Finally, the moment you've all been waiting for: more information about pro forma financial statements and financial analysis in a business plan! Don't everyone flock to this post all at once. Financial analysis can be dry and uninteresting but it is absolutely essential to understanding the viability of a potential business venture. The process of putting together financial statements begins with either revenue modeling or cost projections. The order of creation depends on whether you are an optimist or a pessimist!
We began compiling our financial projections by building a revenue model that consists of our sales channels, the planned sales mix within those channels, and product pricing estimates. Every input in our model is adjustable so that we can produce different revenue projections that account for increases or decreases in our pricing or changes in how much beer we sell out of our taproom vs. wholesale. We can project these figures using any level of monthly or annual production, which allows us to account for revenue seasonality as well. It's fun to project revenue generation at 200% of planned production levels! And then it's very sobering (but necessary) to project revenue generation at 50% of our planned production levels.
The next step for us was to review costs. This was a two step process. First, we researched prices and spoke with an unending stream of suppliers to determine the capital required to start the business. Examples of these costs include the brewing system, a glycol chiller, and furniture for our taproom. Second, we went through the same process to determine our ongoing expenses. Those monthly costs include rent, utilities, brewing ingredients, and labor. We built another model that adjusts in response to changes to any of our monthly "running" costs. For example, we can alter the model to account for unexpected inflation increases (and the resulting increases in salaries and related payroll tax payments) or a 10% rate increase from Dominion Power.
The two sides of the equation are brought together in the financial statements. The business plan for The Virginia Beer Company contains three year's worth of monthly Income Statements, Balance Sheets, and Statements of Cash Flows. It also includes those same three statements in an annual summary format to cover the first five years of operation. Our analysis of those statements includes projected financial ratios (comprising liquidity measurements, profitability indicators, operating performance measurements, and cash flow indicators), a break-even analysis, and an earnings sensitivity analysis, which measures the sensitivity of projected net income to changes in both gross margin and total operating expenses. The Financial Analysis section of the table of contents of our business plan is shown to the right - it's a total of sixteen pages!
Building adjustable models and incorporating them into our financial statements was one of our better time investments. We have a base set of projections for annual production, and all of the hard-coded financial figures in our business plan (like our chart detailing financial highlights for the first five years) are compiled using those projections. However, when we speak to investors we have the flexibility to share altered projections or answer important questions about the future financial health of the business. This is especially true when referring to cash on hand for operating the business. I would encourage anyone starting a brewery, or any type of small business, to build similar flexibility into your financial projections.