What is a Pro Forma Income Statement?
A Pro Forma Income Statement is a financial document that projects the future income and expenses of a business. This statement is used for planning and management purposes, and it can be particularly useful for forecasting various scenarios. Investors and lenders may also refer to Pro Forma Income Statements to evaluate the potential profitability of a business.
The term “pro forma” is Latin for “as a matter of form” and is used to describe a document that serves as a model or template. In business, “pro forma” usually refers to a method of calculating financial results using certain projections or presumptions.
Structure
The structure of a Pro Forma Income Statement largely mirrors that of a standard income statement and typically includes the following components:
- Sales Revenue: Projected revenue from sales of goods or services
- Cost of Goods Sold (COGS): Projected costs directly associated with the production of the goods or services
- Gross Profit: Calculated as Sales Revenue – COGS
- Operating Expenses: Projected expenses related to the daily operations of the business (e.g., wages, utilities, rent)
- Operating Income: Calculated as Gross Profit – Operating Expenses
- Other Income/Expenses: Projected non-operating income and expenses, such as interest earned or paid
- Pretax Income: Calculated as Operating Income + Other Income/Expenses
- Tax: Projected taxes on the pretax income
- Net Income: Calculated as Pretax Income – Tax
Uses
- Business Planning: To set financial targets and measure expected profitability.
- Investor Relations: To communicate potential profitability to existing or potential investors.
- Loan Applications: To demonstrate the company’s ability to service debt.
- Scenario Analysis: To understand the financial impact of various business scenarios such as expansion or the introduction of a new product line.
Example in Table Format
Here’s an example of a simple Pro Forma Income Statement for a fictional company for the year 2024:
| Item | Projected for 2024 (in $) |
|---|---|
| Sales Revenue | 1,200,000 |
| Cost of Goods Sold | -700,000 |
| Gross Profit | 500,000 |
| Operating Expenses | |
| Wages | -200,000 |
| Utilities | -50,000 |
| Rent | -100,000 |
| Total Operating Expenses | -350,000 |
| Operating Income | 150,000 |
| Other Income/Expenses | |
| Interest Expense | -10,000 |
| Total Other Income/Expenses | -10,000 |
| Pretax Income | 140,000 |
| Tax (25%) | -35,000 |
| Net Income | 105,000 |
In this example, the Pro Forma Income Statement shows that the fictional company is expected to generate a net income of $105,000 in 2024. This can be useful information for management, investors, and lenders.
All topics to explore on Income Statement:
- Income Statement – what is an Income Statement?
- Income Statement Example
- Multi Step Income Statement
- Income Statement Format
- Common Size Income Statement
- Income Statement Template
- Income Statement Accounts
- Pro Forma Income Statement
- Income Statement Formula
- Contributuon Format Income Statement
- Single Step Income Statement
- Contributuon Margin Income Statement
- Statement of Comprehensive Income
- How to Prepare Income Statement?
Return from Pro Forma Income Statement to AccountingCorner.org