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

These projected financial statements are referred to as pro forma financial statements. Once all the relevant information has been gathered, create a spreadsheet or financial model that incorporates all of the relevant variables. This model should include assumptions about the company’s future performance such as sales growth or cost increases. As discussed in Note 2 to the pro forma financial statements, the pro forma adjustments reflect management’s assumption that X Division of the acquired company will be sold.

Accountants who prepare companies’ pro forma financial statements are bound by certain requirements, as per the American Institute of Certified Public Accountants (AICPA)’s Statements on Standards for Accounting and Review Services (SSARSs). The SSARSs say that the auditor promises no material modification to the historical financial documents and understands that they are simply showing changes to the company’s financial picture based on a transaction or event using adjustments. They must also ensure they label all pro forma information as such, to avoid confusion with historical information, and list the specific assumptions and uncertainties about them they are making. Pro forma financial statements are detailed estimates of a company’s future financial performance. They are designed as a tool to help management plan for the future, analyze potential strategic decisions, and obtain financing.

Example pro forma cash flow statement

For example, you may be able to add the investment onto the balance sheet under the cash row in the historical with acquisition pro forma template, or you may have to divide the investment under multiple rows. Check the templates in this guide to determine which is right for you to create your own. According to the SEC, for public companies, a pro forma balance sheet should have the same dates, plus one year from the last submitted balance sheet. If interim period balance sheets were submitted, the company should pick up from where they left off. If it is an annual period, the document should also align with the company’s filed GAAP-approved financial statements. Pro forma income statements usually project a minimum of three years, whereas regular income statements may just be the year prior or based upon a lender’s request.

Generally, pro forma financial statements tend to portray a business as being more successful than it really is, and having more financial resources available than may actually be the case. Consequently, investors should be extremely cautious when evaluating these types of financial statements, and spend time understanding how they differ from the issuing firm’s normal financial statements. For cases in which your company is specifically seeking funding, you want to show your potential investors how the company’s financial results will change with their investment. There may be several sets of these pro forma documents, each based on different potential investment amounts, or just one based on what you think you need. For this projection, you need to determine where in your company the investments would be parlayed.

Purpose of a Forecast

Review the video Business Plan and Pro-Forma Financial Statements to learn about the basics of pro forma financial statements and why they are helpful. Continuing with the earlier example, the management can prepare pro forma cash flow statements to determine whether it will have enough liquidity or not to fulfill the debt servicing including repayments and interest payments. Management could take a set of assumptions and then create different likely and unlikely scenarios to better understand how a company’s performance is impacted in each case. Additionally, some businesses use pro forma statements to show investors how profitable and viable their operations will be in future years.

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. Pro forma financial statements are projections of future expenses and revenues, based on a company’s past experience and future plans. 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.

• Pro forma is a Latin term that roughly translates to “as a matter of form,” and is most often used to describe a document that is based on financial assumptions or projections, such as a pro forma balance sheet.
• Management could take a set of assumptions and then create different likely and unlikely scenarios to better understand how a company’s performance is impacted in each case.
• Without historical financial statements, financial analysis and evaluation would not be possible and management, board members, investors, and customers would be largely in the dark about how well an organization has done.

In reality, no one knows exactly how much revenue will be made or how much expenses will be incurred at the end of a given period; however, a realistic forecast can be determined. You create a pro forma cash flow statement much the same way you’d create a normal cash flow statement. That means taking info from the income statement, then using the cash flow statement format to plot out where your money is going, and what you’ll have on hand at any one time. This pro forma statement can be part of a larger cash flow forecast used for decision making. They can help you make a business plan, create a financial forecast, and even get funding from potential investors or lenders. 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.

Statements of cash flow, or cash flow statements, measure the sources of a company’s cash and how it uses that cash over the stated period. Pro forma statements of cash flow estimate how much cash inflow and outflow is expected in one or more future periods. 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.

What are the types of pro forma statement?

A pro forma cash flow statement for a company would tell the management as to what will happen to the cash inflows and outflows if a certain deal or decision is taken. It might also tell them if additional financing needs to raised or other lines of credit need to be arranged. A direct method of preparing a pro forma cash flow statement will entail itemizing forecasted cash inflow from customers or other sources, and cash outflow to vendors or investors to arrive at the net forecasted cash flow statement.

Pro forma financial statements can also be used to obtain financing or evaluate how a company would be positioned if a certain event or transaction were to occur. In this article, we’ll discuss what pro forma financial statements are, their advantages and disadvantages, how to prepare them, what information is included in them, best practices for interpreting them, common uses of them, their limitations, and tips for analyzing them. Financial projections are built on a set of assumptions, and can be built from scratch for a startup company. Pro Forma financial statements on the other hand are based on your current financial statements, and then are changed based on one event. For example, your pro forma statements might explore what your business financials would look like if you secured a new loan, or how they might change if you received investment. Financial projections on the other hand would include assumptions about sales, financing, and expenses as a whole.

