Pro Forma Financials

Here is your Spring 2024 graded assignment for pro forma financials

Learning Objectives

Students who complete this module will have an improved ability to:

• Construct forecasts of future financial statements

• Apply the "bottom up" method of revenue and cost estimates to estimate income statement contents

• Determine the impact of capital investments on income, cash flows, and balance sheets

• Identify situations where the venture will need financial support to maintain and grow operations

• Model decision-making scenarios for different assumptions about revenues, fixed costs, and major one-time costs

• Incorporate relevant horizontal, vertical, activity, liquidity, leverage, profitability, and market ratios (see first module) into pro forma assumptions for accuracy and credibility with your investor audience

Instructions

• Watch the assigned videos and presentations; 

• Read the assigned readings; 

• Complete the practice quiz or other assigned practice activity

• Complete the assessment;

• Complete the "Mark as Complete" checklist.

Readings, MEDIA

Pro forma financials for an investor audience (google slides without narration; narrated slide presentation below); give me some more examples, you might say. OK. Here is a 229-page document presenting pro formas for a "resort hotel." (Note the breakdown of assumptions, revenue and cost categories, and so on).

Here is an Armstrong approach to startup stages, milestones, and pro forma financial statements

Some Notes on Milestones

Milestones are accomplishments of strategically-oriented activities (such as projects, programs, products and other initiatives) that objectively demonstrate progress in an organization. I think milestones are important enough to warrant their own section, probably a whole page, and later a whole course. You're accomplishing goals and objectives, hitting KPIs (Key Performance Indicators), and OKRs (Objectives and Key Results, e.g., "We will achieve a certain OBJECTIVE as measured by (a.m.b.) the following KEY RESULTS). Milestones show that you know what goals and objectives you need to validate your product, market, and team performance and demonstrate to external stakeholders that you understand what you're doing and need to do in the future.

Speaking more specifically about OKRs, venture capital investor John Doerr says that they "drive clarity, accountability, and the uninhibited pursuit of greatness." During his tenure as Google CEO Eric Schmidt credited OKRs with "changing the course of the company forever" (Doerr, 2017: 15) 

OKRs can be both a survival and growth in new ventures where you must grow quickly and continue to seek funding  to fuel that growth before you run out of cash ("OOC," technical term). An example at a startup might be "We're going to build this product, and we've proven the market by talking to twenty-five customers, and here's how much they're willing to pay for it" Doerr, 2016: 12). In Steve Blank's terms, this would be an important milestone to achieve in customer development (Blank & Dorf, 2012).

Don't simply rely on pro forma balance sheets, income statements, and forecasts to drive your milestones. Your milestones should drive your forecasts. Startups should focus on tracking their progress on turning assumptions and hypotheses into validated facts. Blank and Dorf provide a suggested "dashboard" of metrics that startups and their investors should agree upon:

• have the customer problem and product features been validated?

• Does the minimum feature set resonate with customers?

• Who in fact is the customer, and have initial customer-related hypotheses on the likes of value proposition, customer segments, and channels been validated through face-to-face customer interaction?

• Customer-validation questions might include: average order size, customer lifetime value, average time to to first order, rate of sales pipeline growth, improvement in close rate, and revenue per salesperson (2012: 42).

Practice and Apply

Assessment - Graded Activity

Watch the videos for Crimson Wines and Beatbox Beverages below. The videos communicate different value propositions (right?), different customer segments, different customer relationships, and different channels. These differences should affect revenues and the margins and operating costs as well. After watching both videos open the google doc ASSESSMENT and follow the instructions. 

References

Blank, S., and Dorf, R. 2012. The Startup Owner's Manual, Vol. 1TM, The step by step guide for building a great company, Pescadero, CA: K&S Ranch, Inc. Publishers.

Doerr, J. 2017. Measure what matters: OKRs - the simple idea that drives 10x growth. Portfolio Penguin. (Fun fact: In his role as a venture capital investor with Kleiner Perkins, which he joined in 1980, John Doerr has helped to create more than 425,000 jobs.)

Lingle, M. 2016. Your Milestones Slide. http://mikelingle.com/milestones-slide/, accessed August 13, 2020.

Tuovila, A. 2020. Pro Forma, https://www.investopedia.com/terms/p/proforma.asp accessed August 13, 2020.

Mark as Complete (optional)