Learn how to create a pro forma income statement and why the report is an important financial planning tool.
Ken has been an accounting educator for over 25 years, working with institutions like St. Louis University, Dummies, Lynda, and O'Reilly Media as a professor, author, and video course creator. He's a 4x Dummies author and has worked as a CPA, auditor, tax preparer and college professor.
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Karen is an expert in accounting processes, GAAP compliance, and FP&A. Prior to Rho, she operated as a Controller at Namely and started her career as a Staff Accountant at EmblemHealth. She holds an M.S. in Accounting from Queens College.
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Successful SMBs use financial tools to forecast business performance based on assumptions.
This post defines the pro forma income statement and the common assumptions used. You’ll learn the best practices for generating the statement and how this financial tool can improve business forecasting.
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A pro forma income statement is a projection of an income statement based on historical data and performance assumptions. Startups, small businesses, and large companies can all benefit from generating pro forma reports for decision-making.
Pro forma is a Latin word meaning “as a matter of form” and refers to a set form or procedure performed in a particular manner. In business, pro forma financial statements are produced based on assumptions.
The income statement is generated using this formula:
Revenue - expenses = net income (loss)
The income statement is produced for a specific period (month, quarter, etc.), and the matching principle matches revenue earned with expenses incurred to grow revenue.
A multi-step income statement includes additional line items for operating expenses and cost of goods sold (COGS).
An income statement is based on actual company data, and a pro forma income statement is based on assumptions. When businesses close the month-end books, each revenue and expense account is reconciled, and the account balance is posted to the income statement.
Businesses also create a pro forma balance sheet and a pro forma cash flow statement. These three types of pro forma financial statements are used to generate financial projections and make business decisions regarding future periods.
A pro forma balance sheet presents total assets, total liabilities, and equity balances. A pro forma projection for cash flows lists cash transactions for operations, financing, and investing activities.
Standard Brands is a CPG company whose owner is building a pro forma income statement for 2025. Here are the steps required to create the pro forma statement using average income statement balances for the past three years.
Pro forma statements are created using Excel or other financial software tools.
Standard computes the three-year average for the income statement balances listed below.
The owner creates a column that lists the percentage of sales for all of the income statement balances except for taxes. The company knows it will pay a 30% tax rate on the average earnings; the 30% is not a percentage of sales. Finally, the owner estimates 2025 sales to be $1,400,000.
Pro Forma Income Statement| Line Item | 2025 | Average Balances (2024, 2023, 2022) | Percentage of Sales |
|---|---|---|---|
| Sales | $1,400,000 | $1,200,000 | |
| Cost of Goods Sold | $431,667 | $370,000 | 30.8% |
| Gross Profit | $968,333 | $830,000 | 69.2% |
| Operating Expenses | $433,333 | $380,000 | 31.7% |
| Depreciation and Amortization Expenses | $52,500 | $45,000 | 3.8% |
| Earnings Before Interest and Taxes (EBIT) | $472,500 | $405,000 | 33.8% |
| Interest Expense | $24,500 | $21,000 | 1.8% |
| Earnings Before Taxes (EBT) | $448,000 | $384,000 | 32.0% |
| Taxes (30%) | $134,400 | $115,200 | N/A |
| Net Income | $313,600 | $268,800 | 22.4% |
