Pro Forma: What It Means and How to Create Pro Forma Financial Statements

Whether you “might” lose an account or make an acquisition, pro forma financial statements allow a glimpse into the future. This document is like the hydration strategy for your marathon; it tracks the flow of cash in and the cash disbursements out of your business. It helps ensure you don’t run out of liquid assets (cash) by showing when you might need a financial water station. Breaking it down, it covers operating activities (daily business operations), investing activities (buying and selling assets), and financing activities (loans and investments). Of course, if the patent isn’t granted, all of this would be highly inaccurate.

• Often, events depicted in the pro-forma financial statements have yet to occur, so the actual financial picture of the company may be very different from the picture presented.
• Pro forma financial statements are valuable tools managers can use to plan for the future, anticipate and control risks and acquire funding for their business.
• For example, a consulting company is working on a big client project but won’t get paid in full until the end of the project.
• They also help make better-informed business decisions and prepare for worst-case scenarios by understanding how certain variables impact the company’s operations.
• Businesses use pro forma financial documents internally to aid in decision-making and externally to showcase the effect of business decisions.
• Let’s take a look at each report in the set and why management would choose to create a pro-forma version.

Pro-forma Income Statement Considerations

Compiled pro forma financial statements can form the basis for calculating financial ratios and financial models, which test assumptions and relationships of your company’s plan. You can use them to study how changes in the price of labor, materials, overhead, and the cost of goods affect the bottom line. Use these models to test the goals of a company’s plan, provide findings that may be understood, and offer better, more accurate data than other methods. New financial models use computer programs that has made this testing better, which enables quick calculation for real-time decision making.

What are the types of pro forma statement?

The pro forma income statements considers past data, but its projections reflect the addition or subtraction of events or things. Ultimately, it involves financial projections and assumptions that allow you to make calculated and logical business decisions. For decades, the proforma income statement has been a useful tool for startup founders, investors, and key decision-makers to examine the future financial health of the business. A pro forma financial statement is a report prepared base on estimates, assumptions, or projections. In other words, it’s not an official GAAP statement issued to investors and creditors to relay information about past company performance. Instead, it’s a tool created by management to help project future performance and plan future events.

Q: Does Excel have financial templates?

We’re America’s largest bookkeeping service helping thousands of business owners better understand the financial health of their operations so they can keep focused on growth and planning. When it comes time to create a pro forma statement, you have reliable numbers and reports to get started. Just as a hiker uses a map to decide whether to cross a river at its narrowest point or take a bridge, you use your pro forma financial statement to navigate through business decisions. Pro-forma financials used in the pro-forma forecast will usually reflect the predicted state of the business after a large or important transaction has taken place.

The closer the projection is to the actual numbers reported, the more accurate it is. Further, if a company has a stable order backlog, the pro forma statement of cash flow is more accurate. Finally, and regardless of its relative accuracy, a pro forma statement of cash flow forces management to think about the future expected cash flow and whether it is enough. For the effects proforma example of the business combination, only show the current and immediately preceding periods. It is better to be cautious and assess the projected pro forma income statement calculations along with the rest of the financial documents to get more accurate and updated projections. Pro forma statements essentially revolve around the “what if” formula for founders of a startup.

This might be the introduction of a new product, the acquisition of another company, the purchase of new equipment or the closing of a money-losing division. The objective is to examine various alternatives and determine the best course for the business. Lenders want to feel comfortable that a business has sufficient working capital and liquidity to support its operations.

Often requested by banks, they may also be prepared as a part of the annual budgeting or forecast and estimate where cash shortages may occur in order to obtain additional funding. In the case of estimated cash overages, the company can produce a plan for investment. Arguably, the statement of cash flow is the most important of the pro forma documents. If the pro forma balance sheet and income statements lead to a statement of cash flow that shows inadequate funds for what management has planned, the other documents will be invalid and may need to be reworked. Projections are a fundamental application of pro forma financial statements.

What is a pro forma income statement?

Let’s dive into how you can forecast cash inflows and outflows with the precision of a skilled gardener ensuring their plants thrive. One of the key purposes of pro forma analysis is forecasting financial performance. This isn’t just about predicting how much money you’ll make; it’s about understanding how various factors like market trends, new product launches, or changes in pricing could impact your finances.

Just like Bea, you can apply these steps and lessons to navigate your business’s financial future with confidence. Bea starts by gathering her sales data, costs, and cash flow statements from the past three years. It’s a bit like detective work, sifting through files and receipts, but it gives her a solid foundation. She notes a steady increase in sales each year and identifies seasonal trends that impact her business. A pro-forma forecast, similar to any sort of pro-forma report, is not required to abide by GAAP.

• Several third-party sites offer links to pre-built pro forma templates they’ve designed.
• He can always offer the person a full-time job after his projection actualizes.
• A pro forma income statement starts like an ordinary income statement based on actual financials.
• Many of the items listed above are part of the GAAP, but not included in pro forma reporting, making it rife for possible deception.

These reports provide key stakeholders, investors, and creditors the foresight needed to make decisions and strategically plan. Managers and individual contributors can also benefit from creating pro forma statements, enabling them to understand different factors impacting business units. Using pro forma https://www.bookstime.com/ templates can save you valuable time when creating your own pro forma income statements. The forecasting function of this template should handle most small businesses, however, there are a few limitations to what pro format financial statements can do, or really an income statement in general.