How To Create A Pro Forma Budget

Click here

What Does Pro Forma Mean?

You may be wondering, what does "pro forma" mean? Basically, it is a fancy word for "future" or "projected." Sometimes, however, it is used to restate financial books in an unofficial way.

For example, a company might present a "pro forma" income statement of what its income may have looked like if it did not include the money-losing division it sold off. But for our purposes, we will be using the first definition.

A pro forma income statement, along with a pro forma cash flow and a pro forma balance sheet, form the primary financial projections for a business. They should also be included with in the financial of a business plan.

A Pro Forma Statement Is an Important Tool for Planning Future Operations

For my purposes here, a pro forma income statement is similar to an historical income statement, except it projects the future rather than tracks the past. If the projections predict a downturn in profitability, then you can make operational changes, such as increasing prices or decreasing costs, before these projections become reality.

Related: The 300 Best Small Business Ideas

Pro forma income statements provide an important benchmark or budget for operating a business throughout the year. For example, they can determine whether expenses can be expected to run higher in the first quarter of the year than in the second. They can also determine whether sales can be expected to run above average in, let's say, June. They can determine whether your marketing campaigns need an extra boost during the fall months. All in all, they provide you with invaluable information—the sort of information you need to make the right choices for your business.

More financial statements samples for your business: Sample Business Plan financials

How Do You Create a Pro Forma Income Statement

Sit down with an income statement from the current year. Consider how each item on that statement can or will be changed during the coming year. This should, ideally, be done before year's end. You will need to estimate final sales and expenses for the current year to prepare a pro forma income statement for the coming year.

Related: How to Create an Income Statement for Your Small Business

Pro Forma Gross Profit

Let's assume that you expect sales to increase by 10 percent next year. You multiply this year's sales of $1,000,000 by 110 percent to get $1,100,000. Then, in this case, you assume there will be no increase in the cost of each item you are selling, but you will need 10 percent more items to sell in order to achieve your sales goals. So, you multiply this year's cost of goods sold (let's assume a figure of $500,000) by 110 percent to get $550,000.

To figure your pro forma gross profit for next year, subtract the pro forma cost of goods sold from the pro forma sales. Thus, $1,100,000 minus $550,000 equals your gross profit, or $550,000.

This is, of course, a very simple example. What you really want to do is take into consideration everything possible to project sales. Are you going to launch new products? New promotions? Change pricing? Expect new customers? All of these items should be carefully figured into creating sales projections.

Pro Forma Total Expenses

Let's assume salaries and other expenses will increase by 5 percent. So, you multiply your historical salaries of $200,000 and your historical expenses of $100,000 by 105 percent each. Your pro forma salaries for next year will be $210,000 and your pro forma expenses will be $105,000. You then figure your pro forma total expenses by adding pro forma salaries and pro forma other expenses together. In our sample case, your pro forma total expenses will be $315,000.

I would give a lot of thought to every single expense line item. Is there any way you can cut this cost? Is the cost projection realistic?

Related: Quick Ways to Boost Profits

Pro Forma Profit Before Taxes

Pro forma profit before taxes is figured by subtracting the pro forma expenses from the pro forma gross profit, or $315,000 from $550,000, for a pro forma profit before taxes of $235,000.

Pro Forma Taxes

Pro forma taxes are figured by taking your estimated tax rate—in this case, 30 percent—and multiplying it by the pro forma profit before taxes of $235,000. This produces a pro forma tax bill of $70,500.

Related: A Comprehensive Guide to Business Taxes

Pro Forma Profit After Taxes

Pro forma profit after taxes is figured by subtracting the pro forma tax bill of $70,500 from the pro forma profit before taxes of $235,000. Your pro forma profit after taxes, in this case, would be projected at $164,500.

Remember that pro formas are essentially best guesses. You should continually update your projections by recalculating your pro formas using any new and actual financial information you have as a base. Doing this on a monthly or quarterly basis will help ensure that your projections are as accurate as possible.

Pro Forma Income Statement Example

Before creating your own pro forma income statement, take a look at our sample pro forma income statement:


Profit and Loss Projection (Also Called Income Statement) for Bob's Rent-A-Bike



				Year1	Year2	Year3
Sales
	Number of Daily Rentals			700	1200	1600
	Average Daily Rate (Adult/Child)			$21	$21	$21
	Daily Rentals Total $			$14,700	$25,200	$33,600

	Number of Weekly Rentals			50	90	120
	Average Weekly Rate			$71	$71	$71
	Weekly Rentals Total $			$3,550	$6,390	$8,520

	Number of Monthly Rentals			8	14	18
	Average Monthly Rate			$110	$110	$110
	Monthly Rentals Total $			$880	$1,540	$1,980

	Total Sales $			$19,130	$33,130	$44,100
				-------------------	-------------------	-------------------

	Costs
		Cost of Sales
			Fuel for Car, est $1/rental	$758	$1,304	$1,738
		Gross Profit		$18,372	$31,826	$42,362
				-------------------	-------------------	-------------------

	Expenses
		Marketing
			Website expenses	$350	$200	$200
			Search engine advertising	$500	$1,000	$1,000
			Publication advertising	$500	$1,000	$1,000
			Flyers & Posters	$700	$700	$700
			Other marketing	$300	$400	$500
			Total Marketing	$2,350	$3,300	$3,400

		General & Administrative
			Payroll	$700	$1,000	$1,300
			Parts for repairs	$400	$600	$800
			Liability insurance	$600	$700	$800
			Cell phone expense	$400	$400	$400
			LLC registration fees	$350	$350	$350
			Other G&A expenses	$600	$700	$800
			Total G&A expenses	$3,050	$3,750	$4,450

		Depreciation
			Bicycle depreciation	$1,500	$2,500	$3,100

		Total Expenses		$6,900	$9,550	$10,950
				-------------------	-------------------	-------------------

	Profit			$11,472	$22,276	$31,412
				-------------------	-------------------	-------------------

	Statements are for fiscal years ending May 31st.

Were you looking for a pro forma income statement because you are starting your own business? Wonderful. Check out this article if you want to know how to start your business in 5 steps.

For More on Financial Statements and Business Plans

For more on how to create financial statements and projections see my course, Accounting & Financial Statements. This course includes step-by-step instructions, samples and templates for creating historical and pro forma income statements, balance sheets and cash flows.

You may also be interested in my course, How to Create a Business Plan. This course includes step-by-step video instructions, samples and fill-in-the-blank templates for both a one page business plan and a full length business plan.

Accounting & Financial Statements and How to Create a Business Plan are among the more than 130 courses included with BusinessTown. Other popular courses include Start-a-Business 101, How to Find a Business Idea and The Complete Guide to Digital Marketing. You can try BusinessTown for free.

About Bob Adams

Bob Adams is a Harvard MBA serial entrepreneur. He has started over a dozen businesses including one that he launched with $1500 and sold for $40 million. He has written 17 books and created 52 online courses for entrepreneurs. Bob also founded BusinessTown, the go-to learning platform for starting and running a business.