Predicting Potential

A Pro Forma Income Statement (also known as a Profit & Loss statement) is essentially a financial projection for your business. It estimates your future income, expenses, and profits based on certain assumptions and scenarios.

Think of it as a sneak peek into your business's financial future.

Creating a pro forma income statement involves estimating your revenue, subtracting projected expenses, and calculating your expected net income.

It's a valuable tool for any new business owner looking to navigate the financial landscape with confidence.
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Pro Forma Income Statement
(Profit & Loss)

Projects your revenues, costs, and net income over a period (usually 3–5 years).

Includes:
  • Revenue (sales forecast)
  • Cost of Goods Sold (COGS)
  • Gross Profit
  • Operating Expenses (salaries, rent, marketing)
  • EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)
  • Net Income
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Key Assumptions

Every pro forma should include a section that outlines your assumptions, such as:
  • Market size and growth rate
  • Customer acquisition cost
  • Pricing strategy
  • Sales growth rate
  • Inflation or cost increases
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Break-Even Analysis

A break-even analysis is a financial calculation that helps determine the point at which a business's total revenue equals its total costs, meaning the business is neither making a profit nor a loss. This point is known as the break-even point.

Formula:  

Break-Even Point 
Fixed Costs / (Price per Unit - Variable Cost per Unit)

Steps to Create a Pro Forma Income Statement

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Estimate Revenue:

Sales Forecast: Predict your sales based on market research, historical data (if available), and industry trends. Consider different scenarios (best case, worst case, most likely).

Other Income: Include any additional income sources like interest, rental income, or other business activities.

Calculate Cost of Goods Sold (COGS)

Direct Costs: Estimate the costs directly associated with producing your goods or services, such as raw materials and labor.

Estimate Operating Expenses:

Fixed Expenses: These are costs that remain constant regardless of sales volume, like rent, salaries, and insurance.

Variable Expenses: These costs fluctuate with sales volume, such as shipping, utilities, and marketing.

Calculate Gross Profit:

Formula:
Gross Profit Revenue −COGS

Calculate Net Income:

Formula:
Net Income = (Gross Profit − Operating Expenses) − Other Expenses

Don't over think it.

A proforma only sounds complicated.
It's basic math and logical numbers that you need to know.
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Building a financial projection.
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Here is a template to help you get started.
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How to Build Financial Projections