Proforma Income Statement What is it and what is it used for?

The Proforma income statement / pro-forma, Known in the same way as proforma profit and loss, it determines how the adjusted income statement will look at the moment exclude various assumptions such as non-recurring items, restructuring costs or in the event that a unit expires that allows losses.

What is pro forma income statements?

The proforma income statement shows a document with the adjusted income of a company by eliminating different financial factors, therefore, it is the way to show the income of the company in case of various elimination costs.

It is usually a financial statement that includes one or more assumptions in order to demonstrate which It could be the financial situation or the results of the different operations that could introduce. Its objective is to show in advance the impact that this situation or results would have on the company's future operations, including those already carried out.

The purpose of the Proforma income statement is provide retroactively, the financial situation that could have occurred if subsequent events had been incorporated within the actual results, or if the possibility of occurrence is valid on the date the statement of results.

What is a proforma income statement used for?

The pro forma income statement indicates assumptions and projections, therefore, a company can use this financial statement to forecast what may happen in a given eventuality. A proforma projection can be used for the following:

• Forecasting revenue is often difficult for business plans, the assumptions must be real and need to support the forecast. In this case, proforma projections are used to produce balance sheets and cash flow statements, since they are fundamental elements within a business plan.
• If there are property losses by fires, earthquakes and floods. For this, you must consider the insurance coverage that you should have if any type of natural catastrophe were to happen.
• Has the ability to check past and future finances. Proforma income statements try to predict what future transactions will cause within the financial situations of the company while focusing on the experiences of financial decisions past.
• You can prepare for transactions in advance, which the company will carry out in the future. If, for example, a company plans to obtain another company, it can take the measures required by a proforma financial statement so that you can assess the effect this new project is going to have on your finance.
• You can change the financial structure. In order to adopt a policy that mainly modifies the financial structure of the economic system, must measure and quantify the financial impact it has on capital investments and results.
• Incorporate only some transactionsIn this case, a proforma report can exclude unique eventualities and some elements related to the transactions of a given period.
• For there to be a corporate function, it is necessary to know in advance what is the situation of the actions and the consequences that the grouping of the assets and liabilities of the companies brings. It is also necessary to know what would be the transformation that the costs, income, expenses and taxes of the result of the merger would generate.
• Allow business loansIn this sense, the lenders will need the financial statements for the previous years and the financial reports for the next few years. With this, the proforma earnings will allow to verify the net income of the project and the ability of the borrower to repay the loan.
• If a company has a one-time expense, so you can quickly decrease your net income in the same year. In future years this cost will be insignificant, which indicates that companies eliminate these costs at the time of obtain proforma profits and losses and thus offer a better financial position to investors in the business.
• Restructure debts, since it is mostly short to long term and transactions can drastically modify the financial structure of the company. Also, you can consolidate several debts into one, providing benefits in terms of interest and maturities.
• Invest in capital, any capital structure of a company can include combinations of debt and capital. Due to this, investors require a pro forma income statement to be able to make a evaluation of the ability of a company to produce higher sales and acquire good Profits.
• Model financial statements, pro forma statements are used to analyze the financial impact of a business decision. If the company considers adding a new product line or opening elsewhere, pro forma reports have the ability to anticipate the outcome of the company's decision.

A pro forma income statement, is one of the most used financial statements in business systems. They can help investors analyze the impact that certain economic conditions, agreements, business decisions, functions, and other events have on a company's profitability. If you want to see similar topics, be sure to go to our website.

Sources and references:

• Lugui. M. (January 2020) Pro Forma Financial Statements
• Licdo. Morteto R. (June 2019) Proforma Income Statement