Nasir emigrated to Dubai from Khyber Pakhtunkhwa, a scenic area of northern Pakistan which is surrounded by snow tipped mountains and greenery. He made the decision to come to Dubai after his older brother told him that there are many opportunities for employment, and also many other Pakistanis.
After arriving in Dubai, he found a job as a gardener for a landscaping company which caters to one of the many gated communities in Dubai. This was in 2008, and since then he has been back to see his family four times. Nasir talks fondly about his three sons who are back in Pakistan, and is always amazed by much they grow in between his visits. His eldest son is now eighteen years old and is also looking to come to Dubai soon.
Nasir works nine hours a day, six days a week and moves from house-to-house using his bicycle. He lives in company-owned accommodation where he shares a room with one other gardener of similar background. At the beginning and end of each day the company bus transports Nasir and the other gardeners to and from their accommodation in Al Quoz.
In general Nasir enjoys working in Dubai, especially in the winter. During the summer his hours are decreased and he longs for Friday – his day off. He spends his day off at the Mosque, followed by the cafeteria near his accommodation.
Almost all of his monthly salary is sent back to his family and he survives on as little as he can in Dubai. Like many migrants in the UAE, he does not have a bank account. Nasir’s dream is to start a modest car sales business and bring his whole family to Dubai. One day, he hopes to save enough money to move back and live comfortably in Pakistan – although with his current banking situation, or lack thereof, he has scepticism as to whether he will achieve this.
Projected Financial Statements (otherwise known as pro-forma financial statements) refers to a set of financial statements which are an important part of a business model. No, not important, ESSENTIAL. It’s actually the apotheosis of the whole business model and is the first thing that’s turned to when someone looks at it. Whatever has been done before, is only in preparation for creating these statements.
The pro-forma should contain the following three statements:
Profit and Loss
(You can also include Statement of Change in equity if you are willing to, but investors usually only want to see the first three)
In this post, I am going to look at the simplest way to produce the pro-forma Balance Sheet and Profit and Loss statement. In the next blog, I will look at the Cash Flow Statement and Statement of Changes in Equity.
First thing’s first, let’s talk about the Statement of Profit and Loss. It’s the easiest one to do, which you’ll remember if you’ve followed my blog from the beginning. If not, to make a Profit and Loss statement in Excel, you should have a detailed (ideally, monthly) budget, where all your expense items are attributed to certain expense types, as they are going to appear in your final Profit and Loss statement. Then simply, by using the Sumif function, you summarise all your budgeted figures on an annual basis. The process looks like this:
Once you have your Profit and Loss statement, you can use it as a starting point for creating your Balance Sheet.
From the Profit and Loss statement you need the Net Profit figure, which you will use for your Retained Earnings in the Balance Sheet (within the Equity section). For the first year the Retained Earnings will be equal to the Net Profit figure. Every subsequent year’s Retained Earnings is the Retained Earnings from the previous year, plus Net Profit for the current year.
Next, I suggest you calculate your Cash line. In order to do that, you need to make sure your budget has a line for cash (or bank – doesn’t really matter how you name it) at the bottom. This is where you summarise the income, (less expenses, plus investment) you are planning to receive and any loans. Ideally you should track it on a monthly basis against your actual cash in bank. Once you have that sorted, use the amount at the end of the year for your Balance Sheet Cash account. Then it needs to be adjusted for the accounts receivable and payable by decreasing it by the amount of receivables and decreasing it by the amount of your payables.
If you have investment coming in, include it in your Capital within Equity, and corresponding amount, to the Cash line. If you have a loan, add a line for Long or Short-term loans in Liabilities and the corresponding amount goes to Cash.
Capital line should include all capital put up as of the Balance Sheet date and the same amount should either be in Receivables from the owners or Cash (included in your budget in the Cash line as well).
That’s it for this blog, in the next one we will cover the other two financial statements to make your business model look even more beautiful!
If you are thinking of starting your own business or have already started one, sooner or later you will face questions such as:
What is my burn out rate?
