How to Create a Pro Forma

Creating an effective pro forma, regardless of its purpose, involves thought, evaluation and vision. Pro forma (Latin for "as a matter of form") can have somewhat different meanings depending on what you are creating and why. The most common usage is applied to accounting, finance and business. Here is how to create an effective pro forma for business, stating projected revenues, expenses and profits.

Think about what you want to accomplish with a pro forma and how you'd like to accomplish your goal. Creating an effective pro forma does not typically respond to "brain storming". It does involve focused thinking and planning.

Focus on the revenue side of your equation first. While you must start somewhere, there are good reasons to concentrate on revenues and incoming cash flows first. Your projected income drives the remainder of your projections. The level of sales and revenue strongly influences the need and size of operating expenses. For example, if you're planning on making relatively few big ticket sales to a small customer base, you shouldn't need a large telephone or customer servicing department. The size and manner of your company's income, for these reasons, should be your first step.

Estimate your operating and financing expenses. Some operating expenses will be relatively fixed (rent or lease, some utilities, signage), while others will vary with the size and type of your revenue (advertising, salaries and wages, inventory purchases, postage). Financing expenses, in the form of interest and fees on business loans, should also be estimated carefully. Don't focus merely on current financing. Project future debt service expenses for loans that you believe will be needed during the pro forma period.

Forecast profits, taxes and profit distribution. Your profit level will determine itself as you subtract your operating and financing expenses from your projected revenues. Still, you should analyze this figure. For example, if your industry typically considers a 10 percent net profit before taxes as reasonable, and your first pro forma draft indicates a 25 percent net profit level, you should re-examine your projections. Find justification for your projections or revise your forecast for some revenue and expenses. Classify an appropriate portion of original net profit for loan principal payback and/or asset purchases

Write a meaningful narrative supporting each line item in your pro forma. You need a text narrative to explain to all readers (including yourself) the source of the numbers you project. For example, assume you project widget sales for the next year to generate revenue of $750,000. Write a narrative explaining how many widgets will be sold; individual or average prices of each; the accounting periods in which these sales will be made and how much cash and accounts receivable (monies owed by customers) will result. The simple projection of an annual number is relatively meaningless without the accompanying text to explain its composition.


  • Be conservative, but realistic in projecting future revenue and expenses.

    Remember to factor in future increases or decreases in revenue and expenses.


  • Never be so optimistic as to render your pro forma almost useless to other readers.

    Don't overlook any operating expenses because they may not be important or material. They can add up to a significant number.



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