A pro forma income statement is a document that shows a business’s adjusted income if certain financial inputs were removed.
In the following lines of this article, we are going to look at how a pro forma works. Take your time to read through it.
What is the difference between a pro forma income statement and a regular income statement?
A pro forma income statement depicts a company’s adjusted income after certain financial inputs are removed. In other words, it’s a means to indicate what the business’s profits might be if certain costs were eliminated.
When Would A Pro Forma Income Statement Be Necessary?
Let’s pretend your company makes and sells widgets to the general market. Widgets for kids, widgets for adults, widgets for dogs, and widgets for cats are all created by you. Over the course of six months, you notice that the cat widgets aren’t selling.
Because the loss your business suffers as a result of the cat widgets has a significant impact on your revenues, you decide to discontinue producing and selling cat widgets. You must now liquidate inventories, sell machines, and terminate connections with cat widget vendors.
While all of this is going on, your business appears to be losing money on paper. Pro forma income statements are useful in this situation.
A pro forma income statement displays all of the same data as a typical income statement but without the costs of making and selling cat widgets. It depicts the projected health of your company without the cat widgets.
Pro Forma Income Statements: Who Uses Them?
Pro forma revenue statements are created by business owners, accountants, or outside consultants for the following reasons:
- To show creditors or investors the business’s potential earnings.
- To persuade prospective employees of a company’s long-term viability
- To provide financial scenarios, such as significant, one-time purchases, to management.
- To aid in the decision-making process when acquiring a business
How to Make a Pro Forma Invoice Profit and Loss Statement
There are two sorts of pro forma income statements: those that look past (historical profit and loss) and those that look forward (forward profit and loss) (projections of the income statement).
The income statement of the company is the starting point in both cases. Let’s imagine the business owner of our widget seller wants to look backward at historical profit and loss.
Add two columns to the income statement for each quarter you want to calculate. List all of the costs related to cat widgets that you’d like to eliminate in the first column. Subtract those costs from the total for each item on the income statement in the second column.
The last column is your pro forma, which shows you how much money you’ve made in the past. If you never had any expenses linked to cat widgets in the first place, it reflects the business’s adjusted income.
Bottom Line
You’ll need forecasts from all sections of the firm to generate the forward-looking pro forma income statement, including predicted income from all sales channels and expected costs for all operating expenses. You’ll only have a forecast instead of a comparison like previous profit and loss.
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