Small businesses can use pro forma income statements to help track their progress and growth. A proforma income statement includes all income and expenses from the past year, plus projected future income and expenses.
This information can be used to assess your business’s strengths and weaknesses and to build a budget that reflects your goals.
A proforma income statement is not a projection. It is an actual statement of what you earned in the past year and what your business will earn in the coming year. Here are a few things you should know about creating a proforma income statement:
What is a Proforma Income Statement?
A proforma income statement is a useful tool for analyzing the financial health of a small business. A pro forma income statement uses the same accounting principles as a standard income statement, but looks at your business from a different perspective. It can help you identify problems and assess potential solutions.
A proforma income statement includes all the usual business data, such as revenue, expenses, and profits. However, it also includes estimated future revenue and expenses (projections), to show how the business might perform over time.
The goal of a proforma income statement is to provide a snapshot of the business’ current situation and future potential. Proforma income statements can be useful in a variety of situations.
For example, they might help you evaluate your business’ financial health if: You are considering taking out a loan. Loan providers often require proforma income statements to determine the viability of a business. You make an investment in a business, such as an acquisition. You are looking to raise equity capital.
Proforma income statements are useful because they enable you to see how the business is performing at any point in time, and also to estimate its future performance.
How to Create and Calculate a Proforma Statement
Small businesses often use pro forma income statements to help them assess their financial health. A pro forma income statement is a simplified version of a company’s financial statements that accounts for the effects of certain events, such as acquisitions or layoffs.
It can be helpful to understand how your business is performing on an individual level before making important decisions. A proforma income statement is a handy tool for managers and investors to see how a company is doing financially. It’s also a good way to keep track of changes in your company’s fortunes.
Here are some tips for creating a pro forma income statement:
- To create one, you’ll need basic information about your company, such as its annual revenues and expenses.
- You can find this information in your company’s financial reports or on the Web.
- Next, list all of your expenses on the left-hand side of the table, and all of your revenues on the right-hand side.
- You can group together similar expenses if they’re related.
- Finally, add up the totals on each row to get your proforma income statement.
Calculations
- Start by sorting your business’s revenues and expenses into categories. This will help you quickly identify where your money is going and what needs to be cut back.
- Calculate your net profits after subtracting all your expenses from your revenues. This figure will give you an idea of how much money you’re making on every dollar of sales.
- Take the net profit and divide it into your net sales. This will give you an idea of how much profit you’re making on every dollar of sales.
- Next, add up all the expenses to get a total expense figure.
- Factor in the cost of goods sold (COGS) to see what your gross profit is.
- Calculate the return on investment (ROI) by dividing your net profits by your total expenses.
- Finally, divide your net profit number by the total number of shares you issued to get a percentage. This will give you a percentage figure that shows how profitable your business is.
To make it easier, here are some common ratios used to calculate the return on investment:
ROI = Net Profit/Total Expenses
ROI = Gross Profit/Total Shares Issued
Benefits of Creating a Proforma Income Statement
Small businesses should create pro forma income statements to predict their future financial health. A pro forma income statement evaluates a company’s performance against its planned goals and objectives.
It allows small businesses to identify problem areas, set achievable goals, and measure progress towards success.
Pro forma income statements are an important tool for forecasting future cash flow, determining solvency, and budgeting. By creating a forecast of your business’s cash flow, you can identify potential issues early on and take steps to address them.
You can also use the information in a pro forma income statement to determine whether your company is profitable or not.
A pro forma income statement gives you a clear picture of your business’s performance over time. You can use this information to make informed decisions about your business’ future and track your progress along the way.
Is a Proforma Income Statement Necessary For Small Businesses?
Small businesses often don’t have the time or resources to create a proforma income statement, but it’s important to understand why one is necessary. A proforma income statement is simply a summary of your business’ financial performance for a specific period.
It can help you identify areas where you need to make improvements and track your progress. By creating one regularly, you can ensure that you’re always keeping track of your business’ development.
Conclusion
There are a few things to keep in mind when creating your proforma income statement for your small business. The first is to make sure that all the income and expenses shown are actual, rather than estimated.
Next, try to be as detailed as possible, including line items for revenue and costs associated with each product or service offered. Finally, use a consistent format across your statements so that investors or other interested parties can easily compare and contrast your results over time.