Pro Forma financial statements are forward looking financial projections. Small business owners create Pro Formas to forecast their future revenues and profits while entrepreneurs use them to estimate the profitability of a new business venture. Major corporations also use Pro Formas when undergoing mergers or acquisitions but their financial models are much more detailed than those that small business use. All Pro Formas are created with the same purpose in mind: to project future earnings and profits so that investment decisions can be made.
Build revenue projections. The top line of any income statement is always business income or gross revenue. Use realistic assumptions to create this number, based on market demographics and average pricing.
Estimate your costs. Outline every cost associated with doing business including rent, employee wages, payroll taxes, utilities, and inventory or supplies. Some of these costs, such as wages, will be attributed to SG&A and are called above the line costs, others such as rent are operating costs and are subtracted from your gross profit.
Copy projections over several years. Most Pro Formas are three or five year projections.
Calculate your bottom line. Subtract all your costs of doing business from your revenue to arrive at your NOP, or net operating profit. This figure will be the businesses bottom line and is used to return capital to investors.
Consider consulting with your CPA when building your Pro Formas, as they can provide valuable insight and advice.
- Consider consulting with your CPA when building your Pro Formas, as they can provide valuable insight and advice.
Kelcey Lehrich has been writing for several online media outlets for the past few years. His work can be found on Electronista.com, Macnn.com and LeftLaneNews.com. Lehrich holds a bachelor's degree from Cleveland State University in business administration and finance.