INTRODUCTION 
TO

PRO FORMA FINANCIAL STATEMENTS
				
The financial statements that follow are pro forma statements.  They show your projections for the future profitability of your business.
			
All business plans must contain the following pro forma statements:

Cash Flow Statement
Three-Year Income Projection
Break-Even Analysis
						
All three pro forma statements are included in Automate your Business Plan. Each statement comes with instructions, a filled-in example, and a pre-formatted and pre-formulated spreadsheet that is ready for you to customize and input your numbers.			

Also included in Automate Your Business Plan  are:
		"Cash to be Paid Out" and "Sources of Cash" worksheets 
These worksheets will help you to develop your cash flow statement and may  be included in your business plan.

"Quarterly Budget Analysis" spreadsheet 
This is your tool for comparing your company's projections  with its actual performance.  Your cash flow statement will be effective only if it is revised quarterly reflecting the results of a budget analysis.
If you are a new business: you have no actual performance to measure against projections.  Therefore, you will not have a quarterly budget analysis until you have been in business for  three months.
If you have been in business for one or more quarters: do a quarterly budget analysis, revise your cash flow statement accordingly and insert the revised cash flow statement in your business plan.

THE MOST IMPORTANT PROJECTION
IS A
PRO FORMA CASH FLOW STATEMENT (BUDGET)

The Pro Forma Cash Flow Statement is the single most important financial document in your business plan.
 		
It is a fact that a third or more of today's businesses fail due to a lack of cash flow.  The cash flow statement is usually the first thing a lender or investor examines in your business plan.  What is cash flow?

  WHAT IS A CASH FLOW STATEMENT?
 
The Pro Forma Cash Flow Statement is the financial document that projects what your Business Plan means in terms of dollars.  A cash flow statement is the same as a budget.  It is a pro forma (or projected) statement used for internal planning and estimates how much money will flow into and out of a business during a designated period of time, usually the coming tax year. Your profit at the end of the year will depend on the proper balance between cash inflow and outflow.
			
The Cash Flow Statement identifies when cash is expected to be received, and when it must be spent to pay bills and debts.  It also allows the manager to identify where the necessary cash will come from. This statement deals only with actual cash transactions and not with depreciation and amortization of goodwill or other non-cash expense items.  Expenses are paid from cash on hand, sale of assets, revenues from sales and services, interest earned on investments, money borrowed from a lender and influx of capital in exchange for equity in the company.  If your business will require $100,000 to pay its expenses and $50,000 to support the owners, you will need at least an equal amount of money flowing into the business just to maintain the status quo.  Anything less will eventually lead to an inability to pay your creditors or yourself.
			
The availability or non-availability of cash when it is needed for expenditures gets to the very heart of the matter. By careful planning, you must try to project not only how much cash will have to flow into and out of your business, but also when it will need to flow in and out.  A business may be able to plan for gross receipts that will cover its needs.  However, if those sales do not take place in time to pay the expenses, your venture will soon be history unless you plan ahead for other sources of cash to tide the business over until the revenues are realized.
			
Time Period. The Cash Flow Statement should be prepared on a monthly basis for the next tax year (or more) of your business.  To be effective, it must be analyzed and revised quarterly to reflect actual performance in the preceding three months of operations.

PLANNING WORKSHEETS
TO HELP YOU PREPARE YOUR PRO FORMA CASH FLOW  STATEMENT 
 
Before preparing your budget, it might be useful to compile individual projections and budgets.  They might be as follows:
			Revenue Projections (product and service)
			Inventory Purchases
			Variable (Selling) Expense Budget (w/Marketing  Budget)
			Fixed (Administrative) Expense Budget
			
PRE-PLANNING WORKSHEETS
Because the cash flow statement deals with cash inflow and cash outflow, the first step in planning can be best accomplished by preparing two worksheets.  
			
       1.   Cash to be Paid Out  
This worksheet documents the cash flowing out of your business.  It identifies categories of expenses and obligations and the projected amount of cash needed in each category.  Use the information from your individual budgets (inventory purchases, direct expenses, administrative expenses, owner draws, etc.)  
These expenditures are not always easy to estimate.  If yours is a new business, it will be necessary for you to do lots of market research.  If you are an existing business, you will combine information from past financial statements with trends in your particular industry.	
      2.	Sources of Cash  
Use this worksheet to document the cash flowing into your business.  It will help you to estimate how much cash will be available from what sources.  To complete this worksheet, you will have to look at cash on hand, projected revenues, assets that can be liquidated, possible lenders or investors and owner equity to be contributed.  This worksheet will force you to take a look at any existing possibilities for increasing available cash.
Figure all estimates on both worksheets for the same time period  (i.e. annually, quarterly, monthly). When you get to the Example Cash to be Paid Out Worksheet, note that it shows a need for $131,000.  It was necessary in projecting Sources of Cash to account for $131,000 without the projected sales because payment is not expected to be received until November and December (too late for cash needs January through October).  Next year, those revenues will be reflected in cash on hand or other salable assets.