Will I be able to afford to hire a sales director?
How many customers do we need to break-even?
How much does my company cost?
In order to answer these and many other questions, you need to have a financial model in place. More importantly, if you need to raise further funds to grow your company, a financial model is something which will prove invaluable.
As Winston Churchill once put it:
“Plans are of little importance, but planning is essential.”
The same applies to a financial model. It doesn’t have to be precisely correct, however it does need to show that you, as a founder, know exactly how your business operates and what you are trying to achieve.
There are different templates available on the web for financial modelling, however, in my opinion, using someone else’s template is like wearing someone else’s suit – it just doesn’t feel right. If you want to feel comfortable you need to have one tailor-made just for you.
A good financial model has the following components:
Budget (monthly or quarterly)
Assumptions for revenue and cost
Projected financial statements (balance sheet, income statement, cash flow and statement of equity)
Headcount or hiring plan
Working capital assumptions
If you don’t have a financial background, the five easy steps listed below should be enough to get you going and prepare the first part of the financial model, the budget, which is a great starting point for drafting financial statements and other key financial and operating metrics.
The five steps
1– Start gathering actual data
When starting a business, you may feel that keeping track of your expenses is an arduous and boring task. However, I would highly recommend that you remember, (no matter how boring it sounds) to separate your business expenses from your personal ones! Get a separate credit card, separate bank account – whatever works best for you – but make sure you keep everything separate, it’s highly important! After this is done, start collecting all of your business expenses’ receipts and invoices and inputting them into a simple Excel table which might look like this:
It is very crucial to add a date column, where you input the dates stated on your receipts and invoices, which ideally highlight when the product was purchased or service was rendered.
2 – Simplify the presentation of your expenses by type
After the data is gathered, you need to add another column and classify all expenses into several categories. For a start-up company these are the main expenses that most likely will be present:
Administrative expenses – office rent (probably in a shared area), stationery and subscription to admin software such as Dropbox, Microsoft, etc.
Staff related expenses – salaries – this can also fall into the administrative expenses category, but due to its significance it is better to separate them
Regulatory expenses – licensing, other legal fees, and notarial fees are significant in the first year, therefore also suggest to present them separately
Selling and Marketing expenses – google ads, attending marketing events and PR campaigns, etc.
IT costs – if you are a digital start-up, IT costs would constitute a major part of your profit and loss statement, therefore it is wise to present them separately as well.
After this exercise is done, your table might look like this:
3 – Accumulate your actuals by expense types and by periods (whether months or quarters)
This step simply means presenting your actuals in an aggregated format based on the expense types and periods. By using the Excel formula Sumif, your actual transactions will be accumulated and presented by expense types:
In this table, columns are months, meaning that this budget is prepared on a monthly basis. To do that, after the dates are inputted in step 2, by using Excel formula Month, they can be distributed to different months which they relate to.
4 – Start projecting your expenses and revenues for future periods
After you have finished inputting your data, it’s time for projections, which, in my opinion, is the most exciting part of financial modelling! If you have already incurred expenses, then it should be fairly easy to predict how much something will cost you later on. However, if there is a new expense – then you need to do some research on how much it will cost your business. And if you have no idea whatsoever on where to go for an answer – then you need to start making assumptions.
5- Accumulate assumptions
Create a separate sheet for assumptions where you will accumulate all data related to future expense and revenue drivers. One of the advantages to keeping them on a separate sheet, is that after you link them in your budget table, you can easily change your projected data by changing those assumptions. Another advantage is that it makes your calculations transparent for someone who wants to review them.
Assumptions can include the following:
Growth rate or your customers’ number or projected customers’ number in absolute amounts
Number of customers per sales agent
Office rent per year
Technology cost per user, etc.
After you have performed these 5 steps above, you will have a budget which will be a very important source of information for preparing projected financial statements, key metrics and valuation for your company.
Stay tuned to the blog for the rest of my “five easy steps” series, which will help you create the entire financial statement.