Notes Deco Frost Financial Pro Forma Statement Notes - Outline all assumptions driving the financial proforma on this sheet Suggested Method: 1. Start with the income statement. Figure out...

Notes
    Deco Frost Financial Pro Forma Statement
    Notes - Outline all assumptions driving the financial proforma on this sheet
    Suggested Method:
        1. Start with the income statement. Figure out the revenue, COGS and GM
        2. Estimate your operating expenses and get your EBITDA
        3. Subtract any depreciation if you have planned on capital purchases (that will be reflected on the balance sheet and cash flow statements ONLY)
        4. Subtract any interest expenses from the EBIT from 3 above to get your EBT.
        5. If your net income is positive, subtract taxes from your EBT to get your Net Income.
        6. Complete the Cash Flow projections by reconciling your Net Income from the Income Statement. Do not duplicate your expenses on the Cash Flow Statement!
        7. Put your financing into the flow statement, whether investments or debt. These must be sufficient to remain cash flow positive at the end of each month.
        8. Itemize any capital expenses in the investment section.
    ALL NOTES GO HERE. No comments in the spreadsheet!
    Business description:
    Development Plan:
    Marketing Plan:
    Sales Plan:    direct or through channels?
        what channels?
        trade discounts by channel?
    IP plans?    TM
        Patent upgrades?
        License
    COGS
        reference for similar gross margins for similar equipment
        changes in COGS over the three years
    Sales Price:
        changes in price over the three years
    Sales volume growth exoectations
    Hires: Hires should make sense for your revenue level. Justify your salary levels.
        Marketing
        sales
        engineering
        administrative
    AP plans
        What are your inventory levels? How quickly will you ship?
        How quickly will you pay for inventory?
    manufacturing plans
        contract
            premium on cogs
        in-house
            assembly people
            production space
            equipment -fixed assets? Capital expenditures?
    expenses
        insurance
        rent
        general maintenance
        office supplies
        communications - internet, phone
        marketing expenses
    AR Plans
        when do you get paid by customers or channels?
    tax rate
        remember taxes are only paid on positive income
        where are you located and what do they charge?
    How does your accounting get done?
        bookeeping by admin
        accounting services
        full time accountant
Income Statement
    Deco Frost Income Statement
                Year 1                                                    Year 2                                                    Year 3
                Jan    Feb    Mar    Apr    May    Jun    Jul    Aug    Sep    Oct    Nov    Dec    Year 1    Jan    Feb    Mar    Apr    May    Jun    Jul    Aug    Sep    Oct    Nov    Dec    Year 2     Jan    Feb    Mar    Apr    May    Jun    Jul    Aug    Sep    Oct    Nov    Dec    Year 3
    Sales Volume
    Price
    Revenue
        Trade discounts
Graef, Ted: Graef, Ted:
This is the discount you have to give to retailer like amazon or best buy. If sellin in more than one outlet, put a line for each with specific discount for that retailer.
        COGS
        Credit card charges
        Shipping
    Gross Margin
    Expenses
        Salaries (Itemize with line per hire)
            Owner 1
            Owner 2
            Employee 1
            Employee 2
            Employee 3
        R&D
        Marketing
            Social Media
            Advertising
            Tradeshows
            Guerilla events
            Demo equipment
        Sales expenses (travel)
        Rent
        Maintenance (fixed assets)
        Insurance
        Professional services
            accounting
            legal
    EBITDA
        Depreciation
    EBIT
        Interest expense
    EBT
        Taxes
    Net Income
Cash Flow Statement
    Deco Frost Cash Flow Statement
            Year 1                                                    Year 2                                                    Year 3
            Jan    Feb    Mar    Apr    May    Jun    Jul    Aug    Sep    Oct    Nov    Dec    Year 1    Jan    Feb    Mar    Apr    May    Jun    Jul    Aug    Sep    Oct    Nov    Dec    Year 2     Jan    Feb    Mar    Apr    May    Jun    Jul    Aug    Sep    Oct    Nov    Dec    Year 3
    Beginning Cash
    Cash from Operations
        Net Income
        Depreciation
        Change in AR
        Change in AP
    Cash for Investments
        Capital Purchases
        Acquisitions
    Cash from Financing
        Equity Investments
        New Debt
        Retired Debt
        Dividends Paid
    Ending Cash
Balance Sheet
    Deco Frost Balance Sheet Proforma
                Year 1, End of month                                                    Year 2                                                    Year 3
                Jan    Feb    Mar    Apr    May    Jun    Jul    Aug    Sep    Oct    Nov    Dec    12/31/Year 1    Jan    Feb    Mar    Apr    May    Jun    Jul    Aug    Sep    Oct    Nov    Dec    12/31/Year 2     Jan    Feb    Mar    Apr    May    Jun    Jul    Aug    Sep    Oct    Nov    Dec    12/31/Year 3
    Assets
        Cu
ent Assets
            Cash
            AR
            Inventory
        Tangiblle Assets
            Fixed Assets
            (Accumulated Depreciation)
        Intangible Assets
            IP
        Total Assets
    Liabilities
        Cu
ent Liabiliites
            AP
            Credit Line, Debt due <12 mos
        Long Term Liabilities
            Long term debt
        Total Liabilities
    Shareholders Equity
        Equity Capital
        Retained Earnings    
Graef, Ted: Graef, Ted:
Equals the sum of Net Income over time, that's it! Do not change this formula!    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0
        Total Shareholder Equity
    Total Liabilities and Shareholder Equity            0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0
    Accuracy Check
        Assets - Liabilities        0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0
        Shareholders Equity        0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0
        Difference (should = 0)        0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0    0

It's now time to put together the financial forecasts for the Deco Frost Company. You must determine how much cash financing is needed to get the company to the point of
eak even, where it is earning enough revenue to cover all its expenses. Your project is to generate estimated financial statements for the first three years of the company, along with financial notes that make your assumptions clear over these three years of projections.
