An integral part of the business plan is to develop a business model.

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An integral part of the business plan is to develop a business model. Simply put, a business model describes how a company plans to make money. It is not what you do, but how you will make money doing what you do. A solid business model is the link between venture strategy and financial plans. Projecting the financial performance and requirements can be classified as financial goals of the venture. A venture capitalist will want to know not only the numbers, but how those were derived.

develop both a business model and financial goals for your new venture. develop and submit the following:

Define the business model of your venture company, explaining why it is you have selected this business model as the ideal model for your venture.
Create a five-year revenue projection and illustrate how you have come up with the projected numbers.
Develop a five-year pro forma P&L statement and justify your assumptions within the statement.
Devise a five-year pro forma cash flow statement and justify your assumptions within the statement.
Design a five-year pro forma balance sheet and specify how the balance sheet relates to the other two financial statements in parts (2) and (3).

Sample Solution

My new venture is a software company that develops and sells a cloud-based customer relationship management (CRM) platform. My business model is based on a subscription fee, which customers pay on a monthly or annual basis to access the CRM platform.

I have selected this business model for my venture because it is a recurring revenue model, which means that I can generate predictable and reliable revenue over time. Additionally, the subscription model allows me to scale my business quickly and efficiently.

Five-Year Revenue Projection

The following table shows my five-year revenue projection for my software company:

Year Revenue
1 $1 million
2 $2 million
3 $3 million
4 $4 million
5 $5 million

I have derived these projected numbers by considering a number of factors, including:

  • The size and growth of the CRM market
  • The competitive landscape
  • My company’s pricing strategy
  • My company’s marketing and sales strategy

I believe that these revenue projections are realistic and achievable based on my company’s strengths and the market opportunity.

Five-Year Pro Forma P&L Statement

The following table shows my five-year pro forma P&L statement for my software company:

Year Revenue Cost of Goods Sold Gross Profit Operating Expenses Net Income
1 $1 million $250,000 $750,000 $500,000 $250,000
2 $2 million $500,000 $1.5 million $750,000 $750,000
3 $3 million $750,000 $2.25 million $1 million $1.25 million
4 $4 million $1 million $3 million $1.25 million $1.75 million
5 $5 million $1.25 million $3.75 million $1.5 million $2.25 million

I have made the following assumptions in developing my pro forma P&L statement:

  • Cost of goods sold will be 25% of revenue.
  • Operating expenses will be 50% of revenue in the first year and will decrease to 40% of revenue in subsequent years.
  • Net income will be 25% of revenue in the first year and will increase to 45% of revenue in subsequent years.

I believe that these assumptions are realistic and achievable based on my company’s business model and the market opportunity.

Five-Year Pro Forma Cash Flow Statement

The following table shows my five-year pro forma cash flow statement for my software company:

Year Net Cash Flow from Operating Activities Net Cash Flow from Investing Activities Net Cash Flow from Financing Activities Net Change in Cash and Cash Equivalents
1 $250,000 ($250,000) $250,000 $0
2 $750,000 ($500,000) $0 $250,000
3 $1.25 million ($750,000) $0 $500,000
4 $1.75 million ($1 million) $0 $750,000
5 $2.25 million ($1.25 million) $0 $1 million

I have made the following assumptions in developing my pro forma cash flow statement:

  • Net cash flow from operating activities is equal to net income.
  • Net cash flow from investing activities is equal to capital expenditures.
  • Net cash flow from financing activities is equal to debt and equity financing.

I believe that these assumptions are realistic and achievable based on my company’s business model and the market opportunity.

Relationship Between the Three Financial Statements

The three financial statements – the pro forma P&L statement, the pro forma cash flow statement, and the pro forma balance sheet – are all interrelated.

The pro forma P&L statement shows how the company expects to generate revenue and expenses over time. The pro forma cash flow statement shows how the company expects to generate and use cash over time. The pro forma balance sheet shows the company’s financial position at a specific point in time

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