You’ve probably heard the term pro forma before, and maybe you even have an idea what it is. According to the Business Dictionary, pro formas are “assumed, forecasted, or informal information presented in advance of the actual or formal information.” That’s the basic definition, but what does that mean? In a nutshell, you’re taking historical numbers over the last few years, and you’re trying to project them forward into the future. You’re using a spreadsheet to create pro forma financial statements.
My personal pro forma financial statement goes back five years and displays all of the income I’ve earned and the expenses I’ve incurred. Then, I’ve projected out the next 10 years of my company’s income and expenses. You don’t have to go backwards five years or forward 10 like I do. Maybe you show your historical trends over the past three years and forecast your numbers over the next five years. Essentially, though, your goal is to show historical patterns that predict plausible future profit margins.
So, how do you do that? How do you build your pro forma financial statements?
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Ultimately, you’re using your pro forma financial statements to track your company’s profit margins. You want to see if your margin is within your industry’s standards. For if you can show a significant profit margin and show how you got to that point and how you’ll keep hitting that margin, then you can ask investors or business buyers for a premium for your company.
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