A financial pro forma is an indispensable tool for small business owners, projecting future financial statements to provide a clear forecast of performance over a designated period. This strategic resource not only facilitates proactive adjustments to safeguard financial stability but also plays a crucial role in securing capital. Effective pro forma statements can significantly enhance a business’s ability to attract investments or obtain loans by demonstrating its potential for growth and profitability in a tangible, well-documented manner.
At Forte Business Services, our financial team specializes in meticulously crafting pro forma statements, ensuring our clients possess a comprehensive understanding of their expected financial health. This insight is vital for making informed decisions and presenting a compelling case to potential investors and lenders.
To successfully create a robust financial pro forma for your small business, consider the following steps:
Gather Financial Data
The first step in building a financial pro forma is gathering all necessary financial data. This includes information such as past financial statements, budgets, and sales forecasts. It is important to have as much detailed and accurate data as possible in order to create an accurate pro-forma.
Determine the Time Period
The next step is to determine the time period for which the pro forma will be created. This could be a year, several years, or even longer. The length of the period will depend on the business’s needs and the available information.
Use a Basic Template
Once the time period has been determined, the next step is to create a basic template for the pro forma. This should include the three main financial statements: the balance sheet, the income statement, and the cash flow statement. Each of these statements has specific components that should be included in the pro forma, such as revenues, expenses, assets, and liabilities.
Build in Flexibility
When creating your financial pro forma, it’s crucial to incorporate flexibility, allowing for easy adjustments to assumptions as new data emerges. This adaptability is essential for maintaining accuracy in your financial forecasts and swiftly responding to market changes or unexpected circumstances. At Forte Business Services, our method for developing pro forma statements is designed with modularity and clarity in mind, enabling you to update assumptions without undermining the integrity of the projections. This approach ensures that your financial strategy remains robust and responsive, equipping you with the agility to seize opportunities and effectively mitigate risks as you steer your business forward.
Forecast Revenues
The first step in building the pro forma is to forecast the business’s revenues. This can be done by looking at past financial data and sales forecasts and considering any changes in the market or the business’s operations that may impact revenues. It is important to be realistic when projecting revenues, as overestimating them can lead to unrealistic expectations for the company.
One way to project revenues is to use a top-down approach, which involves starting with the overall market size and then breaking it down to the specific market segment the business serves. For example, if the business is a retail store that sells clothing, the first step would be to determine the size of the overall clothing market. Then, the business can consider its market share and expected market growth to project its future revenues.
Another way to project revenues is to use a bottom-up approach, which involves starting with the business’s specific sales data and then extrapolating it to project future revenues. This can be done using sales trends, such as the average sales growth rate over a certain period. It’s important to consider any changes in the business’s operations or the market that may impact sales, such as the introduction of new products or changes in consumer demand.
It can also be helpful to consider any external factors that may impact the business’s revenues, such as economic conditions, regulatory changes, or competitive trends.
Forecast Expenses
The next step is to project the business’s expenses. This includes both fixed expenses, such as rent and salaries, and variable expenses, such as materials and marketing costs. It is important to consider any changes in the business’s operations or the market that may impact expenses.
One way to project expenses is to use a percentage of sales method, where expenses are projected as a percentage of revenues. This method can be quick and easy, but it may not always be accurate because it does not consider changes in the business’s operations or the market.
Another way to project expenses is to use a budgeting method, where expenses are broken down into specific categories and projected individually. This allows for more detailed and accurate projections but can be time-consuming and require more data and analysis.
In addition to these methods, it is important to consider any changes in the business’s operations or the market that may impact expenses. This could include new product launches, changes in consumer demand, or regulatory changes.
To project expenses accurately, it is important to have detailed and up-to-date financial data, including past financial statements and budgets. It can also be helpful to consult with other members of the company, such as department heads or financial advisors, to get a better understanding of the business’s expenses and any potential changes that may be coming.
Why Pro Formas are So Important
Small business owners should build a financial pro forma, because it allows them to see how their business is expected to perform financially over a certain period of time. This can be particularly useful for planning and decision-making, as it helps the owner understand the financial implications of various actions and scenarios. A financial pro forma can also be used to communicate the financial expectations of the business to stakeholders, such as investors or lenders. Creating a financial pro forma is a crucial step that small business owners can take to identify possible financial risks or challenges. By doing so, they can take appropriate measures to address them. A financial pro forma is an effective tool to ensure financial stability and success for small businesses.
Knowing your financial needs are taken care of and in order is a relief that lets you focus on your best interests. If you’re having trouble, Forte can help you organize and optimize your finances so that you can focus on your forte. Head to our website to see how Forte’s finance and accounting services can help your business.
