What Is a Pro Forma Income Statement?
A pro forma income statement is very similar to a cash flow forecast in the sense that it shows much of the same information. In the accounting world “pro forma” means to predict, assume or hypothesize. The prices of your goods or services will go up and so will expenses as time passes, therefore, examples of pro forma income statements predict those increases to determine future profits.
The agency SCORE, a division of the Small Business Association helps small business owners to plan, fund, and project items like income and expenses. In our Media Gallery, you’ll find an example of a pro forma income statement from SCORE in a Microsoft Excel format that calculates automatically.
This pro forma income statement is useful in predicting incomes and it also takes into account the taxes your business may have to pay on that income, depending upon how your entity is structured.
Creating Your Projected Income Statement
Sales and marketing professionals use historical data to determine the percentage incomes and expenses will rise in the future. Often, a business may have an expense that decreases such as a short term loan. Also, a product or service that is sold may become obsolete in the future meaning the sales and cost of sales for that product or service will cease.
You can make pro forma income statement assumptions based on your market area and current trends and much like initial sales forecasting, some items you predict are often your best guesstimate.
To get started, first download the pro forma income statement example in our Media Gallery using the link provided in the above section. Right away you’ll see this income statement is much like a cash flow forecast but deals more with sales and cost of sales to determine your base gross profit margin. In the sales and cost of sales sections, enter the amounts you feel products or services will increase in the future. For example, if you expect product A to increase 10% in the next year, and last year’s sales were $100,000, on the pro forma income statement, the amount you enter under product A would be $110,000. Perform this calculation on all the goods or services you sell to determine total future sales.
In the cost of goods section in the pro forma income statement example, you will now have to determine the future cost of the products or services you sell. You can predict these numbers by looking at historical data to determine how much costs of goods or service have risen in prior years, or ask vendors and suppliers about upcoming price increases. Once these are determined enter these figures to determine your gross profit margin.
Now it’s time to look at all of your expenses including wages paid to employees, all of your fixed expenses, bank or vehicle loans, and credit card expenses. Forecast your expense increases much as you did when you predicted future cost of sales increases.
For each line item, take into account whether you expect to spend more or less in the upcoming year. For example, if you have an employee expense you know will be ending, adjust the expense. The same process should be used to determine every expense line item.
Once you’ve determined sales, cost of sales, and expenses, our example of a pro forma income statement will calculate estimated taxes to determine your final income projections. You can ask your tax professional for help in determining predicted tax, or if your entity is a pass-through entity such as an S Corporation or LLC, you can delete the calculated tax.
Beyond this useful example of cash flow pro forma income statement provided by SCORE, visit their Business Tools web page. You will find many templates that are handy such as balance sheets, and cash flow projections. All of them are available free in a MS Excel format and can be modified to suit your business and accounting needs.
For help in predicting sales, learn how to create a sales forecast in Excel right here on Bright Hub.
- Increases in Capital (https://www.freedigitalphotos.net/images/Finance_g198-Increase_In_Capital_p20131.html)
- Future Business Growth (https://www.freedigitalphotos.net/images/Charts_and_Graphs_g197-Growth_And_Arrow__p19186.html)
- Predicting Expenses (https://www.freedigitalphotos.net/images/Charts_and_Graphs_g197-Business_Graph_With__p18335.html)
This post is part of the series: Income Statements
Find tips on how to prepare, read and analyze income statements along with examples and free templates you can download for personal or business use.