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Pro Forma Income Statements

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Pro Forma Income Statements

A pro forma income statement is similar to a historical income statement, except it projects the future rather than tracks the past. Pro forma income statements are an important tool for planning future business operations. If the projections predict a downturn in profitability, you can make operational changes such as increasing prices or decreasing costs before these projections become reality.

Pro forma income statements provide an important benchmark or budget for operating a business throughout the year. They can determine whether expenses can be expected to run higher in the first quarter of the year than in the second. They can determine whether or not sales can be expected to be run above average in June. The can determine whether or not your marketing campaigns need an extra boost during the fall months. All in all, they provide you with invaluable information—the sort of information you need in order to make the right choices for your business.

How do I create a pro forma income statement?

Sit down with an income statement from the current year. Consider how each item on that statement can or will be changed during the coming year. This should, ideally, be done before year’s end. You will need to estimate final sales and expenses for the current year to prepare a pro forma income statement for the coming year.

Pro forma gross profit
Let’s assume that you expect sales to increase by 10 percent next year. You multiply this year’s sales of $1,000,000 by 110 percent to get $1,100,000. Then, in this case, you assume there will be no increase in the cost of each item you are selling, but you will need 10 percent more items to sell in order to achieve your sales goals. So, you multiply this year’s cost of goods sold (let’s assume a figure of $500,000), by 110 percent to get $550,000.

To figure your pro forma gross profit for next year, subtract the pro forma cost of goods sold from the pro forma sales. $1,100,000 minus $550,000 equals your gross profit, or $550,000.

Pro forma total expenses
Let’s assume salaries and other expenses will increase by 5 percent. So, you multiply your historical salaries of $200,000 and your historical expenses of $100,000 by 105 percent each. Your pro forma salaries for next year will be $210,000 and your pro forma expenses will be $105,000.

You then figure your pro forma total expenses by adding pro forma salaries and pro forma other expenses together. In our sample case your pro forma total expenses will be $315,000.

Pro forma profit before taxes
Pro forma profit before taxes is figured by subtracting the pro forma expenses from the pro forma gross profit, or $315,000 from $550,000 for a pro forma profit before taxes of $235,000.

Pro forma taxes
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. This produces a pro forma tax bill of $70,500.

Pro forma profit after taxes
Pro forma profit after taxes is figured by subtracting the pro forma tax bill of $70,500 from the pro forma profit before taxes of $235,000. Your pro forma profit after taxes, in this case, would be projected at $164,300.

Remember that pro formas are essentially best guesses. 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 to assure that your projections are as close to being accurate as possible.

* Source Streetwise Small Business Start-Up

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