A Pro Forma is an estimated financial statement, usually the Income Statement (aka Profit and Loss Statement). Entrepreneurs prepare a pro forma for many reasons, but the main one is to obtain financing either from a bank or an investor. As with most everything, the pro forma is only valuable if the information used to create it is good and accurate.

I just finished helping two business owners prepare projections for their business ventures. The problem with an estimated projection of the future is that it is rarely 100 percent accurate. Generally you will not earn as much in revenues as you anticipate and your expenses will be higher. The expenses will be higher in part because items were left out, either intentionally or unintentionally.

Creating a pro forma is not a waste of time because it forces the business owner to really think about what the business can achieve. Can you really sell 100,000 widgets with only 1 sales person, i.e., yourself? When you put numbers on paper you have take an honest look at what needs to happen from a financial perspective to create and sell your products or services.

The real challenges for business owners is not the time it requires to create a pro forma/projection, but creating one that is realistically achievable. Does it really do you any good to underestimate your expenses or overstate your revenues? Do you think the bank or investor won’t doubt your numbers? They will, even if your numbers are totally realistic.

The problem with pro forma financial statements isn’t that they are unrealistic or unachievable, it is that often times the data used to create them isn’t accurate or there are too many unknowns. Yearly projections are a good business practice. These exercises can help you and your business be more profitable as long as the information used to create them is considered high-quality and items are not left off in order to make the numbers “look” good.