There are two reasons why you are on this page right now. First, you are just starting with your business, and you want to learn about pro forma. Second, you are not sure if you are making your business proforma income statement correctly.
Before we discuss the process of creating a proforma income statement for your business, let’s start with the definition of proforma.
Pro forma: What is it and why I need one
Pro forma is the process of calculating financial results with the use of presumptions or projections. It is a Latin term that means “for the sake of the form” or “as a matter of form.” Businesses used this to describe a document needed to conform to a specific doctrine or norm.
A pro forma income statement is a component of the financial projections of any business. It should be included in the financials of a business plan. This income statement is just like a historical income statement. The only difference is that it projects the future instead of the past. It will help you make some operational changes right away if the projections predict a decrease in profitability.
Now that you know what a proforma is, the next part is about creating a proforma income statement for your startup business.
Uses of Proforma Income Statement
Pro forma income statement has several uses. Some of which are as follows:
Planning and Control
The income statement is used in estimating in-coming budgets and sales. It serves as a planning tool to set standards for future operations and business activities. The financial information is used to control and monitor the performance based on the set standards. It is achieved through the use of various tools like variance analysis and ratio analysis.
Some businesses are required by the legislation to prepare a pro forma financial statement as part of their financial report.
It is also used in creating a summary of the expenses and incomes of your business. The financial models can help you in deciding, and it is based on the presumptions done by the company.
Steps on How to Create a Proforma Income Statement
Below are the steps in preparing the proforma income statement:
Step #1 Calculate Business Revenue Projections
When creating a proforma income statement, you should use realistic market assumptions. You can do some research or talk to the experts to determine the expected yearly revenue, asset accumulation, and cash flow.
Here are steps on how you calculate revenue projections of your business:
a. Estimate How Much to Sell
Determine how much of your product you are going to sell within a specific period. Also, you should have a better understanding of the market.
b. Calculate the Projected Income
To calculate your projected income, multiply your total estimated sales by the amount you charge for every item you sell. After estimating how much you will sell, determine the cost of each product.
c. Calculate the Projected Expenses
Next, calculate the projected expenses of the company. It is a must to figure out how much the company is spending in producing your products or services.
d. Subtract projected expenses from projected income
The final step in calculating business revenue projections is subtracting projected income from your projected income.
Step #2 Estimate Liabilities and Costs
Liabilities are the lines of credit and loans of the company. On the other hand, the costs are your lease, insurance, materials, licenses, employee pay, permits, etc. In creating the first part of your company pro forma, you will use the business revenue projections calculated from step one and the estimated costs and liabilities.
This step is your chance to evaluate if all your expenses are necessary and what you can do to reduce them.
Step #3 Estimate Cash Flows
Cash flow is calculated by making some adjustments to your net income by subtracting or adding differences in expenses, credit transactions, and revenue, leading from transactions that happened from one period to the next.
These adjustments are carried out due to non-cash items calculated in the income statement and total assets and liabilities. Since some transactions do not involve cash items, some are re-evaluated when computing the cash flow from operations.
Cash flow is calculated using these two methods:
Direct Cash Flow Method
The direct method adds the receipts and the different cash payments, including cash paid to suppliers, cash paid as salary, and cash receipts from customers. These numbers are computed using the starting and ending balances of the different business accounts and assessing the net increase or decrease in your account.
Indirect Cash Flow Method
With the indirect cash flow method, the operating activities are computed by getting the net income off the company’s income statement. Because it is set on an accrual basis, revenue is recognized if earned and not received.
This part of the proforma statement will project the company’s future net income, dividends, sale of assets, issuance of stocks, etc. The estimation of cash flow is considered as the second part of your pro forma financial statement.
Step #4 Creation of Chart of Accounts
The chart of accounts will complete your proforma income statement and includes data collected for a three to five-year period. The first year is detailed and broken into every month increments. The following years will be split into by quarter, and the fourth and fifth years are then broken into yearly.
Some business owners are surprised at how good a pro forma income statement is to their startup operations. But, if done correctly, you can consider it a strategic planning tool to direct your company in the right direction.
Follow the steps in this guide to make sure you get the correct estimations and numbers in completing a proforma income statement. Others think that the income statement will not benefit new businesses. But for others, it is a good start in foreseeing the future of the company. If you want to share your thoughts about the topic, or have questions, feel free to comment below.
