Predicting Potential
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
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
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)
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.
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.
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.
It's basic math and logical numbers that you need to know.
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