Easy Pro Forma Income Statement Tutorial: New vs. Existing Businesses
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- Опубликовано: 5 окт 2024
- Learn the simple steps to create a pro forma income statement for both new and existing businesses.
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Transcript Notes:
A pro forma income statement is simply a future version of an income statement.
It’s how we want our business to perform in the future.
How we calculate the pro forma income statement is going to depend upon two different considerations.
It's going to matter whether you're doing this for an established business versus a new business.
The benefit of existing businesses is that you already have financial data being generated by the company. So, you should already have an income statement.
With that benefit of already having the data in hand, all we have to really do is decide when in the future we are looking to establish an outcome for the pro forma.
Then we focus on revenue, and we establish some benchmark we'd like to achieve with revenue.
An increase of 20% let's say. So, $1,000 plus 20% is $1,200. That's generally how we reach our revenue forecast for the pro forma.
That's, good that we have a timeline and a goal, but what does that tell us about what we need to do each day to achieve this goal?
I like to convert the revenue forecast into something more tangible. So, if we say for instance, we're selling each product for $10, that would equate to 120 sales.
120 sales is a lot easier to grasp as far as how many customers need to come through the door. Then we can start backing into how many new leads we need to generate from marketing channels.
It provides a clearer picture of what we need to do to realize that increase of 20%.
Now we can start to focus on the costs. Typically, most tutorials are going to tell you to create a common size format.
This means we're converting costs into percentages based on revenue.
If we look at revenue itself, that is 100% of the common size income statement. So when we look at costs, it is simply a factor of dividing costs by revenue to arrive at some percentage.
That way everything is translated into terms of revenue.
Typically, you would want to look at this common size format over a certain number of periods to get an average.
Then you take the average, multiply the new revenue by this common size amount, and you arrive at some number based on the growth in sales.
It's almost treating all of these costs as if they grow in line with sales when you do it this way, which I don't really like that much.
It's often helpful to consider which of these costs are going to be fixed and which are going to be variable.
Fixed costs are going to stay pretty flat, but variable costs are really the ones that are going to grow along with revenue.
A lot of the times variable costs sit heavily in the cost of good sold section, but they're also in the SG&A section as well.
I would identify which line items are fixed versus variable and forecast them appropriately.
So now we're going to talk about creating a pro forma for a new business.
We don't have historical data, so I recommend approaching things from a bottoms up perspective
What are the actual activities you're going to be doing that drive revenue?
We have a lot more control over what the revenue drivers are versus what the actual dollar amount of revenue will be.
Once we get an idea of whether we want to forecast revenue based on marketing activities, or maybe cold calling, we can start to look at what the transaction looks like.
This is the monetization model. It's the "when" in time we monetize customers and the "how much" they pay.
Once we get a sense of when these factors start to take place and how they take place, then we can get a sense of our revenue.
Next, we can start to look at what the costs are. This is going to be very different depending upon your business model, industry etc.
We need to start googling the startup costs for this business, or startup cost budget etc.
Then you're going to group these costs into two different categories. The first is cost of goods sold. These are the direct costs of producing revenue.
The second is the cost of running the business or operating expenses. Things that support the general running of the business.
Once we get those costs grouped into two different areas, we can start to look at what the variable costs are versus fixed costs.
Variable costs are going to be a lot more important going forward. Fixed costs are going to matter more in the beginning because it's going to comprise a higher percentage of overall costs, but your variable costs are going to affect the scalability of your business model.
In the early stages especially, you're going to want to identify what those variable costs are and forecast them according to the growth in revenue.
I'm part of an undergraduate business program that is very well-ranked in the country and I literally found this content so much more digestible than how we were taught this - excellent work and an indictment on the value of college courses and degrees.
Thank you Syed, I'm happy you found the video helpful!
Extremely helpful! I am not a numbers person at all and I am writing a hypothetical financial plan for college and this really helped me better understand the process and my assignment, especially the explanation of each word and acronym
Thank you Aimee! I'm glad we were able to help :)
Thankyou, was looking for a specific video where both situations are explained, and this was right on the money.
