What Is Pro Forma Income?

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Businesses often include financial projections in their annual reports so that investors can see current management predictions for sales, income and profits going forward. These predictions are based on current management plans and the expected outcome of those plans. Financial statements predicting future expectations are known as Pro Forma Financial Statements, and include the Pro Forma Income statement. The pro forma income statement includes a number of financial components that are used to calculate pro forma income. Pro forma income is often projected for several years of future trading.

Revenues

When you want to calculate pro forma income for a particular year, you need to estimate the gross revenue for that year, where the revenue consists of sales that you expect your company to make. The gross revenue from sales is included in your pro forma income statement. If your company has another form of income, for example receives royalties from licensing the use of patents that it holds, this should also be included in gross revenue predictions.

Cost of Making Sales

You need to include all the costs of making sales in your pro forma income statement. These costs must include all the expenses you are likely to incur in running the business. You should include the cost of sales, such as raw materials or components, if your business involves manufacturing, or the cost of finished items that you buy and then sell if your business is involved in wholesale or retail selling. Next you should include the cost of making the sales, and administrative costs including staff remuneration. If your business is involved in research and development, include your expected research and development costs, and also include the value of depreciation of any plant, premises or equipment that your business owns.

Interest

A pro forma income statement needs to take account of interest payments on any loans or mortgages, including the interest that must be paid to bond holders if the company has issued bonds or intends to issue bonds. If your company expects to be holding cash reserves, you should include the amount of interest you anticipate that your company will receive for the cash that it holds on deposit. You should subtract the amount of interest payable from the amount of interest you expect to receive. If this figure is a negative amount, you are paying more interest than you are receiving, and interest payments form part of the costs of running the business. If you have a positive amount, this is added to the income you receive from your business activities, such as gross sales.

Calculating Pro Forma Income

Add all your projected income totals together, such as those achieved from sales and royalties. This figure is your gross revenue figure. Next you should add up the costs associated with running your business. Subtract the total costs of running the business from the gross revenue to arrive at your pro forma operating income. This is income that takes no account of the costs of borrowing, or income from non-business activity, such as interest received on cash deposits. If your projected interest amount is a negative amount, you should subtract this amount from the operating income, but if your projected interest amount is a positive amount, you should add it to your operating income figure. This will give you a figure that represents your pro forma income before taxes. You should estimate the amount of tax you will have to pay, and subtract this from your income before taxes figure. This will leave you with a figure that represents your pro forma net income.

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