Sales & Cost of Sales
Pro forma income statements are great for both startup and existing businesses. For the new business owners, they can use it to predict sales revenues by first pricing their products and calculating the anticipated costs of sales. For the existing business owner, historical data is often used increased based on market research and trends.
When creating projections for future sales revenues, most business owners often hit these numbers right on point, especially by looking at competitor pricing. However, many business owners make the mistake of under-judging the true cost of sales, hence a nice and juicy gross profit appears on the pro forma income statement.
Not calculating or even estimating the correct cost of goods sold can be deadly, especially if you have investors looking at your pre-business startup. Experienced investors can tell pretty quickly if you’re overstating your gross profits.
Make sure you include things like inventory costs, labor and payroll costs (including payroll taxes), and other items associated with the cost of your goods or services. For new business owners, if you have trouble doing this, speak with your accountant. Most accountants can help you determine if the cost of sales you’ve set are close or way off the mark.
Perform an Internet search to find out what profit margins your particular products or services usually gain. For example, most auto parts stores usually realize a profit margin between 10% and 15% on the parts they sell; more on larger selling parts and less on slower moving parts. If you were to under-judge true costs and your pro forma income statement shows profit margins out of this world or way above industry standards, you need to recalculate your cost of goods sold. The sample pro forma income statement in our Media Gallery is able to automatically calculate profit margins prior to expenses.