Proforma Income Statements
Why are Income Statements (also called Profit and Loss Statements)so important?
Anyone reading your business plan, particularly if they are thinking about investing in the business, will want to get an idea of how well you expect the business to perform in the first three years of operation.
Your forecast of the future financial performance of the business is presented in proforma profit and loss statements.
What is an Income Statement?
It is a representation of the net results of the small businesses operations over a specified period of time, usually a month, a quarter or for a full financial year.
The statement is generally compiled on a double entry bookkeeping or accrual accounting basis, so that the revenues reported are matched with the expenditure incurred to generate the sales.
Because the Income statement reports on the profit or loss for the period it is sometimes called a Profit and Loss Statement. The amount of profit or loss reported in the statement comprises of net revenues less expenses for the period. For a more detailed discussion of what is included in an income statement click here.
What is a Proforma Income Statement?
Where a normal profit and loss statement is a review of past performance, Proforma Statements represent your best guess as to how the business will perform in the future.
And when I say best guess, I mean a carefully researched estimate of likely income and expenses based on knowledge of your industry and the results of your market research and your cost and sales analysis!
A proforma statement will usually cover a three year period. The statement for the first year includes figures for each month and the second and third year by quarter.
As the proforma statement is an estimate based on your research rather than actual performance it is a good idea to include foot or end notes with information about all of your underlying assumptions.
For example, what did you base your sales figures on?
The usual layout for an Income or Profit and Loss Statement is:
- Sales or Income
- Less Cost of Goods Sold
Equals Gross Profit or Loss
- Less Operating Expenses
Less Financing Costs
Equals Net Profit or Loss
In a proforma Income or Profit and Loss Statement you have to provide an estimate of each of these income or expense groups. To get you started, here are some of the questions that you need to answer before you can start putting your proforma Income or Profit and Loss Statement together:
- What will you sell in what quantity and when?
- How much will it cost you to produce or buy in that quantity of inventory?
- How much will it cost you to store that quantity of inventory?
- How are you doing to make the sales - what are your chosen distribution methods and how much will it cost?
- How much will it cost to actually run the business?
- How much is your start-up financing going to cost?
- Will you have any other financing costs that need to be accounted for?
- How much does the business need to 'pay' you?
A bit of advice, be conservative with your sales forecast and always, always, over-estimate your costs. If you do this and your proforma Income or Profit and Loss Statement still yields a positive net result you have a winner!
