What is a Pro Forma and why is it critical to your business?

We have never opened a restaurant without having a pro forma fully vetted before debating anything we would do. In fact, my brother and business partner Jim and I have had many conversations around the pro forma, where it was the deciding factor NOT to do a potential venture. A pro forma allows you to see the future or at least have a solid, hypothetical guess of what will happen—mapping out everything that this potential new store could achieve and all the downsides that go along with it purely from a financial perspective to determine whether or not this is worth the risk. All entrepreneurship is a risk, but this helps mitigate it and makes it a calculated one.

Demystifying the Pro Forma

A pro forma is a set of financial projections that give you and potential investors a clear picture of your restaurant’s expected financial performance. Unlike a typical business plan outlining goals and strategies, a pro forma provides concrete financial figures – revenue, costs and net income estimates over a given period.

This is a regular Excel spreadsheet. There’s nothing crazy in our high-tech about this, i.e., no geometry or insane pivot tables. It’s just projections of revenue with simple multiplication and addition.

We don’t use business plans, at least not in the classic sense. Most new-age business plans are more like vision boards; a bank or an investor does not care about your logo nearly as much as they care about your projection for profit. The strategy and intent are all good to know, but hard data matters most.

The Role of Pro Forma in Business Expansion

Informed Decision-Making:

A pro forma allows you to project the financial outcome of opening a new pizzeria. It considers location-specific costs, potential customer base and expected sales, giving you a clearer understanding of whether the venture is financially viable. These are massive considerations that must be highly evaluated. If you haven’t considered the worst-case ending profit, you are flying blind into the ether on a hope and a prayer.

Attracting Investors:

Investors are primarily interested in numbers. A well-prepared pro forma can demonstrate the potential profitability of your new venture, making it easier to secure funding. It’s like any sales proposal you go through, but in reverse, instead of the all-in cost on the last page, the investor wants to see the potential return in that final column. They also want to see that the potential return is rooted in solid factual research, not just “restaurants like this make as much as (blank) per year.” or “We’ll probably make about (blank) per year.” Instead, they want to hear, “Based on all this data and site research, we can conservatively say this concept should yield (blank) per year based on these projections in the pro forma.”

Risk Management:

Expansion comes with risks. A pro forma helps you anticipate and plan for potential financial challenges,
ensuring you’re not caught off guard. A WORD OF WARNING: DO NOT create a pro forma with an optimist mindset. Fill it out assuming low revenue and high labor costs. That way, if it still shows a profit, you know with more certainty this is a solid venture.

Comparative Analysis:

If you’re considering multiple locations for expansion, pro formas can be prepared for each, allowing for a side-by-side comparison to determine the most promising option. These will vary based on how many seats you have on-site and the average income metrics of the surrounding area.

How to do it:

Developing a pro forma might seem daunting, but it’s essentially about understanding and projecting your business numbers. Here are some key components:

Revenue Projections:

Estimate the sales your new location might generate. Consider factors like foot traffic, menu pricing and the size of the establishment. The size only matters, though, if the seating is there. If the location is all kitchen and very little seating, it will translate to a poor pro forma. Butts in seats are the determining factor to the success of most pro formas.

Cost Analysis:

Include both one-time costs (like renovation and equipment) and ongoing expenses (like rent, utilities, staff salaries, and how many people it will take on shift to make this thing run). If you have a massive location and the kitchen is super spread out, it will require more people to operate, affecting your projections. Meanwhile, if the location is lean and mean and can pump out tons of product with minimal staff serving a large audience, that is a better setup for success.

Profit Projection:

Deduct your estimated costs from the projected revenue to forecast profit. This will give you a sense of the financial health of the proposed expansion. And remember, if it doesn’t pass muster, ditch it. This is a business, not a hobby. Do not fall in love with a location or the vibe; many gorgeous high-end restaurants close daily because of rent, bad foot traffic, poor visibility and overall poor planning.

Why a Pro Forma Can Be More Insightful Than a Business Plan

While a business plan is great for new operators to map out their brand’s strategic direction and goals for their own guidance, a pro forma provides the numerical backing for those strategies. If your brand is established, making a business plan is optional. The pro forma translates your business plan into quantifiable expectations and realities. A pro forma brings the financial implications of your business decisions into sharp focus, making it an indispensable tool for any expansion.

In summary, a pro forma is not just a financial document; it’s a map for growth, a reassurance for investors and a reality check for your business aspirations. It separates dreams from reality and aspirations from concrete facts.

As you contemplate your next steps in expanding your pizzeria, remember that a comprehensive pro forma is not just beneficial – it’s a fundamental necessity. It makes you a LITERAL fortune teller, seeing if you will make money or not and if the project is a GO or a PASS.