Pro Forma Financial Statements: What to Know Plus Examples

Historical pro forma financials provide a backward-looking projection of a company’s results in one or more prior years that includes the results of another business that the company wants to purchase, net of acquisition costs and synergies. This approach is useful for seeing how a prospective acquisition could have altered the financial results of the acquiring entity. Pro forma income statements are important because of the information they can offer a company. If, for example, it is preparing to produce new goods, the financial statements can help forecast if producing the new goods will cause expenses to increase. This enables the company to accommodate any potential for profit/loss by changing production strategy, materials, or even the rate at, or timing of, the production of the goods.

  • Traditionally, financial statement analysis is used to better understand a company’s performance over a specified period.
  • Other individual line items can also be easily forecasted, such as the cost of goods sold, since it can be assumed it will proportionally grow with sales.
  • That can help you show investors or partners what business finances could look like by the end of the fiscal year.

The pro forma models the anticipated results of the transaction, with particular emphasis on the projected cash flows, net revenues and taxes. Consequently, pro forma statements summarize the projected future status of a company, based on the current financial statements.[1] Pro forma figures should be clearly labeled as such and the reason for any deviation from reported past figures clearly explained. In a sense, pro forma financial statements allow management to A/B test different strategies without any real-world impact.

Basic templates for creating pro forma statements can be found online, or they can be created using a Microsoft Excel spreadsheet to automatically populate and calculate the correct entries based on your inputs. Pro forma means “for the sake of form” or “as a matter of form.” When it appears in financial statements, it indicates that a method of calculating financial results using certain projections or presumptions has been used. Because pro forma statements aren’t GAAP compliant, these hypothetical numbers are just that.

Pro forma financial statement definition

He thinks of expansion but is skeptical about entering into a new side of his ongoing profitable business. While pro forma financials are useful for management to evaluate the consequences of various alternatives, they can sometimes present more optimistic pictures of future results. GAAP requirements are often omitted from pro forma statements because they result in more negative reporting. A company’s balance sheet shows a company’s financial position and it’s made up of assets, liabilities and equity. When creating a pro forma balance sheet, you might consider if any assets will be purchased, any investments will be sold or any debt will be paid. Another popular pro forma statement is the balance sheet projection; this type projects cash flow over time to determine how much money will be available for investment and debt service obligations.

In the business lending world, lenders will look at a company’s pro forma balance sheet to determine the debt-to-equity ratio for additional lending. However, creating pro forma statements doesn’t have to be intimidating or complicated. In this guide, we’ll walk you through the steps to create pro forma statements for your business with ease. While it’s not the only tool you should be relying upon for your investing needs, pro formas can certainly provide helpful guidance when considering potential investments. In simplest terms, a pro forma is essentially an estimated financial statement that projects future income and expenses for either an existing company or a new project.

  • This is also true of companies that change tax status from a private, nontaxable company to a taxable C-corporation to file for an IPO.
  • Big corporations who have in-house accountants use pro forma statements for financial modeling and forecasting different scenarios.
  • The main benefit of pro forma statements is it gives you an informed peek into your financial future.
  • Lenders and investors will require such statements to structure or confirm compliance with debt covenants such as debt service reserve coverage and debt to equity ratios.
  • If these charges recur every year and the company excludes them on the pro forma statements, the company’s management may be misleading its investors.

For business owners seeking to clarify their financial projections, our Pro Forma Template serves as a direct and effective tool, instilling confidence in guiding your business forward. Businesses can develop pro forma income statements, balance sheets, revenue projections, estimates of costs and expenses and expectations of cash flow, such as the result of a merger or the introduction of a new product. Pro forma statements are a vital tool for any business that wishes to forecast its financial performance in the future. These statements project what a company’s income statement, balance sheet, and cash flow statement might look like if certain assumptions hold true. They are used for many purposes, including financial forecasting, budgeting, and gaining insight on how proposed changes might impact a company. Since pro forma financial statements and financial projections are quite similar, they may be considered synonymous.

These statements provide a comprehensive picture of the expected revenue and expenses, allowing businesses to prepare for potential economic changes and make informed decisions. Before creating a pro forma statement, it’s important to have accurate historical data on hand. This information includes past sales revenue, expenses, cash flow, profit margins, and any other relevant financial metrics. Without this critical information, making accurate projections may be difficult. Pro forma statements can be used to project the impact of financial decisions on your business. Building accurate pro forma financials requires an in-depth financial analysis of your present business.

Predict the influence of financial decisions

For example, if a company is considering an acquisition or a merger, it may publish a pro format statement of the expected impact of the move on its future earnings and expenses. A company may present a pro forma statement to inform investors about their internal assessment of the financial outcome of a proposed change in the business. It takes into account past expenses and revenues and factors in the costs of the company’s plans for the fiscal year.

What It Means for Individual Investors

A pro forma invoice is required to state the same facts that the commercial invoice would and the content is prescribed by the governments who are a party to the transaction. There was a boom in the reporting of pro forma results in the US starting in the late 1990s, with many dot-com companies using the technique to recast their losses as profits, or at least to show smaller losses than the US GAAP accounting showed. Pro forma statements are typically used when creating budgets and forecasts for businesses, startups, and other financial ventures. They’re generally created using Excel spreadsheets or specialized software programs designed for this purpose. Before delivering an actual invoice, send a client a pro forma invoice that lists the cost of the goods and services you’re planning to provide.

Understanding a Pro-Forma Forecast

With that information, you can conduct ratio analyses using hypothetical numbers and gain insight into how projects might affect the value of your investment. A pro forma financial statement is supposed to include reasonably accurate information. However, companies that create these documents have some leeway in their assumptions. They might be overly optimistic or omit important information investors need to know about. Here’s a closer look at what pro forma financial statements are, how they’re created, and why they’re a key aspect of financial decision-making.

Mastering the Art of Developing Accurate Pro Forma Statements: A Comprehensive Guide.

For example, GAAP requires deductions for such expenses as depreciation, amortization, restructuring expenses, one-time costs, stock payouts and employee stock options. Management might not feel that invoice templates in adobe illustrator some of these expenses affect cash flow or are not part of normal operating costs, however. Keep in mind, expenses can be fixed or variable, and they are calculated as a percentage of sales.

The COGS forecast is the COGS/Sales ratio from several years multiplied by the sales forecast. You can address this fact simply with a final paragraph in the compilation reports, and the author may elect to include the reason for the lack of independence. Finally, in each page of the pro forma information, there must be a reference to the compilation report. In most cases, pro forma documentation is used to present a reasonable representation of what an anticipated occurrence will look like, often a cash expense for shipments. Pro forma statements show the underlying assumptions about the shipment and what the documentation will look like if the assumptions are proven true.

As you might’ve noticed, we’ve used the word hypothetical several times already. And while pro formas can be enormously helpful in looking at different financial models based on various assumptions, they’re still – you guessed it – hypothetical. Do you want to learn more about what’s behind the numbers on financial statements? Explore Financial Accounting, one of three courses comprising our Credential of Readiness (CORe) program, to discover how you can develop an intuitive knowledge of financial principles and statements to unlock critical insights into performance and potential. Financial assumptions refer to guidelines and expectations made about your business. It’s essential that these assumptions are as true to reality as possible, grounded on facts and historical data.