What is pro forma earning and how to calculate them? 

Lesson Details:

Video Transcription: In the business planning world you sometimes hear this term pro forma revenue or pro forma profit what does it mean it's a fancy term confuses a lot of people but really it just means future projections okay that's just somebody being fancy often it's somebody just not knowing themselves what exactly pro forma means and they're just saying performer because they don't know what exactly that is I've had a client before who had a boss and the boss was like get me the pro forma revenue and my client was like what is this Performa and I'm like well he's just your future projections don't over complicate it where this issue can get complicated is pro forma the projections are typically based on past history if you're just getting started with your business there is no past history to base to create projections with that's the challenge if you have let's say a business that's been in business for one year two years three years you can make projections months or years into the future based on past months or years if you have a five percent month-over-month growth you can project that if you have a ten percent year-over-year growth you can project that and the things that would change it are market conditions let's say you might maybe have a recession coming or you think recession is coming or maybe you think a boom is coming or maybe a company development is going to happen maybe like you launch a new product or you add a lot more staff so then of course if you add staff to your sales a marketing team your revenue might grow faster so those kinds of things historical data and conditions that might change your business like overall economy or corporate developments with inside your company or anything else you fight for see like maybe some competitors gaining strength or is becoming weaker those can augment your pro forma if you have historical data if you don't have historical data if you're just starting this is worth challenging because if you tell me well I'm starting a YouTube channel and I'm just gonna do an example with a YouTube channel because it's so easy everybody understands YouTube well.

I can make a video about how to be happy I can get ten million views or I can get three views so it's nearly impossible to make projections unless you know the industry you know yourself and you know what to expect from yourself so when you are starting a business part of the expectation is that you know what you're getting into you know your industry if you know your industry and yourself like if you're a YouTube expert you can kind of know where your skills and your marketing abilities will get you how many views but if you're just starting out of course you're hoping for the best case but it's really random and you should not assume best in case growth because usually you see well if Facebook succeeded or if Twitter succeeded look at that growth they are such rare instances those scale studies actually serve to confuse and mislead because they are certainly not the common experience the common experience is far less great so you have to find what's typical now what is typical you have to either yourself be an industry expert like I mentioned or consult with other industry experts hopefully multiple and knowing also the Diskin sentence is very error-prone and it's an estimate that you're getting to the best of your ability to the best of your knowledge but you're narrowing it down by not thinking it's going to be the best possible case scenario and having a lot of people who are supposedly experts look over what you're doing and give you their opinion and you kind of synthesize their opinion that's usually how you get a pro forma projection when you are just starting out.