Advantages of Pro Forma Income Statement

A pro forma income statement is quite similar to the income statement with just one major difference. Unlike the statement of income, the past records are not tracked, instead pro forma income statements use future predictions. The biggest benefit here in this scenario is that if these predictions are not favorable, then the management can take measures in advance to fix the issue. These steps could involve increase in the sales prices of goods being manufactured or decrease the cost of raw materials. In short, pro forma statements are quite helpful in mapping the entire future of a business or establishment.

These pro forma statements do tend to tell us a lot about the future and are therefore are considered to be mandatory while making operating year budgets. The statement can decide a lot of things such as:

• Whether or not expenses will soar
• If the cost of goods will go up
• Boosting the work as well

In short, the pro forma statement tells us a lot and reveals even more. It equips the reader in a way that will help in the realization stage of financial planning. How much and when are the two main questions that if answered can tell us what are the correct path is.

Benefits of the Pro Forma statement:

Using a correct pro forma income statement format means that the company is clear about its plans for the future and things are under control. It also means that the company is confident that it plans for growth in the future and is not hesitant to inform the investors of the growth. The benefits of using a correct pro forma income statement format are many. Here are a couple areas in which this statement can work wonders:

• Business planning – In order to make the pro forma sample, it is essential to have planning and the budgeting phase in full swing. A proper completion of these two tasks can only ensure a personal income statement template. Apart from this process, the accounts and marketing department also have their own roles. The account department along with the sales team will finalize on the number of expected sales in the near future while the marketing team will analyze the current market conditions. These three divisions will be instrumental in deciding a final number of goods and their expected costs and sales. To determine the final price of the manufactured item, the production and the accounts team sit together with the current costs incurred during manufacturing and the market trend. Accordingly, the accounts team will collaborate with the existing other units to determine other cost so that the same can be reflected in the pro forma sample. To get the final projected income statement, the sales figures, costs incurred on the products and other operating expenses are taken into consideration.
• Investor communication – The investor of today is not the nonchalant types as was the case earlier. Today, they are smart and sophisticated and have a full right to know about the performance of the company and its future course of action. They surely want to know about the diverse ways that the company plans to get income. If you check the history of successful companies, you will find that all of them have outlined the ways and means of obtaining profits in the personal cash flow statement and stuck by it. This helps the company in two ways. First, it attracts new people and helps the organization to enlarge its customer base. Secondly, the value as well as the demand of the existing company shares in the market tends to shoot up leading to more capital build up. A pro forma statement is the most ideal way to communicate all these in a concise, proper and systematic way to the investors of the company for future. Releasing this document builds confidence among the investors about the company and they feel positive about it.
• Assessment of the impact – When an organization foresees less scope for the growth of a particular product line, it wants to either discontinue the manufacture of the products or mulls about increasing their overall prices. A proper pro forma financial statements template will incorporate all this in it. In fact, the management will include details as it understands that such decisions will surely affect the profitability of the company. The pro forma personal income statement is the only tool by which the management can do changes and modifications in the final financial statement to allow these changes to be adjusted accordingly. These changes will affect the bottom line and that is the gross profits. With the pro forma financial statements template, the rise in numbers or prices will be reflected. Either ways it will get accounted for in the statement.

In order to create a pro forma income statement, one should know the final estimated amount of the total sales figure of the company as well as the total operating expenses expected to be incurred in the future financial year. With certain values, you can easily calculate the pro forma gross profit, total expenses, profit before taxes and profit after taxes. With the pro forma financial statements template firmly in place, there is less possibility of the investors loosing faith in the growth plans of the company or the ability of the current management to lead a company. To sum it all, one needs to understand that at the end, the figures mentioned in the pro forma financial statements are not actual figures and are just estimates expected in the next financial year. To get the best value, one should always calculate using the latest figures for proper and accurate estimation. If the company is able to prepare pro forma personal income statement on a regular basis such as every month keeping in mind the current production values and incurred expenses then the projections for the future will be very close to the actual reality.

Wikipedia describes proforma income statement as:

In accounting, pro forma earnings are those earnings of companies in addition to actual earnings calculated under Generally Accepted Accounting Principles (IFRS, US GAAP etc) in their quarterly and yearly financial reports.