If outside funds are needed, pro forma statements can help present the expected future results to lenders and other investors. Managers can use pro forma statements for a variety of reasons to illustrate the effects of executive decisions or expected changes in business. 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. Although pro forma statements have advantages, they have limitations and downsides. After all, the statements are projections, which are essentially guesses about the future.
Pro forma financial statements are a great way to assess the financial impact of those assumptions. You may be courting investors or trying to convince your business partners of the value of a capital investment or additional financing. In that case, you can use a financing pro forma projection to make your case. It takes into account an injection of cash from an outside source—plus any interest payments you may need to make—and shows how it will affect your business’s financial position.
- 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.
- Pro forma results may contain adjustments to GAAP numbers in order to highlight important aspects of the company’s operating performance.
- In that case, you can use a financing pro forma projection to make your case.
A pro forma balance sheet shows what your future balance sheet may look like and can summarize your total assets and total liabilities. Banks and lenders often use them to project a business’s financial stability. Because pro forma balance sheets can showcase a company’s five-year projection, it’s also helpful for business planning. Once you’ve created your pro forma income statements, and cast your eyes forward to the future of your business, you can start planning how you’ll spend your money. When it comes to accounting, pro forma statements are financial reports for your business based on hypothetical scenarios.
Other Types of Pro Forma Financial Statement Templates
Of course, if the patent isn’t granted, all of this would be highly inaccurate. To prepare your pro forma income statement, you’ll need to determine your estimated revenue projections. The statement of cash flow indicates the amount of money that goes in and out of a business. A pro forma statement of cash flow can be helpful in determining when there might be a shortage of cash, which could help determine whether cutting expenditures or taking on a loan could help.
Also, it’s important to remember the SEC, AICPA, and FASB have specific guidelines regarding the form, content, and necessity of pro forma financials under particular circumstances. Therefore, whatever prompts the need for them, you must adhere to any mandatory guidelines involved. With Bench, you get a crystal clear image of your financial history so you can focus on planning your future. 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.
- Taylor suggested starting the process with actual data that has been audited (if you have an auditor), or at a minimum have been validated as accurate.
- If so, they may issue pro forma financial statements that include the corrections they believe are necessary to provide a better view of the business.
- Pro forma financial statements project how a company might perform in the future if the business takes an assumed course of action.
- Keep in mind that the American Institute of Certified Public Accountants (AICPA), and the Securities and Exchange Commission (SEC) both have guidelines for creating pro forma statements.
Put another way, they use information that can vary substantially from actual data. So while pro formas are fantastic for looking at events from different angles, never take them as gospel, only well-informed conjecture. For example, sales might be presented as 15% higher (best case), 5% higher (expected), 20% lower (worst case).
If material costs increase sharply, or there is a shortage of labor, the cost of sales will increase. 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 top rated tax resolution firm show the underlying assumptions about the shipment and what the documentation will look like if the assumptions are proven true. 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.
The legal liability of the company may increase upon submitting forecasts instead of pro forma income statements, but the practice may be more relevant for certain businesses. A pro-forma forecast is a financial forecast based on pro-forma income statements, balance sheets, and cash flow statements. Pro-forma forecasts are usually created from pro-forma financial statements and are forecasted using basic forecasting procedures.
The Ultimate Guide to Pro Forma Statements
Prudent financial management requires a balance between the amount of debt a company owes compared to its equity base. You can then determine the net effect on cash based on the hypothetical scenario. Pro formas can help a company and its lenders determine the most appropriate type of financing. I’d advise Russel to hire a part-time assistant to reduce the risk of sinking nearly $60,000 into a new position when he’s not sure he’ll see the increased revenue he’s expecting. He can always offer the person a full-time job after his projection actualizes. Using this as a tool, your business can come up with optimistic, realistic, and pessimistic future scenarios for the future of the company.
An example of pro forma
Whether in an assurance that the company is financially sound, also known as a comfort letter, or through a compilation letter, the auditor is only responsible for ensuring the financial statements are prepared correctly. The company’s management is responsible for the documents’ overall validity. 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. If you take out the loan, you might share the pro forma financial statements with the lender to demonstrate your ability to repay the loan. Businesses also use pro forma financial statements to prod investors to provide capital.
Some of the most commonly used financial statements for pro forma are the income statement, the cash flow statement, and the balance sheet. When deciding whether or not to invest in a company or a project, it’s reasonable to wonder how the future will unfold. There’s no way to predict the future with certainty, but you can analyze multiple “what if” scenarios to understand the potential outcomes. Pro forma financial statements enable investors to do that with available information. Every small business should create a budget, and the budgeted financial results are pro forma statements. An owner may create pro forma reports to assess the potential profitability of a product, or to determine if a business expansion makes financial sense.
Pro forma balance sheet
As a result, they often reflect the best-case scenario, which the firm would like to portray to investors. For example, net income doesn’t tell the whole story when a company has one-time charges that are irrelevant to future profitability. The preparation of pro forma statements in various economic environments is useful for management to examine the consequences of rises in expenses or economic downturns.
Definition of Pro Forma Financial Statement
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. These reports provide key stakeholders, investors, and creditors the foresight needed to make decisions and strategically plan.
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. Here we’ll be covering definitions, uses, and benefits of pro forma statements. A pro forma invoice requires only enough information to allow customs officials to determine the duties needed from a general examination of the included goods. These are models that forecast the expected result of the proposed transaction. For example, a company will report its actual sales and expenses for the quarter that just passed and, in the same chart, will list its projections of these numbers for the current quarter.
AccountingTools
Pro forma financial statements are projections of future expenses and revenues, based on a company’s past experience and future plans. Even public companies are not required to get their pro forma document audited by an independent auditor, according to the SEC. However, to comply with professional auditing standards, the documents can be audited at the request of the company or a third party. The SEC guides auditors to ensure that they do not take on too much responsibility for the company’s claims.
These assumptions can be off by a little or a lot, but the bottom line is their outcomes should not be weighed too heavily in decision-making without other indicators to back up the assumption. And as we mentioned earlier, they are not in compliance with GAAP, which means they have to be labeled as pro forma and cannot replace formal financial statements. These are often intended to be preliminary or illustrative financials that do not follow standard accounting practices. Companies use their own discretion in calculating pro forma earnings, including or excluding items depending on what they feel reflects the company’s true performance or future performance. 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.