Example pro forma balance sheet

A university press most often uses proforma statements in connection with its annual operating budget and long-term financial planning process. Budgets and multi-year financial plans usually contain pro forma income statements and balance sheets to summarize financial performance for given time periods and financial conditions for given dates. Simply put, pro forma financial statements are financial reports that are created on hypothetical assumptions. For example, in creating a pro forma income statement, you would need to forecast revenue for future periods. This can be done by analyzing past sales, orders for products or services in the current period or any backlog orders yet to be fulfilled. A realistic revenue amount can then be forecasted and used in a pro forma income statement.

Traditionally, business owners search for spreadsheet templates online and create a set of pro forma financial statements based on those templates. The problem with spreadsheet templates is that the formatting is limited, the templates can be overwhelming, the spreadsheet is not interactive. The purpose of a pro forma statement is to help management in making informed decisions about certain events or transactions. It allows them to see the possible outcomes of a particular decision and how it will impact the company’s profitability, financial position, and cash flow. When your financial statements are put into pro forma financial statements, you adjust material charges, credits, and tax effects to the transactions. In other words, you get an idea of what your financial results would have been if the event had already occurred.

Pro Forma Company Income Statements

This is when you take the financial statements of your business and merge them with financial statements of the other to see what your previous year might’ve looked like and what it may look like in the future. Your business might benefit by following the SEC guidelines for public companies outlining how to use pro forma statements, even if you’re not a publicly traded business. A simple way to begin a full financial statement forecast might be to simply use the common-size statements and forecast every item using historical percentages. First, managers must address the cost of an account and determine if it’s a variable or fixed item.

• Pro forma financials are not computed using generally accepted accounting principles (GAAP) and usually leave out one-time expenses that are not part of normal company operations, such as restructuring costs following a merger.
• So it’s best to use them in combination with other tools such as balance sheets, income statements, economic audits, and more.
• When it comes to accounting, pro forma statements are financial reports for your business based on hypothetical scenarios.
• Next, gather any additional information that may be relevant such as projections for sales and expenses or changes in capital structure.

They can show the projection of what money will be tied up in receivables, equipment, and inventory. Further, they can represent if your company could run out of money, and how much is necessary to keep it afloat. If your company has a high debt-to-equity ratio, it will show on the balance sheet. This pro forma balance sheet can also be used for corporate retail or wholesale businesses. If a business is acquiring a new business or disposing part of its business, the pro forma statements need to adjust the historical figures to reflect this, and to show, in the case of an acquisition, what a corporation would have looked like separately, but added together. For the effects of the business combination, only show the current and immediately preceding periods.

Historical with Acquisition

Furthermore, they cannot account for all external factors that could affect a company’s future performance such as changes in customer preferences or new competition entering the market. The historical condensed financial statements are derived from the historical financial statements of X Company, which were audited by us, and of Y Company, which were reviewed by other accountants, appearing elsewhere herein [or incorporated by reference]. These statements are useful for making estimates and analyzing future risks, what is posting in accounting but they’re not foolproof. So it’s best to use them in combination with other tools such as balance sheets, income statements, economic audits, and more. In accounting, pro-forma financial statements are hypothetical financial reports that show either forecasts of or alterations to actual financial statements. Pro-forma financial statements show the financial statements of a company in a hypothetical scenario that has not yet been realized or that represents a modification of the actual financial statements.

Our work has been directly cited by organizations including MarketWatch, Bloomberg, Axios, TechCrunch, Forbes, NerdWallet, GreenBiz, Reuters, and many others. Creditors might also get insecure due to higher financial leverage situation of a company as this might violate existing debt covenants that are in place. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. Income is the financial figure that refers to all capital earned from sales of products or services.

They differ from pro forma statements in that they are not projections, but rather historical reports — therefore, they do not consider things like litigation costs, restructuring charges, and other one-time items. Additionally, pro-forma projections or pro forma reports are simply modified versions of actual financial statements that are made for the sake of showing what these documents would look like under certain hypothetical scenarios. For example, if an entrepreneur has an idea for a company, and he wants to pitch the idea to potential investors, then he may want to draw up pro forma financial statements to show the potential investors what the company would look like once it’s up and running. In this case, the entrepreneur would create pro forma projections of the various financial statements and present them to the investors. Or if a company incurs a major one-time cost that is not related to regular business operations, the company may want to show investors what the financial statements would look like without the affects of that major one-time cost. In this case, the company would include pro forma financial statements in its annual report.