Entrepreneurial Finance: Fundamentals of Financial Planning and Management for Small Business

CHAPTER 9 PRO FORMA STATEMENT AND FINANCIAL FORECASTING

As it was mentioned in the last chapter, a financial plan, as a major element in profit planning, would require a series of projections and preparation of the pro forma statement. The financial projections are not only required by lending institutions, potential investors, and the Small Business Administration (SBA), but they also represent the key to successful management, and they stand as a test of the project feasibility. Perhaps the most important projections of all is the sales projection which forms the basis for other projections, and their accuracy and reliability. Based on the predicted sales levels and the expected expenses, the firm's profitability would be assessed. On the same basis, other requirements can be assessed such as the size and type of financing, capital, services, obligations, personnel, and size and status of cash flow. The crucial question on how much earnings a firm would expect can be answered based on simple math using the projected values that would start with the expected sales and the expected market price of the product. Figure 9.1 confirms that a projected sale would be the start. A projected revenue would be obtained by multiplying the projected sales by the expected market price of the product. All costs of producing the goods and services would be subtracted from the projected revenue to get the gross profit or as it is sometimes called the gross earnings. The gross profit would be ...