ProForma Analysis – It Is All About Assumptions

When running a Pro Forma Analysis you typically have to make many cost and revenue assumptions.  The accuracy of these assumptions are the complete foundation of any analysis.  Make the wrong assumptions and your case may look good now, but fall apart down the road when actual cost numbers roll in or revenue falters.

Make sure you scrutinize every cost and revenue assumption against history, market, and expert opinion.  The Proforma will only be ‘good’ if it is accurate.  Ask tough questions of the persons making the assumptions, and always try to validate for accuracy.

  • Do the assumptions align with our historic information?
  • Is it aligned with market benchmarks or competition?
  • Has Sales and Product Management vetted the revenue forecast ?  Does it have a realistic ramp?
  • Have you included all costs?
  • Have costs been validated by more than one person within the functional area (ie Implementation costs agreed to by more than one internal person in that area)

It is always best to run 3 versions of the Proforma Analysis – Best, Worst, and Mid Case (or hopefully contractually committed case if it is a single customer Proforma).  This will enable you to determine the sensitivity of missing the revenue forecast and/or cost over runs.

One last word of caution – you may be thinking – I’ll just pad my costs or sand bag my revenue to make sure we have “covered ourselves”.  This is a flawed approach – often what will happen in these cases is that your price will be driven too high to cover the artificial costs (vs your competition) and you lose the deal.  Or the revenue is too low thus making margins unacceptable for internal deal approval.

Remember, the goal for any Proforma is accuracy, with an eye on the sensitivity.  Best of luck!

 

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