What is the pro forma profit and loss statement?
Pro forma profit and loss is a projection of a company's net income for a period of time in the future. This information is usually found on a profit and loss statement, which is also known as an income statement, and includes a company's projections for future income, expenses, and income. Pro forma profit and loss projection is important for a business as it allows you to budget for the next time period and see where adjustments need to be made in your operations. One method of projecting these numbers is to look at a current statement, decide if there are changes to certain items in the offer, and adjust the other items to match those changes.
A company has several reasons why it should prepare a profit and loss statement. Large public companies are often required so that investors, financial regulators and shareholders can gain access to relevant information about a company. An income statement also serves a business purpose as it shows areas of the company that can be improved. Preparing a pro forma profit and loss statement is helpful for a company to see where it is going in the future.
It is important to understand that information found on a pro forma income statement may not be realized. Unlike actual income statements, which must be based on actual financial information, pro forma figures are estimates. Still, it's important for a company to get as close as possible when projecting future numbers.
When preparing a pro forma income statement, company management must include all items that affect net income. This means that sales revenue must be estimated first. Next, projected expenses must be compiled, which include cost of goods sold, operating and administrative expenses, interest and taxes. By subtracting the projected expenses from the projected revenue, one obtains an estimate of the company's net income for the period under study, which is usually the next year or a year in the near future.
There are several different methods by which a company can project pro forma profit and loss. The most common way is to look at a current statement and project forward based on expected increases and decreases. For example, if a company's sales are expected to increase by 10%, current revenue must be increased by the corresponding amount on the pro forma statement. Companies need to be as realistic as possible with their estimates, as these estimates often provide the basis for budgeting and decision making for years to come.