How to Prepare Pro Formas

Pro forma financial statements can predict future income and expenses.

Literally translated, pro forma means "for the sake of the form" in Latin. A pro forma is a financial statement that calculates financial results to estimate projected figures. Pro formas are commonly used in the business and investing world. Similar to a standard financial statement, a pro forma uses the same methods to predict future income and expenses. It can be used to reflect proposed changes such as mergers. The figures in a pro forma may not always follow generally accepted accounting principles, therefore investors should take care when reviewing them.

Things You'll Need

• Current-year financial statements.

Instructions

1. Review an income statement for the current year. Determine how every item on the statement can or will change during the next year.

2. Determine the anticipated percentage difference in business income. Multiply the current year's sales by the percentage increase or decrease you anticipate. For example, if you expect sales to increase by 5 percent, multiply the current year's sales of $10,000 by 105 percent to arrive at $10,500.

3. Estimate the difference in expenses caused by the difference in income. If you anticipate 5 percent more in sales, you will need 5 percent more in product to sell and you will need to anticipate any changes in cost of product. Following the example, multiply the current year's cost of goods sold of $5,000 by 105 percent to arrive at $5,250.

4. Figure your pro forma gross profit by subtracting the pro forma cost of goods sold from the pro forma income. For example, $10,500 minus $5,250 equals a gross profit of $5,250.

5. Anticipate the percentage difference in salaries and other expenses. For example, if you expect salaries and other expenses to increase by 2 percent, multiply your current year's expenses of $500 and your current year's salaries of $500 by 102 percent each. Your pro forma expenses will be $510 and your pro forma salaries will be $510. Your total pro forma expenses will be $1,020.

6. Subtract the pro forma expenses from the pro forma gross profit to determine the pro forma profit before taxes. For example, the pro forma gross profit of $5,250 minus the pro forma expenses of $1,020 gives you a pro forma profit before taxes of $4,230.

7. Determine your pro forma tax amount by estimating the next year's tax rate and multiplying that rate by the pro forma profit before taxes. For example, if you anticipate your tax rate to be 10 percent, multiply your pro forma profit before taxes of $4,230 by 10 percent to arrive at a pro forma tax bill of $423.

8. Subtract the pro forma tax bill from the pro forma profit before taxes to determine your pro forma profit after taxes. For example, the pro forma profit before taxes of $4,230 minus the tax bill of $423 gives you a pro forma profit after taxes of $3,807.

Tips & Warnings

• Continually update your pro forma. Recalculate your pro forma any time you have new, actual financial information to use as a base. Monthly or quarterly recalculations will keep your projections as accurate as possible.

References

• Business Town: Pro Forma Income Statements