Awesome job.
Thank you, as a new business owner with no business experience this was very helpful
I'm happy you found the video helpful!
This was an informative & easily understood video. Thank you!
Awesome, I'm glad you found the video helpful, Natasha!
This was excellent, thank you so much
I'm glad you liked it!
Excellent and informative tutorial. Awesome narration and incite.
Thanks, Joshua! I'm glad you enjoyed the tutorial :)
Good shit man. Keep it coming
Thank you, will do!
Nice job. It would be great if you could do the same for balance sheet and cash flow statement. Thanks.
Amazing video, thank you so much.
No problem, Elizabeth! I'm happy to hear you liked it :)
Thanks, you did a nice job
Glad you found the video useful, John!
Very Informative, appreciate the information!
Can you give an example of what goes into your COGS & SG&A please.
EX: for a construction project
COGS(Cost of Goods Sold) are GOODS like materials(studs, nails, wire, pipe, concrete, etc.)..essentially these are tangible items which you will pay for yourself in order to produce your revenue stream, passing the costs in the form of a sale price and can typically be allocated per product/widget/project.
SG&A: which I call Operating Expenses are: A work truck payment, Insurance(Workers Comp, auto/truck and liability), fuel and business license and office/warehouse lease costs.
Very helpful vedio sir
Thanks 👍👍👍👍
I'm glad you found it helpful!
Thank you!
I liked this vid as soon as he said..."that doesn't really tell us what the hell that means."
haha!
Do you guys teach live courses?
Can I request something? Is it possible to do a video on pro forma financials for a non-profit start up?
Thank's
no problem!
Question: Around 13:56 in your video, you mentioned that variable cost would increase while the fixed cost remains the same. You mentioned that fixed cost includes employees. What happens when you hire more employees? Does that count towards Variable Cost now?
Hey Lamar, thanks for the question. Typically, variable costs both increase and decrease with revenue. For instance, if you're selling a product, the cost of products sold would directly decrease when sales are down and increase when revenue is up. You are correct in that hiring new employees would increase salary costs, and act similar to variable costs in that way, but usually, employees aren't fired (at least immediately) if sales go down as that's a more complicated process. If you have contractors that you hire on a per-project basis, then that may be considered a variable cost if you won't otherwise pay them without new customer projects. Hope this helps!
@@getPoindexter Thank you for the explanation. Makes complete sense. Thanks for sharing your knowledge. Appreciate You!
@@lamarmyers6001 Anytime!
I have a question which says plant is at 70% capacity. What does that mean and what to do then ?
hey i really enjoyed the insight. can getpointdexter be used instead of quickbook for tax purposes as well? and also are there services as far as you know who can prepare my pro forma statement so i could get started and learn as i go after that? thank you
Do I need to simplify my income statement to look like yours ( which is very simple)
Hey Cameron, thank you for the question! There's no need to make your income statement look like the one in the video. We used a watered down example in order to keep things simple, and not overwhelm people new to the topic. Income statements can vary widely in content depending on the business, but they all adhere to the general structure outlined in the video (revenue, costs, expenses, net income).
What happens when you're dealing with creating a pro forma for something like a renovation construction company where every job is different? There's no way to know what jobs are coming up, what the scope of the jobs will be or what the costs are going to be without doing detailed estimates. So if a person was going to start such a company and needed a loan from a bank for equipment, for example, what would this person do for creating these financial statements?
Hey Daryl, thank you for the question! This is one of those business models where you'll have to use some more specific assumptions about the future to develop a forecast whether it's a new or existing business. One way to approach this could be to start by making a schedule detailing the number of projects you'll start/complete each month. At that point, you could then make assumptions around the average revenue per project based on its size / scale. Once you get the revenue numbers forecasted you could use an approach similar to the one detailed in the video. The advantage of an existing business in this scenario is that the assumptions would be based on real-world data from previous results. The more you can tie assumptions to specific, tangible data, the more confidence it'll inspire when talking to banks or investors. Hope this helps!
new business 7:48