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Buzzwords & Bullsh!t: Proformas


Not all of the “buzzwords” in this series are about technology. As a CFO, my most hated buzzwords are “proforma financials.” (I’ll tackle its less attractive but equally annoying cousin “budget” in another post.) Don’t get me wrong, they are valuable, but they are definitely not the end all be all in decision making. One of the biggest misunderstandings in this process is the carefully choreographed dance behind the scenes. Understanding the different motivations of users will help you efficiently and effectively craft your projections.

Proformas.  People always ask for them when you are at your busiest.  Right when you are trying to close a deal or launch a new software version, someone always asks what your projected revenue is and for a copy of your pro-fucking-forma financials.  As entrepreneurs, we struggle to get through today let alone craft a new 3-5 year plan on the fly. Spending time on proformas is overhead, not revenue producing. It moves a business forward inches instead of miles.

I’ll let you in on a little secret.  No matter what you provide, guess what?

They are always wrong.

So what are people really looking for?  I think it depends on who is asking for the proformas.  Let me give you my opinionated breakdown.

Bankers are looking for some projections that show you are a safe bet for making a loan or offering a line of credit.  They need to cover their compliance-oriented behinds proving they did their due diligence.  They really care that the bottom line is trending from low to high, that there is growth, and most importantly, that you can pay back the debt.  The key to showing bankers proformas is to graph it.  Show the peaks and valleys and explain why they happen.  Good examples of reasonable instability are seasonality, capital improvement plans, ramp ups, etc.

Capital Investors are really looking for the business plan in numerical form.  They want to know what their ROI is. Where are you planning on taking the business? What’s the use of the funding?  These proformas tend to be more worth your time as it is an exercise in direction setting. You have to look at reality because raising capital is a time suck. You don’t want to undershoot your needs as you’ll be back to capital raising mode. Plus you’ll give up more of your precious equity than you want to, potentially causing resentment.  My advice is to be as realistic with these as possible while still accepting that you are trying to sell your business’ upsides. Be optimistic, be real, and give yourself reasonable wiggle room in these. This is the one time I like having the conservative/realistic goals and the stretch goals broken out into two different models.

Management: I’ve had the privilege of working for some smart people. Some have actually taken the time to understand the company’s financials. Some have even done analysis on them. Most “good” executives have a pretty good pulse on money coming in and the burn rate. So a lot of the time, it seems like CEOs just want to be able to understand projected cash positions.  The best CEOs use this information when evaluating decisions, thinking how risky would it be if they invest $X in an initiative, it should return $Y in Z amount of time.

Boards: I think the goal of proformas and boards are two-fold. The first is to confirm management is on the right track. Does management’s plan sound reasonable? Is the direction the right direction? Are they “missing the forest because they are so focused on a tree”? The best boards point out flaws here. For this to work, they need to spend time looking at the proformas as well as having a real sound understanding of the business as it stands today.

The other objective boards have is evaluating leadership.  Is the tone at the top the right tone?  Is it time for a change?  Is the leader taking the troops where the troops need to go and are the troops still listening? Is the boss’ vision achievable and do they have the right course plotted? Proformas are a good way of understanding the vision and can be taken home to study as opposed to taking precious time away from the CEO.

I hope this provides a little bit of insight to how I think about these PITA documents. There is value to them, but not really for the numbers.  The value lies in the thought exercise, the vision, and the execution process.  So next time you request proforma statements, know what you are really looking for.  Don’t waste the management’s time unnecessarily.  Don’t hide behind the “proforma financials” buzzword just for the sake of checking a box.

About the Author Mark Nassi

Mark has a 20+ year career marrying technology and accounting. He holds a Bachelor of Science degree in Mathematics from the University of California-Davis as well as a Masters in Accounting from the University of Colorado-Denver. He co-founded NCS with Adam Crabtree in 2015. Mark is a licensed Colorado CPA.

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