Build pro formas like a pro

They say that “plans are useless, but planning is priceless”. The same is true of financial forecasting, which is an integral part of the planning process. The actual numbers on your forecast are not really meaningful. However, the process of thinking about your business model and identifying the key assumptions behind it is invaluable.

I’ve been doing pro formas for venture-backed startups for 9 years now. Despite lots of operating success, I’ve yet to come in “on budget”. In this post, I’d like to talk about the main areas of the forecast and where things can go wrong as well as share some general tips on producing pro formas like a pro.

Time horizon:

Ideally, your forecasts should go out 5 years. I realize that looking even two quarters out is hard to do, and things quickly go from fact to fiction. The goal here is not to accurately predict revenue 5 years from now. Instead, it’s to show your thinking about how you scale the business and how much capital you will need over that time period. If you can’t think 5 years out, 3 is the minimum.


Your proformas should include the following:

Detailed assumptions for every aspect of the business

Balance Sheet (your assets, liabilities and equity)

Operating Statement (revenue, expenses)

Cashflow (operations, capital and investing activities)

Hiring plan

Sales plan

Departmental plans

Accounts receivable and payable plans (to measure the delay in getting paid by customers + paying our suppliers)

Capital budget

Key metrics

Each of these should be monthly for year 1, quarterly for year 2 and annual thereafter.

Typical forecasting challenges


To be an entrepreneur, you need to be optimistic. This outlook produces high revenue forecasts. I always temper these down with my stereotypical “glass half empty” CFO ways, but we still often come short. The fact is, it’s really tough to get sales. People don’t buy from startups the way they buy from established players. Instead, you need to sell them. One at a time. If you want a somewhat accurate revenue forecast, you’ll like to lower the target below what you think is doable.

Cost of Goods:

You need to show a clear numerical correlation between your revenue scaling and cost of goods. What economies can you get as volume grows? How does volume impact your capital budget? (i.e. how many servers do you need as volume grows?)


People costs are usually the single biggest expense category. And startups usually run out of money because i.) revenues are below forecast; and ii.) They have too many people. No matter how much money you raise, you need to think hard about every new hire you authorize. You should always feel like you’re bootstrapping and your people should be capable of wearing many hats.

Other expenses:

If you want to defend your budget both with the CFO and the VCs, you need to show the results of your planned spend. What do you expect to get from your PR and marketing investments?

Dos and don’ts


Include all your key people in the budgeting process. They won’t buy in and sign up to the targets if they’re not involved

Preview your thinking, assumptions and high level numbers to your investors before you send them the budget and ask for approval

Make it a living budget by checking actual spend against it all the time

Continually test your key assumptions against actual and make adjustments as needed

Make your model highly interactive. Make the assumptions clear and construct the model so that playing with those assumptions automatically updates your forecast.


Take any comfort from coming in below your planned loss by cutting expenses when revenues fall short. You’re expected to spend below budget anyway

Ask for approval by your board before each member has told you that they agree with the budget

Show a hockey stick on the revenues. It just won’t happen

Produce multiple versions (i.e. a lowball for the board and a high vesion for your new VCs). If you sell new VCs on an optimistic plan they’ll be pretty disappointed when they show up to their 1st board meeting and find out that the “real” plan is something else.

Final thoughts

Getting budget approval is tough. This is one of the biggest leverage points that your board has over you. It will take a few passes before you get something that works for everyone.

Finally, make your pro formas meaningful by constructing them in the same way as you think about your business model. Don’t just put revenue numbers down. Start with your whole sales funnel. Show how it cascades down into sales. Build the pro forma model so that it becomes a key tool in how you run your business.