Before writing the financial statements for your business plan, you must do specific market research and make important decisions regarding the product or service you would like to offer. A financial pro-forma is in essence a projected income statement. Each statement is usually done over the course of one year and is broken down by twelve months. A business plan should include projections for three to five years. There are three main sections to such a document: Income, Cost of Goods Sold (COGS), Gross Profit, Expenses and Net Profit. Below is a breakdown of what is needed to complete each section:
- Revenues from each product– This should equal the number of products/services you intend to sell multiplied by the cost of each product/service. For example, let’s say you sell staplers and pens. You believe that in the first month of business you will sell 1,300 staplers at a rate of $2.88 each and 9,000 pens at a rate of $0.99 each. You will have made $3,744 from staplers and $8,910 from pens in revenues in your first month of business.
- Other Income – This is income you receive other than your products or services. For example, Company A owns a website which offers free advice on building offices and Company B sells office supplies. Company B will want to advertise on Company A’s website. Company A will charge Company B for these advertisements, thereby making extra income outside of their products or services.
- Total Income – this should be the addition of the revenues from services and other income.
Cost of Goods Sold (COGS) – This section should include all costs it takes to create the product or service you are offering multiplied by number of products you sold. For example, if you are selling staplers, the plastic costs $0.40 per unit and the metal costs $0.65 per unit. Therefore you are spending $1.05 on each stapler you sold. Before we stated that you sold 1,300 staplers in your first month of business. Therefore the COGS for staplers in your first month will be $1,365. Here are some examples of different COGS:
- Cost to manufacture
- Cost of materials
- Broker Dealer Fees
Once you have finished this list, you should make a Total COGS row which sums these costs.
Gross Profit – This is the Total Income minus the Total Cost of Goods Sold. With the example given above, you will have $3,744 – $1,365 = $2,379.
Expenses– Expenses include a wide spread of different operating costs. Here is a list of possible expenses:
- Owner Wages
- Employee Bonuses
- Payroll Taxes
- Business liability Insurance
- Health Insurance
- Director & Officer Insurance
- Printing & Publications
- Office Supplies & Expenses
- Advertising/Trade Shows
- Legal & Accounting
- Travel & Lodging
- Bank Charges
- Interest Expense
- Dues & Subscriptions
- Postage & Shipping
- Miscellaneous Expenses
Once you have finished this list, you should make a Total Expenses row which sums these costs.
Net Profit – This is the Gross Profit minus the Total Expenses.
You will need to decide on growth rates for each of the sections mentioned above. For example, you may anticipate your revenues will grow by 12% over the course of the first year, 17% over the course of the second year and 22% over the course of the third year. If you make $3,744 in revenues the first month of the first year and expect a 12% growth rate, your revenues in the twelfth month of the first year should equal $4,193.28. Please note that COGS and Revenues should have the same growth rate while each expense will probably have different growth rates, or may stay the same. For example, if you sign a leasing contract for office space for two years at $5,000 a month and your contract states this price will remain the same over the course of those two years, then the “Rent” expense will not increase until the third year.