Because marketing managers are accountable for the profit impact of their actions, they must translate their strategies and tactics into pro forma, or projected, income statements. A pro forma income statement displays projected revenues, budgeted expenses, and estimated net profit for an organization, product, or service during a specific planning period, usually a year. Pro forma income statements include a sales forecast and a listing of variable and fixed costs that can be programmed or committed.
Pro forma income statements can be prepared in different ways and reflect varying levels of specificity. They have a typical layout consisting of six major categories or line items:
- Sales—forecasted unit volume times unit selling price
- Cost of goods sold—costs incurred in buying or producing products and services. Generally speaking, these costs are constant per unit within certain volume ranges and vary with total unit volume.
- Gross margin (sometimes called gross profit)—represents the remainder after cost of goods sold has been subtracted from sales.
- Marketing expenses—generally programmed expenses budgeted to produce sales. Advertising expenses are typically fixed. Sales expenses can be fixed, such as a salesperson’s salary, or variable, such as sales commissions. Freight or delivery expenses are typically constant per unit and vary with total unit volume.
- General and administrative expenses—generally, committed fixed costs for the planning period, which cannot be avoided if the organization is to operate. These costs are frequently called overhead.
- Net income before (income) taxes (often called net profit before taxes—the remainder after all costs have been subtracted from sales.
A pro forma income statement reflects a marketing manager’s expectations (sales) given criterion inputs (costs). This means that a manager must think specifically about customer response to strategies and tactics and focus attention on the organization’s financial objectives of profitability and growth when preparing a pro forma income statement.
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