The Proforma

A proforma is nothing but a projection of the assumptions you make of your business's expected revenue and expenses. Because you don't know for sure the number of sales you will make or the expenses you will incur until they happen, your proforma acts as a blueprintor let's say, blue-sky projectionof your business one, two, or three years in the future.

But if it's all projections, what use is it?

The proforma can give you a clear view of the financial viability of your business. The proforma shows where your money has come from and where it could be spent over a specific period of time, usually on an annual basisJanuary through Decemberor your tax year. It also acts as a guide that you can check against as your business develops during the year, and it allows you to revise your assumptions on a monthly basis to better match the reality of your business.

As your business year progresses, your proforma comes closer to reality and becomes a very important window on the performance of your Yahoo! store and the initial projections you created.

Where to Start

Always begin your financial assumption with projected sales because this number drives all others. When you have your sales projections, describe your cost of goods. This is the costs that go into making your product, or what it costs to acquire the product from your supplier, distributor, or wholesaler. For example, if you make and sell wooden toys, the cost of goods would be the cost of the wood, nails, and paintthe materialneeded to build the wooden toys.

Warning: Be Realistic With Projections

A good rule of thumb to keep in mind is to overstate your expenses and understate your revenues. This will give you a conservative proforma and one that could be closer to reality.

Next are your expense assumptions. These include all the expenses that your company will incur on a regular basis, including rent, postage, shipping costs, personnel, equipment, telephone service, and marketing expenses, to name a few.

Let's take a look at a basic proforma:

• Gross income This is the gross sales from revenue from your products or services. It includes all the income generated by the business and its sources.

• Cost of goods sold This is the actual cost of the products, materials, or ingredients you purchase or manufacture for resale.

• Gross profit or gross revenue This is the difference between your gross income and your cost of goods sold. Gross profit can be expressed in dollars, as a percentage, or both. As a percentage, the gross profit is always stated as a percentage of revenue. For example, if you sell a product for $10 and it costs you $9 to make, your gross profit is $1, or 10%.

• Expenses These include your start-up expenses and ongoing operating expense, as well as all overhead and labor expenses of the operations of the business. In other words, they include fixed expenses that must be paid at the same rate, regardless of the volume of business (including rent, utilities, salaries, and wages), and variable expenses, which change based on the amount of business you do (including advertising, sales commissions, freight, and supplies).

• Total expenses The total of all expenses.

• Net profit (or loss) Gross profit or gross revenue minus total expenses before taxes.

Here's a simple format to use when creating your proforma. Use a spreadsheet program, such as Microsoft Excel, to enter your line items and quantitative numbers.

Proforma

Income

1. Gross sales

2. Cost of sales

3. Gross profit (1 minus 2)

Expenses

1. Variable expenses

   1. Advertising

   2. Freight

   3. Shipping costs

   4. Credit card costs

   5. Parts and supplies

   6. Sales salaries

   7. Postage

   8. Legal and accounting fees

2. Fixed expenses

   1. Insurance

   2. Licenses and permits

   3. Office salaries

   4. Rent

   5. Utilities

   6. Fixed salaries and wages, and tax withholdings

   7. Phone service

   8. Equipment lease

Total expenses

Income from operations

(Gross sales minus expenses)

Income before income taxes (called IBIT)

Tip: Know the Credit Card Costs

A company that does not take and process credit cards in today's business environment is a company that is running on only one cylinder of eight cylinders. But setting up a merchant account to accept and process credit cards presents a series of costs that you need to reflect in your income statement.

The costs of accepting and processing credit cards can include some or all of the following:

• Set-up feesThese are the cost to you for the bank setting up your account.

• Sizable depositIf you are a new business, the bank might require a deposit up to six months of projected credit card sales.

• Discount rateThis is the personate of the sale that the bank will charge for processing the credit card. This "discount" rate can be between 1% and 5% of your sale.

• Transaction feesThis is another fee added per credit card charge processed.

• Monthly statement fee.

• Minimum processing feeSome banks charge a minimum processing fee if the transaction fee is too low.

• ChargebacksThis is the fee a bank charges if a customer disputes a charge and the bank refunds the money.

The discount rate and fees, and the set-up costs go under "Credit Card Expenses" on your proforma.

This is just a simple statement. Your proforma could be different and could have many more line items, depending upon the complexity of your business. And if you plan to offer health insurance or other benefits, you need to enter that expense as a line item in your proforma.

After you've determined and described your business assumptions in your proforma, it's time to create the Big 3 of your financial plan:

• Income statement

• Cash flow statement

• Balance sheet