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Understanding Pro Forma Income Statements

What Is a Pro Forma Income Statement?
Susan Guillory
Susan GuilloryUpdated May 31, 2023
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If you’re in charge of your company’s finances, you know that financial statements don’t always paint an accurate picture of your business. For example, if you recently acquired another business, your income statement would show a rather large expense (the purchase of the business) that might throw up red flags to investors or creditors if they didn’t have a little explanation for the large discrepancy in your numbers. Fortunately, there is a financial statement that takes unusual activity into consideration: the pro forma income statement.What is a pro forma income statement, and when should you use one?  How can you create one, and who needs to see it?You’ve got questions. This article has answers. 

What Are Pro Forma Income Statements?

Before we look at your pro forma income statement definition, let’s first look at what a traditional income statement is. An income statement shows a company’s income and expenses over a given period. It’s used to determine whether a company was profitable or not over that time.The problem is: not every period is the rule. There are always exceptions, like when you purchase another company or have to liquidate a large amount of inventory. In these exceptions, a traditional income statement won’t accurately reflect the financial health of your business. That’s where a pro forma income statement is more useful.Recommended: Traditional Income Statements Explained

How Do Pro Forma Income Statements Work?

Just like you would with a traditional income statement, with a pro forma statement, you’ll include both the income and expenses of your business. The caveat is that you factor in whatever scenario you’ve got that will skew the income statement. In our example above, you might remove the investment cost of the business you acquired, since that large investment would make it look like your business operated at a loss.Pro forma income statements can also be used to forecast potential revenues based on a particular scenario. Let’s say you acquire that business, which will create a drop in revenues in the short term. This might also, however, create a boost in revenues down the road, and you can calculate this potential increase in revenues in your pro forma statement.It’s important to note that pro forma income statements aren’t approved for Generally Accepted Accounting Principles and should only be used internally to better understand income and expenses over a period with unusual activity.Recommended: Accounting for Small Businesses

When Do Businesses Use Pro Forma Income Statements?

Under normal conditions where you have no unusual expenses or revenues, you would use a traditional income statement. But if something out of the ordinary occurs, such as making a large investment in another business or on equipment, or you need to liquidate inventory that hasn’t sold, it might be better to use a pro forma income statement.Keep in mind that sometimes when you use a pro forma statement, you’re basing your numbers on a hypothetical situation. By removing the costs to manufacture a product you might decide to stop selling, you’re making assumptions that you’ll sell all the assets involved with that previous product and get numbers back up to what they were for revenues. Because this is a bit of speculation, you can’t share this pro forma statement with investors or shareholders. It’s more used internally to understand how your finances would look if a certain situation occurred.

Which Types of Businesses Use Pro Forma Income Statements?

Any business that has unusual activity over a period can choose to use a pro forma income statement. If you’re considering applying for small business loans, it can be helpful to know what your finances would look like under those scenarios we discussed so you can determine how much you need to borrow to have available working capital.There are many types of business loans as well as lines of credit available to businesses that might need a little cash to get over the hump after a large investment like acquiring another company.

How to Create Pro Forma Income Statements

On the surface, a pro forma income statement looks like a traditional income statement. It includes both revenues and expenses. The difference is that it also factors in the scenario you’re calculating for. Some pro forma income statement examples might factor in:
  • A large investment for acquiring a business or purchasing high-cost equipment
  • A forecast for a sudden increase in revenues due to a new client
  • The loss of revenue from stopping a product line and liquidating assets 
You can create as many pro forma income statements as you like, so if there are different scenarios you’d like to explore, such as different price points for products, these statements can give you a sense of what each potential possibility would bring.

Pros and Cons of Using Pro Forma Income Statements

So is it worth it to use pro forma income statements? Weigh the benefits and drawbacks.
Show you a what-if scenario May not accurately depict your company’s financial situation
Can help with financial strategy and planningNot GAAP compliant
Because the pro forma income statement is based on a possible scenario, you can use it to make informed financial decisions for your business, such as whether or not to take out a business expansion loan. Just be aware that it won’t accurately depict what’s going on with your company, but rather a possibility. And you won’t be able to use these statements anywhere you’re required to use GAAP reports.

Pro Forma Income Statement vs. Income Statement

As mentioned, there are similarities and differences between traditional income statements and pro forma statements.
Traditional Income StatementPro Forma Income Statement
Calculates based on actual numbersConsiders scenarios and possibilities
Based on past financial activityProjections for future based on past 
A traditional income statement uses actual numbers for profit and loss based on what has happened in the past. A pro forma income statement looks at different possibilities based on certain scenarios and may use past data to create future projections for profit and loss.Recommended: Business Grants and Taxes Explained

The Takeaway

If your company has unusual activity coming up that can significantly alter a traditional income statement, consider using a pro forma statement to get a better sense of your profits and losses. Likewise, if you’re considering a certain action, such as buying another company, a pro forma income statement can help you make an informed decision.

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  1. Generally, it can be easier for entrepreneurs starting out to qualify for a loan from an online lender than from a traditional lender. Lantern by SoFi’s single application makes it easy to find a small business loan offer from a lender.
  2. If you are launching a new business or your business is young, lenders will consider your personal credit score. Eventually, though, you’ll want to establish your business credit.
  3. Traditionally, lenders like to see a business that’s at least two years old when considering a small business loan.

Frequently Asked Questions

What's the difference between a pro forma income statement and an income statement?
What should be included in a pro forma income statement?
What items are excluded from a pro forma income statement?
Photo credit: iStock/gorodenkoff

About the Author

Susan Guillory

Susan Guillory

Su Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.
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