A pro forma income statement is a beneficial tool to use to predict the future income of your business. For example, it can help you plan your small business for future opportunities like a change in business or a future expansion into other markets. After you create a pro forma income statement and view your predicted profits, you can adjust your current goals and operations to meet the predictions.
How Pro Forma Income Statements Work
Pro forma income statements operate by utilizing your current income statement. Current income on your income statement is used as a baseline for future income. To create a pro forma income statement, evaluate each item on your current income statement. For example, evaluate all sales income, operating expenses, equipment, losses and taxes for the current year and consider factors that may cause a change in these areas. You should create your pro forma income statement before the end of the year. Most are created in the fourth quarter of the current fiscal year. You will need to estimate costs for the remaining term of the year, so use an average of the previous months' totals. It is beneficial to do a pro forma income statement that will predict the following year's income, but you do not want to try to predict the income too far in advance because that will affect its accuracy. Also, continuously update your pro forma income statement as new information becomes available. This will ensure that your pro forma income statement is as up to date as possible.
Predicting Future Revenue
First, predict how you think sales will change the following year. For example, if demand is growing in the current quarter for a certain item, then it may be realistic to predict an increase in sales next year. In contrast, maybe an external factor is changing demand. If you assume sales are going to increase by 20 percent next year, then multiple this year's sales by 20 percent to determine future revenue. If the cost of goods is increasing, you can predict how that will affect future revenue as well. Then, subtract the cost of goods sold from the pro forma revenue.
Predicting Future Expenses
In addition to predicting revenue, a pro forma income statement can also assist your business in predicting future expenses. Changes in expenses can include an increase in wages, operating costs, and employee benefits. To predict future expenses, multiply your historical expenses by one hundred percent plus the percentage increase you expect. You then determine your pro forma total expenses by combining all the pro forma expenses together.
If you have questions about pro forma income statements or how to use them to help your small business, contact a business consultant. Remember that pro forma income statements are just one tool for a small business to use and should not be relied upon for anything more than predicting future income.