Private Capital Investing

CHAPTER 6Business Plan

INTRODUCTION

Private equity and private debt funds mainly base their financing decisions on projected cash flow. To this end, it is essential to prepare a financial model (so called pro-forma) to forecast cash flows and produce all relevant ratios. Key industry drivers and company specific success factors (influencing sales, profitability, asset base, and liabilities profile) are translated as key drivers in a worksheet. Pro-forma financials provide a logical, structured, and comprehensive approach that allow us to clearly evaluate the reasonableness of the assumptions.

Whilst we do not deal with this topic in great detail in this book, it is important to provide a concise outline of the key steps in financial projection.

PRO-FORMA FINANCIALS

The starting point of the financial forecasting process is the acknowledgement that profit and loss (P&L) and balance sheet (BS) are intrinsically linked.

Another essential building block is the fundamental accounting identity:

The income statement records the performance in a given year, whilst the balance sheet is a picture of the situation at the beginning of and at the end of the year.

The first link between P&L and BS is:

The second link between P&L and BS is:

The above relations, together with the fundamental ...