Staying on top of your proforma

Proformas/financial models aren’t just tools for fundraising; they offer invaluable insights into your day-to-day operations, but only if they’re maintained and updated regularly. If you leave your proforma to collect dust, it’ll quickly become a useless relic instead of a powerful component of your financial planning arsenal. 

Ramsha Rizvi, CFA, is Investment Ops Manager at Enduring Planet. We sat down with her to discuss the recurring hygiene best practices to ensure your model stays a living document, what you can learn from it, and how to adapt your proforma for different audiences.

Refreshing and reviewing your model

1. Incorporating actuals
Adding actual figures (i.e. historical data) can inspire credibility, investor confidence, and add critical reality to your model. Hence, it is important to update monthly forecasts with actual numbers once the month is completed and accounting numbers are available. This also allows you to create a rolling forecast that will help you understand what the future’s likely to hold given the actual performance so far.

If as an early stage business, you did not have any actuals (i.e. historical revenue or expenses) when you built your model, you should start incorporating actuals into the model ASAP.  As you do, you will build a much clearer idea of your revenue/expenses and associated trends, as well as the levers you have to make changes.  

2. Recalibrating assumptions
As you start to add actuals, you’ll discover that some of them invalidate your initial assumptions, and you’ll need to update them to ensure your model is not telling a story removed from reality.  For example, you might have forecasted accounting and legal as a percentage of revenue, but later find that it’s actually a constant figure that’s completely disconnected from your revenue. Or maybe you forecasted a debt or equity raise to happen at a certain date, but it was delayed in a tough fundraising environment - then you’ll need to adjust the assumptions around fundraising, and likely plan for a different cash forecast. 

Once you change values and formulas around these assumptions, you’ll also need to make sure these changes are filtering through to the right places in the integrated financial statements. If your initial assumptions were way off base, this will also give you the opportunity to reflect on why this happened. Were you thinking about this assumption wrong in the first place? 

Sometimes, founders hesitate to recalibrate these goals and assumptions because it could mean having to reseek approval on your model from your board or other stakeholders. But the benefits of doing so, and being able to more accurately predict your performance, far outweigh the drawbacks.

Getting the most out of your model

1. Learning from trends using an analytical dashboard
An analytical dashboard built into the model can help visualize key metrics such as historical and forecasted revenue, revenue composition by segments, profit margins, customer lifetime value (LTV), customer acquisition cost (CAC), general unit economics, and ending balance. It can help bridge the gap between day-to-day operations and longer-term trends. 

For instance, your dashboard might indicate that, to achieve revenue targets by the end of 2025, you need to introduce an additional revenue stream by late 2024, as current revenue growth is insufficient. This insight enables you to plan ahead, brainstorm strategies, and allocate resources effectively to implement and scale this new revenue stream in time to meet you 2025 targets. Therefore, your model and its executive summary can allow you to more effectively iterate and build a better business.

2. Modeling projected runway
One of the most important insights you can gather from your model is a granulated perspective on runway, rather than just taking cash on hand and dividing it by your most recent month’s expenses (a common tactic). 

For example, we recently helped one of our CFO clients understand that a likely delay in near-term revenue could reduce their runway to 3-4 months at the start of Q1 2025. This forecast gives them time to arrange and restructure an unused line of credit with an existing lender to prepare for this risk. Since the cash shortage is temporary in this example, a Line of Credit was deemed the best solution but for longer-term financial needs, equity, longer-term debt, or even grants might be more suitable. Hence, projected runway analysis also helps you evaluate which type of capital is most appropriate for your business's current needs.

3. Deciding on capitalization options
Once you have a clear sense of runway and your internal capital needs from your proforma, you can simulate debt repayments or equity dilution to help you understand the consequences of choosing any given capitalization option. 

You can even model different terms and conditions of financing (principal moratoriums or grace periods, as well as different covenants). For instance, if your cash balance is a covenant in a particular loan, and your cash balance is projected to dip, then you’ll know you need to raise equity instead. Once you’ve conducted this analysis, you can share it with your debt lenders to help them understand more about your position and run their sensitivity analysis.  

4. Where to best invest your cash
If you’ve built your model using a bottom-up, drivers-based approach, you’ll be able to see what’s driving your revenue, and therefore understand the best use of the cash you’ve raised. For instance, your model will show you what’ll happen to your bottom line if you increase your marketing expenditure or hire more salespeople, so you’ll know where to invest your money to drive more growth. 

5. Stress testing scenarios
Taking things one step further, you can push the parameters of your model to really dive into different, extreme scenarios. What if the worst happens? Or what if you have access to unlimited resources? 

For instance, if you’re selling heat pumps, what’ll happen if your manufacturing timeline jumps from three months to six months? Or if you’re able to find a new manufacturer that works two months faster? What if you’re not able to raise the funds you’d modeled, or can only raise half of it? Running these scenarios will help you understand the risks you face as well as unexpected potential benefits - it might be that if you improve one assumption by 10%, you’ll actually see a 40% improvement on your revenue. Bringing out these hidden opportunities is where your model can really shine.

Showing your model to different audiences

Your stakeholders will all have different expectations for your model, so you’ll need to carefully adapt it for each distinct audience. 

1. VCs 
VCs’ underlying assumption is that you’re offering up your most ambitious vision, so if you send them your base or bear case, they’ll only discount it further, and likely question your business’s potential as a VC-backable business. Don’t send them the model you use internally on a daily basis - show them what you could achieve in your best-case scenario (which still connects that scenario to realistic and easily-verifiable assumptions). 

2. Lenders
Showing lenders something overly optimistic tells them you’re divorced from reality. They’ll prefer to see a conservative pro forma, so they can determine whether they’ll be able to service the worst case scenario. Offer them either your base or bear case model, with plenty of context on where risk lies and what mechanisms you have for mitigation.

3. Other stakeholders
As you grow your business, you’ll likely need to share your model with a number of other stakeholders. To hit the right balance between ambition and caution, you’ll first need to understand what drives them, and what they’re looking for in your pro forma.  Do your homework first, and adapt accordingly.