Using a Pro Forma Financial Statement
Your financial statements provide a snapshot of your business’s finances and performance at a point in time; they provide information on profit, cost of goods sold (COGS), expenses and earnings before interest expenses and taxes (EBIT) . The foundation for planning the future course of your business starts with your financial statements.
To get a better sense as to how your business may perform in the next month(s) and next year(s), pro forma financial statements are very helpful in evaluating
(a)future sales and COGS, to estimate your gross profit; and
(b)future expenses, to estimate your EBIT.
Using a pro forma template, you input your projections or presumptions (hypothetical numbers or estimates). The template then generates valuable information to help you make better decisions. You can see where to focus sales efforts and how to manage COGS to try to increase your gross profit and reduce costs.
Additionally, you can allocate your input numbers among different areas of your business and create a detailed analysis and see which division or line may perform better.
Further information can be generated by varying your projections or presumptions making it easier to see the potential impacts on gross profit and EBIT.
Finally, by comparing your actual financial statements with the pro forma statements, you’ll be better able to see if you’re ‘on track’, and, if not, where you can make changes to try to stay on course.
Pro forma templates are available online. Choosing one that is suitable for your business is the best place to start.
The ASE has helped many of its clients understand how to prepare pro forma financial statements and how to use them to better understand the future operation of their businesses.
Mary Ruijs ASE