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What is a Pro Forma Income Statement?

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  • Written By: Autumn Rivers
  • Edited By: Andrew Jones
  • Last Modified Date: 26 August 2016
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Planning is typically considered a crucial element of business, and this particularly applies to a company's finances. Therefore, many business owners do not wait until the next financial year has started to arrange for the future. Instead, they often consider the possible budget for the next year, usually with the help of a pro forma income statement. This is typically considered an invaluable planning tool, and is often requested as part of a comprehensive business plan.

Most income statements look at what has already happened, whereas a pro forma income statement looks to the future. Nonetheless, this type of statement does consider the past when being formed. Typically, business owners look at the performance of the previous year and compare it to the current time period to help determine what the following year might have in store financially. Conducting some research of what experts predict for the relevant industry in the next year is also helpful in developing this type of statement.

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To create this type of document, business owners can first develop a pro forma balance sheet. The first step should be to assume the amount of projected cash flow, liabilities, and assets. This type of statement is full of educated guesses by definition, so estimates are expected. These can then be compared with the current year's actual data. Owners are encouraged to think about how the current year's income would be changed the following year, such as due to changing supply and demand.

A professional pro forma income statement can be developed once the necessary information has been gathered. Categories should include projected sales revenue and cost of each product or service sold. Other crucial categories include the anticipated expenses, depreciation of equipment, and taxes. Many of these tend to remain the same each year, so this may be easy.

Taking a look at the current and projected market conditions should offer some guidance as to anticipated revenue and expenses. At the end of the estimations, the revenue should be added up, with the expenses subtracted at the end. The data may then be compared to previous years to decide whether to hire more help or reduce staff, among other possible adjustments.

Owners may choose to create a pro forma income statement annually, but some experts suggest a new one every quarter to stay as accurate as possible. Many owners might experience some difficulties during the process. Thus, an accountant or similar professional may be consulted to develop this document in many cases.

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