The pro-Forma income statement generates the projected income when a specific project is undertaken. As a reference from the initial income statement, some amounts are taken to predict the future outcome. For example, when an existing organization plans for a merger or acquisition it has to present it to the shareholders. The word “pro forma” is the Latin word that means “as a matter of form”. A pro-Forma income statement is just an income statement under certain assumptions with projections. It can be used as a basis for comparison and analysis under certain conditions. It plays a vital role in the planning process which can help to minimize the risk associated with undertaking a new project.
There are various templates available on the internet, but some of the pro-Forma income statements have some elements in common. A pro-Forma income statement basically looks similar to the conventional income statement. The only difference between the pro forma income statement and income statement is, the income statement is about past results, whereas the pro forma income statement is a projection of the existing income statement. It shows the possible income in the next few years considering the situation. There is no visible difference in the format except for the time and value of the inputs.
Creating a pro-Forma can help you recognize your organization’s income for the next period making some assumptions. The pro-Forma statement you create will be tailored to your regular accounting needs. It is considered that only a professional can make a pro-Forma income statement, but by following the steps below you can also create it.
Step 1 The basic program usually used to create a pro-Forma income statement is Microsoft Excel. Open excel, add the title “pro-Forma Income statement” at the top of the page. Under it, list the name of the organization. Add the effective date of the statement under the title.
Step 2 Similar to an income statement, name the first two entries of the column as sales and cost of sales. Set formulas on the right column beside it to deduct sales from the cost of sales to get the gross margin. Remember, there can also be other items that may be included under cost sales since it is a forecast of the income statement.
Step 3 Below gross margin, add the next element as expenses. Under expenses, list all the potential expenditures to be incurred by the organization for operating under certain conditions. The list can include items like salary, utilities, depreciation, etc. Set up a formula to total all the possible expenses and name it “Total expenses”.
Step 4 Now below total expenses add the field to enter the taxes to be incurred during the period. Set the formula to deduct the possible taxes with total expenses to get the projected net income.
Step 5 On the second column add all the actual values from the last calculated income statement to provide a reference in the pro-Forma income statement. Save the file.
Step 6 Add another column beside the actual values as “Projected year 1”. Here you can enter your projected values for each and every element, like sales, cost of sales, etc. Since you have set up the formulas you can see the real-time changes in the net income. You can create projections of many years using it.
1 You need to plan ahead from where your revenue is coming and you will be spending money. With a pro-Forma projection, you will have no idea whether your business will be making or losing money. They are just the best guess on what will happen to your company.
2 Know your business model in and out, you can’t create financial projections without knowing where your money is coming from and how much it will cost you to bring it.3 Make sure you don’t forget any expenses. Many first time entrepreneurs simply forget the expenses and project an incorrect pro-forma income Statement.
4 Clearly define all your assumptions since they are the base for a projected value for any item in the income statement. Back all your information with strong reasons to avoid any confusion with the investors.
Create a best, likely, and worst-case scenario separately in the statement. This will indicate to the investors how fragile your company is.