How to create a pro forma income statement

0

A pro forma forecast is based on the income statements, balance sheet and cash flow statement. Pro forma projections generally do not follow generally accepted accounting principles (GAAP). In some situations, you can create pro forma profit and loss (P&L) projections to see: how your business model would change if a patent were granted; what could be your financial situation with the introduction of a new product; what if you merge your business with another business; how you would benefit if you bought the assets of another business; or if you just want to have a budget for the next year.

Assumptions, assumptions and more assumptions

The key to creating a reasonably accurate pro forma – which is not a fiction – is understanding how financial variables, such as direct costs, change based on sales (units sold). A few years ago, I helped create a pro-forma for business owners who wanted to master their main business drivers. They wanted to have a better understanding of how selling various products in different quantities would affect their bottom line.

My suggestion was to create an operating plan that killed two birds with one plan. After one year, the accuracy was 97% on the upper line and 95% on the lower line. The following year, the owners sold their business for over $ 5 million.

Calculate the lowest common denominator

If you plan to sell 100 widgets for $ X, then it’s important to understand exactly what’s going on, financially, when it does. Create separate line items for each cost of selling a widget. Include all costs directly related to items such as: products sold (cost of goods sold), sales commissions, shipping costs, and any other costs involved in the sale and delivery of a single widget.

Your overhead shouldn’t be affected much unless you need the extra space to store these widgets. Most of your overhead costs like rent, insurance, phone, utilities, etc., shouldn’t change. However, if the projected growth is geometric, then you will need to consider the additional (indirect) overhead costs that may arise.

Somewhere near the top of your spreadsheet, allow entering additional row items each month. For example, if you are selling pillows, you can have the number of anticipated sales of each type of pillow (if the costs differ significantly). If they all cost about the same, you can group them together. Additional line items can be pillow cases or mattresses.

Look at the historical figures

Gather the results from last year and calculate the number of items you sold in each product category. If your business is seasonal, you can project your anticipated sales based on historical data.

Use simple formulas

As noted above, each item sold is linked to a series of costs. The quantities of products must be multiplied by the cost to arrive at the monthly revenue figures. Your direct expenses must come from each unit sold.

Financial modeling

Use “what if” modeling and create spreadsheets based on last year’s numbers. These results should closely resemble your actual sales, gross profit, and profit from the previous year. This is your basic spreadsheet. Change the units sold to conservative and aggressive sales figures. Pay attention to how your spreadsheet changes, then save and print the results. Think about those numbers, then figure out some realistic numbers you can work with. These are now your pro forma projections for next year.

Perfect practice makes perfect

Remember, the idea is not to achieve 100 percent reliability with your pro-forma. This feat is difficult, if not impossible, unless your name is Carnac. Over time, you will improve; and your accuracy will make it a useful tool for operating your business.

Compare to actual results

When the month is over, insert a column immediately after the month and add your real numbers from your finances. See how well you did. Look to see where you overestimated or underestimated your income and expenses. Open another column and note the percentage differences. Circle the three biggest misfires above and below your pro forma. Investigate the reasons why you got these amounts wrong and learn from your mistakes.

A business tool is a business tool

This tool should help you better manage your income, costs, and the relationship between all expenses related to the sale of an item. Stress goes away when you feel like you are in control and running your business, rather than leading yourself.

Dennis Zink is a volunteer, certified mentor and chapter president of SCORE Manasota. He is the creator and host of “Been There, Done That! With Dennis Zink,” a nationally-released commercial podcast series. He leads CEO roundtables for the Manatee and Venice chambers of commerce, has created a MeetUp group, Success Strategies for Business Owners, and is a business consultant. Email him at centreofinfluence@gmail.com.


Source link

Share.

About Author

Comments are closed.