The Business Plan 287that comparable firm as a starting point. Entrepreneurs then need to articulate
why their projections vary from the comparable firm, both in a positive and
negative manner. Continuing the online bookstore example, I would be insane
to believe that I could achieve the same rapid growth that Amazon.com expe-
rienced, because there is now more competition, especially from Amazon.com.
On the f lip side, I should be able to argue that my expenses won’t be as stif ling
as Amazon’s, because I have studied and learned from their excesses. I would
also articulate how my fulfillment is more efficient than Amazon’s. So the key
in the comparable method is to use other firms and industry standards as a
starting point and then adjust your projections based upon your strategy and
other factors.
Industry averages also provide useful comparable information. The Al-
manac of Business and Industrial Financial Ratios,published by Prentice-
Hall, or Industry Norms and Key Business Ratios, published by Dun and
Bradstreet are excellent sources to use as starting points in building financial
statements relevant to your industry. Specifically, these sources help entrepre-
neurs build income statements by providing industry averages for costs of
goods sold, salary expenses, interest expenses, and the like. Again, your firm
will differ from these industry averages, but you should be able to explain why
your firm differs.
The second method is the buildup method. This approach derives from
the scientific finding that people make better decisions by decomposing a
problem into smaller parts. For financial pro forma construction, this is rela-
tively easy. The place to start is the income statement. Identify all of your rev-
enue sources (usually the various product offerings). Instead of visualizing
what you will sell in a month or a year, break it down to the day. For example,
if I am starting a new restaurant, I would estimate how many customers I
might serve in a particular day and how much they would spend per visit
based upon the types of meals and beverages they would buy. In essence, I am
developing an average ticket price per customer. I then multiply that price by
the number of days of operation in the year. Once I have the typical day, I can
make adjustments for cyclical aspects of the business, such as slow days or
slow months. If I were, say, to open up a chain of restaurants, I could then
multiple my estimates by the number of restaurants. Once you have gone
through a couple of iterations of each approach, you should be able to recon-
cile the differences.
One schedule that is particularly powerful in building up your cost esti-
mates is a headcount schedule. This table should have time across the top and
job categories down the side (see Exhibit 9.14). Next assign average salaries
and burden to these employees and then funnel them into the appropriate in-
come statement lines. Breaking down to this level of detail enables entrepre-
neurs to more accurately aggregate up to their real headcount expenses, which
tend to be the major line item in most companies.
Going through the above exercises allows you to construct a realistic set
of pro forma financials. The financial statements that must be included in your