Dissecting the expansion of online checkouts
Daniel Kornitzer, Chief Business Development Officer
Card payments have long existed as the preferred payment method for online consumers. But in recent years we have begun to see a rise in the use of alternative payment methods. Although card payments continue to serve the majority, it is becoming increasingly clear that consumer preference is diverging rather than reaching a consensus. Across the globe local preferences have developed as eCommerce has grown, and across the global digital payments landscape card payments are being passed over for new ways to pay.
Alternative payment methods are on the rise as they address several of the hurdles which have prevented cards from achieving total rule over consumer preference for online payments. Here are four key reasons for this:
- Alternative methods offer a superior consumer experience, particularly when it comes to mCommerce. With the rise of new regulations such as Strong Customer Authentication and developments in Open Banking, alternative payment methods can be faster and easier to use for consumers.
- New payments methods such as crypto are growing in popularity thanks to a more attractive offering to consumers such as lower cross border payment fees.
- With the digitalisation of services forcing many customers to pay online for the first time and many experienced online shoppers looking for more secure ways to pay, the security of financial data is a major concern. Alternative payment methods can protect customer details by removing the need to share bank details at the checkout.
- Not all consumers have bank accounts or a debit card. By offering alternative payment methods businesses are enabling these customers to join the digital economy.
Businesses have been watching these trends closely and are constantly looking to improve their checkout experience for consumers accordingly.
The impact of COVID-19 on online payments
The need for businesses to expand their online checkout to meet changing consumer expectations is not a new trend. However, it has certainly been accelerated by COVID-19. The majority of businesses agree the pandemic has shifted consumer payment preferences, with alternative payment methods gaining in popularity.
Research shows businesses have seen more alternative methods chosen at their online checkouts with a greater percentage of consumers choosing digital wallets (57%), mobile wallets (39%) and eCash (28%). This has caused businesses to reconsider the way they understand payments, looking beyond traditionally methods to newer consumer friendly alternatives. With this is mind, reports suggest more than 60% of businesses are now making improving their checkout a top priority to fulfil the new high standard of consumer expectations.
Businesses are actively expanding their online checkouts
If we compare data from 2020 to 2021 on the payment methods offered or planned to be offered by businesses in the next one to two years, the trend is clear.
The number of businesses not offering or not intending to offer alternative payment methods is falling, as more and more start to recognise the importance of offering choice at the checkout. In the last year alone the increase in the adoption of alternative payment methods has risen dramatically, particularly crypto and eCash. As businesses begin to understand the urgency of upgrading the checkout experience, it is clear that alternative payment methods will play a key role in making this a reality.
Establishing crypto as a key player
One of the most interesting areas of payments which businesses should be watching is crypto. Research shows businesses are already backing this trend with almost half considering adding crypto as an alternative payment method as an immediate priority, believing it will help them reach new markets, and more than 50% already have confidence in crypto as the future of payments.
Diversifying the checkout as a form of defence
As well as offering a better customer experience and reaching new markets, businesses are expanding their checkouts with alternative payment methods to combat other familiar problems.
Most businesses see their current levels of cart abandonment as an issue, with research showing almost half have experienced an increase in levels of abandonment at the checkout in 2021. Businesses consider two of the most significant causes of this to be card declines and absence of the customers’ preferred payment method. Offering alternative payment methods is an effective way of tackling these problems at the checkout.
The rise of fraudulent transactions is also becoming a more pressing concern for businesses, with the number of fraudulent transactions increasing since the start of the pandemic. Diversifying the checkout with alternative payment methods can be used as a valuable strategy to lower fraudulent transactions.
Looking to the year ahead
2022 looks set to be another year where we will see businesses continue to adopt new payment methods at their online checkout in a bid to keep up with consumer expectations.
By working with a leading payments partner, businesses can benefit from access to a range of payment methods through a single API integration, allowing ambitious plans to become a reality in the year ahead.
All data from this article is taken from our recent research report Lost in Transaction: Finding competitive advantage at the checkout.
How bug bounty programs can help financial institutions be more secure
Rodolphe Harand, Managing Director at YesWeHack
Financial services have been one of the most heavily targeted industries by cybercriminals for several years. One alarming stat from the Boston Consulting Group found these firms to be 300x as likely as other companies to be targeted by cyberattacks.
Furthermore, the pandemic has led to a significant increase in the number of cyberattacks targeting financial institutions (FIs), with around 74% experiencing a spike in threats linked to COVID-19.
