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Pro Forma Financial Statements

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how to create a pro forma income statement

The characteristics both situations have in common is that there is an exchange of value at some point in time in return for receiving something of value . Revenue drivers are activities we, or the business, do that “drives” revenue . These are often activities like digital advertising, cold calling, content marketing , or any number of other initiatives used by companies to create new sales. If we need to forecast our pro forma over multiple future periods, say on a month-by-month basis over the next few years, we use the exact same approach detailed above. With our income statement in hand, we then have to decide at what point in the future we will establish a goal, or outcome, for our Pro Forma. My motivation for this post is to explain the differences between creating a pro forma for existing businesses versus new businesses. What you really want to do is take into consideration everything possible to project sales.

A company may present a pro forma statement to inform investors about their internal assessment of the financial outcome of a proposed change in the business. It’s illegal for publicly traded companies to mislead investors with pro forma financial results that do not use the most conservative possible estimates of revenue and expense. She is an expert in personal finance and taxes, and earned her Master of Science in Accounting at University of Central Florida. Your projected cash flow can give you a few different insights. If it’s negative, it means you won’t have enough cash on-hand to run your business, according to your current trajectory. The pro forma template is all about helping shake the habit of reactive financial management.

How to Create A Pro Forma Statement of Cash Flow

Report on key metrics and get real-time visibility into work as it happens with roll-up reports, dashboards, and automated workflows built to keep your team connected and informed. Use this Word how to create a pro forma income statement template to create your own compilation report, as per the AICPA’s guidance. Consider making pro forma provision for taxes that would have been paid if the company was a corporation in the past.

The projections serve as windows of opportunities for startup founders to increase the production capacity and drive growth in a startup. You can pay close attention to the possible fluctuations in costs in advance. On the other hand, you can also get projections that would deplete your startup’s capital and create financial challenges. You should continually update your projections by recalculating your pro formas using any new and actual financial information you have as a base. Doing this on a monthly or quarterly basis will help ensure that your projections are as accurate as possible. Pro forma taxes are figured by taking your estimated tax rate—in this case, 30 percent—and multiplying it by the pro forma profit before taxes of $235,000. To figure your pro forma gross profit for next year, subtract the pro forma cost of goods sold from the pro forma sales.


GAAP are strict guidelines that all businesses must adhere to in the United States when preparing their financial statements. Companies face heavy fines, sometimes in the millions, and even federal jail time for not following GAAP. However, pro forma financial statements do not have to follow GAAP. A business is allowed to exaggerate and embellish their financial reporting because the pro forma statement is trying to predict what happens in the future. Potential and current investors use this information to decide where to spend their money. An investor is any individual or entity that has a financial stake in a business, with the expectation of a financial return. Likewise, businesses use this information to paint a picture of future success to persuade potential investors and/or to maintain the confidence in their current investors.

how to create a pro forma income statement

Although pro forma statements can be an insightful way to explore hypothetical scenarios, it’s important to remember that they’re based on assumptions, not facts. As such, there’s always a possibility that the scenarios projected by your pro forma financial statements are going to be wildly inaccurate. Many entrepreneurs and small business owners prepare these statements when writing their business plan. A business plan includes expected profits and other projected financial information to secure external financing from banks, lenders and investors. Business owners may use professional help, such as management consultants, business plan writers or public accounting firms, when preparing pro forma reports and statements.

Pro Forma Total Expenses

For new businesses with no historical financial statements, lenders look at pro forma statements for a realistic vision of your company’s future. The Securities and Exchange Commission consistently updates its stringent rules on preparing pro forma statements for the public. Still, pro forma financials are not regulated to the same extent as historical financial statements. There are several ways that a pro forma financial statement can be used incorrectly.

how to create a pro forma income statement

Financial statements are written records that convey the business activities and the financial performance of a company. For this reason, investors must examine not only the pro forma earnings, but also GAAP earnings, and never mistake one for the other. GAAP enforces strict guidelines when companies report earnings, while pro forma figures are better thought of as hypothetical earnings.

Two Types of Pro Forma Income Statement

First step is to add the revenues and the expenses to the income statement for each quarter you want to calculate. List all costs (property rent, advertising, insurance to pay, …) you want to eliminate in the first row. Subtract these costs from the total of each income statement item in the second row. Add back depreciation to capital expenditure, which is arrived at on the cash flow statement. This determines property, plant, and equipment on the balance sheet.

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Now the projected sale has not only put more income on the bottom line, it has also put more debt on the balance sheet. Net accounting income, or net income, is the amount of money a business has actually earned. It is made up of operating, financial and unexpected results, from which taxes must be deducted. Net income serves as the basis for calculating many ratios such as net earnings per share. Expenses in the income statement are divided into operating expenses, financial expenses and exceptional expenses.

You create a pro forma cash flow statement much the same way you’d create a normal cash flow statement. That means taking info from the income statement, then using the cash flow statement format to plot out where your money is going, and what you’ll have on hand at any one time.

  • Now, you need to think about how you’re going to match this production schedule, whether that’s by growing your sales by a fixed amount each month or gradually increasing your sales quota.
  • The resulting calculations would show how a rise would impact the company’s net profit.
  • The first section, Costs of goods sold, includes the direct costs of producing revenue.
  • A firm might construct a pro forma income statement based on projected revenues and costs for the following year.
  • Finally, calculate the total cash payments, net cash change, and end cash position to arrive at your completed pro forma cash flow statement.

Publicly held companies commonly issue pro forma statements to inform shareholders and other business stakeholders with management’s expectations regarding future business profits. These statements can also help internal business managers prepare reports and make financial decisions regarding business operations. Pro forma balance sheets are often created and included in business plans when a new company is starting or when a company is expanding.

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