis, Entrepreneurship, New York: Wiley, © Integrated Financial Statements INTEGRATED FINANCIAL STATEMENTS Income StatementBalance Sheet Statement of Cash Flows Monthly forecasts for years 1 and 2 Adjust monthly forecasts according to seasonality Annual forecasts for years 3-5 Consider Accounts Receivable Show outflow and depreciate PP&E Consider Accounts Payable

Bygrave & Zacharakis, Entrepreneurship, New York: Wiley, © Putting It All Together Explanation of spreadsheets (2-3 pages) Details of income statement Revenue drivers and seasonality Details of cash flows Major cash infusions, A/R, PP&E, A/P Details of balance sheet Major assets and liabilities

Bygrave & Zacharakis, Entrepreneurship, New York: Wiley, © Recap  Execute each step in order to build realistic pro formas  Know your numbers cold  Further refine numbers as you launch the business  Financials help you gauge actual performance