Revenue
The first step is to estimate the revenue over time.
· When is the development done so that manufacturing and sales can start?
· What is the price of the unit?
· Based on the cost of the unit, need to be sure to have sufficient margin.
· What is the value to the customer?
· Where and how will the product be sold?
· What will the average selling price be to the customer or the channel?
· Are a certain amount of sales direct?
· What's the
eakdown of direct sales and sales through a channel at a reduced margin? This is the revenue the company earns, regardless of the price to the final customer.
Once you develop estimates for the price of the product and the sales volume by channel with the associated margins, you can estimate the company's revenue over time. With the estimate of the cost to manufacture you can determine the gross margin, the most important number according to Brodsky. 
Cost of Goods Sold
Over time., your revenue should increase due to increased sales volume, and your COGS will come down due to larger purchases from your vendors. You can make estimates for both of these situations and just be clear in the financial notes what assumptions you are making. For example, as time goes on you might pick up additional distributors ca
ying the Deco Frost or larger chains using it. This will increase the sales volume if it is presenting it to additional markets. COGS can be estimated by looking at similar equipment made by public companies' (since they have to provide their financials) gross margins and making assumptions about how yours will compare.
Operating Expenses
Next you need to estimate expenses. Your biggest question: How much will be spent on engineering, marketing, SG&A and operations?
This includes all the expenses to keep the business running such as rent and insurance, but also the employees that will be needed.
· Who do you need to employ and what are their salaries?
· When does each start? What month? Show their start and the salary expense by month on the Income Statement.
Itemize these positions and costs as salaries are a significant portion of your expenses. And as the business grows many of these expenses will grow as well.
· Which expenses grow in parallel with the sales volume, and which do not scale with the revenue?
· Is the rate of growth the same for all expenses or different for some?
Make clear your assumptions in the notes. 
The growth of the expenses needs to be reflected in parallel with the growth in revenue, although the goal is that they do not grow at the same rate. In a product company selling hardware or software, your expenses and employees do not typically grow as fast as your sales grow as you reach a point where you can abso
additional sales growth without co
esponding employee hires. In a service business it is more likely that the revenue and expenses grow at similar rates, as you need to hire employees to provide the service to keep up with expanding sales.
Build your Income Statement First
1. Start this project by building your income statement first, with your estimated revenue and COGS providing your Gross Margin.
2. Then subtract all your operating expenses to get your EBITDA.
3. Subtract any depreciation from capital investments, then any interest payments and finally any taxes (if you have positive Net Income) to get your final Net Income. 
Cash Flow
You have determined your expenses on the Income Statement. Do not replicate these on the Cash Flow Statement as these are already allocated in the Net Income. Reconcile the Net Income from the Income Statement to determine the cash flow. The Cash Flow Statement must show that you have covered your cash needs through investors, bank financing or a combination of the two. Remember that loans and investments are shown in the financing portion of the statement, not the operating section. And you start with $0 cash on day 1!
Financing
The cash flow statement will make it clear that you need outside financing. Do not let your company go cash negative at any point or you are out of business. 
· How much will you need to remain cash flow positive?
· Where will these funds come from?
Make your assumptions clear, and then reflect the investment or loans on the balance sheet and on the cash flow statements.
Balance Sheet
The balance sheet will show your cash and other assets, your loans and other debts and the shareholder's equity at the end of each month. Shareholder Equity consists of capital contributions—any investment made into the company that is not a loan, and retained earnings—the sum of all Net Income since the start of the business. Don't just subtract liabilities from assets and plug in this number. The numbers should work out when you put these two components into shareholders' equity and the rest of the balance sheet is co
ect. 
Deliverables
Submit an Excel file with four tabs:
1.
1. Notes the notes itemizing your assumptions
2. Income Statement
3. Cash Flow Statement
4. Balance Sheet
All three statements should have monthly columns with an annual column at the end of each year. Note that summing up the year does not make sense on all lines of the balance sheet—pay attention to this. Put all three years in line on the same rows! Don't create duplicates for each year as this will lead to e
ors. Put your notes on an additional tab in the Excel sheet, please do not create an additional document. You can start with the supplied template. The categories are here for each statement, but you need to complete the spreadsheet formulas. Note that you can collapse the months to just see the annual numbers which allows for easy observations of annual performance. 
Your draft copy should include your notes and at least year 1 of the income statement, the balance sheet, and the cash flow statement. Make sure you have all your group members' last names in the file name for all submissions!