With FIs holding some of the largest collections of sensitive and private data, it’s clear they will remain an attractive target for malicious actors, especially as any data stolen can be used for fraudulent activities. This leads to the reputational damage of the financial entity that was compromised and has a knock-on effect in terms of monetary and reputational damage to affected customers.
For CISOs at FIs, the conundrum faced is how do you protect intellectual and customer data, and ensure accountability and transparency for clients and stakeholders, at a time when the pandemic has created budget constraints. Research from BAE Systems found that last year alone, IT security, cybercrime as well as fraud and risk departments had their budgets cut by a third.
Below we look at how bug bounty programs can help to address these pressing issues.
Protecting valuable data
Protecting customer and intellectual data has always been a top priority for FIs. However, as opportunistic cybercriminals have a lot to gain by stealing this valuable data, there is a constant evolution of threats, which means FIs must stay on their toes. By deploying a bug bounty program, FIs can work with ethical hackers that have a wealth of experience and unique skills when it comes to identifying security weaknesses within a FI’s defence, thus helping to implement effective security measures to help prevent data breaches.
Building trust among various stakeholders such as customers, suppliers and investors is critical for achieving business goals. By deploying a bug bounty program, FIs send out a message that they care about protecting the security of the data of those they work with – which in turn can have a cascading effect resulting in better business performance.
For FIs to win customers and keep them happy, amidst the growing threat of neo banks and customer-centric fintech organisations, speed of innovation is crucial. As such, many FIs have adopted an agile approach to build, test, and release software faster to bring online and mobile banking solutions to market quicker. However, this can create frictions between development and security teams. Security mandates are deemed to be unnecessarily intrusive and a cause of delayed application development and deployment.
Yet, with DevOps teams needing to build and deploy applications faster than ever before, an epidemic of insecure applications has emerged. According to Osterman Research, 81% of developers admit to knowingly releasing vulnerable applications, while research from WhiteSource found 73% of developers are forced to cut corners and sacrifice security over speed.
With developers often not having the time, tools, skills, or motivation to write impeccably secure code, there is an evident need to provide developers with more support when it comes to building applications securely Fortunately, bug bounty programs can provide a “fact-based” financial implication of inherent security flaws within the process. This makes it possible to hold development teams and service providers accountable for creating or delivering insecure products, thus addressing inherent security gaps within the business units and helping to drive continuous improvement.
Moreover, security awareness and education of developments teams can be improved significantly for those developers that are directly involved with the management of vulnerability reports for their bug bounty programs. This is because, the mere fact of exchanging information with ethical hackers, or assimilating the thinking of a potential hacker and having proof of concepts of vulnerability exploitation on their application components, naturally accelerates consideration of security early in the development stage and provides ongoing learning.
Get more return on your investment
According to Gartner, 30% of CISOs effectiveness will be directly measured on their ability to create value for the business. When security budgets are challenged, CISOs need to demonstrate business value through initiatives designed to enhance efficiency whilst stretching the dollar.
This is where bug bounties can help tremendously. Compared to conventional penetration testing, bug bounty offers a fast, complete, and measurable return on your security investment, with businesses only paying out for successful discovery of vulnerabilities. Equally, businesses get access to hundreds of ethical hackers that can test their programs, each with their own unique skillsets as opposed to only one skilled researcher testing the network. This results-driven model ensures you pay for the vulnerabilities that pose a threat to your organisation and not for the time or effort it took to find them.
Bug bounty programs also deliver rapid vulnerability discovery across multiple attack surfaces. With this approach, organisations receive prioritised vulnerabilities and real-time remediation advice throughout the process to accelerate the discovery of, and solution to vulnerabilities.
Another appeal of bug bounties is that due to the continuous nature of testing, more vulnerabilities are found over time as opposed to pen-testing. This is key to financial institutions that require agility to keep up with the continuous roll-out and updates of applications.
The cornerstone to a successful security programme
The risk posed to financial institutions by cyber threats will only continue, as evidenced by the number of data breaches seen in recent times. The COVID-19 pandemic has only exacerbated these risks, especially with almost all FIs having needed to shift to a remote working environment – which has only widened the attack landscape.
For FIs, a bug bounty program should be considered a fundamental cornerstone of any security strategy, with it being a modern-day cybersecurity solution that is well-equipped to tackle the immediate security challenges they face. In doing so, FIs will not only prove to customers and stakeholders their commitment to data protection and security but this will also be help them to avoid the monetary damages that could be imposed by regulators if a breach was to take place.
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