pro forma in business planning

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What Are Pro Forma Financial Statements?

• 28 Oct 2021

When it comes to making business decisions, so much relies on numbers. To get sign-off from key stakeholders, win investors, and strategically plan, you need to demonstrate that your ideas make financial sense.

While certain financial statements —such as balance sheets, income statements, cash flow statements, and annual reports—help provide a historical snapshot of a business’s performance, they often lack the ability to provide foresight when planning for the future. For this reason, professionals typically turn to forecasts and financial projections to guide their plans and answer critical “what if” questions. Pro forma financial statements are a common type of forecast that can be useful in these situations.

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.

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What Is a Pro Forma Financial Statement?

A pro forma financial statement leverages hypothetical data or assumptions about future values to project performance over a period that hasn’t yet occurred.

In the online course Financial Accounting , pro forma financial statements are defined as “financial statements forecasted for future periods. They may also be referred to as a financial forecast or financial projection.”

The course notes that these projections can be used “as a depiction of what the financial statements for the business will look like over a certain period of time, if the assumptions made when preparing them hold true.”

Since the term “pro forma” refers to projections or forecasts, it can apply to a variety of financial statements, including:

• Income statements
• Balance sheets
• Cash flow statements

Whether you’re trying to interpret pro forma financial statements or prepare them, these projections can be useful in guiding important business decisions. In fact, business owners, investors, creditors, and other key decision-makers all use pro forma financial statements to measure the potential impact of business decisions.

How Are Pro Forma Financial Statements Used?

Traditionally, financial statement analysis is used to better understand a company’s performance over a specified period. While this provides insight into a company’s historical health, creating pro forma financial statements focuses on its future. For this reason, these reports can be leveraged in several ways, including analyzing risk, projecting investments, and showing expected results before the end of a reporting period.

One of the most important uses of pro forma reports is related to decision-making and strategic planning efforts. For example, you might create pro forma financial statements to reflect the outcomes of three investment scenarios for your business. Doing so can allow you to conduct a side-by-side comparison of possible outcomes to determine which is favorable and guide your planning process.

Creating Pro Forma Financial Statements

Keep in mind that the general process of creating pro forma financial statements isn’t significantly different from that of creating traditional statements. The difference lies in the assumptions and adjustments made about various inputs, while the format and calculations remain the same.

There are, however, specific methods used for these forecasts. The percent of a sales forecasting method, for example, involves determining future expected sales and finding trends across accounts in statements. This is typically used when creating pro formas internally.

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. Line items like income tax expense, on the other hand, typically don’t change directly with sales. Stable businesses can generally estimate income tax expense as a percentage of income before taxes.

All in all, the process of preparing a pro forma balance sheet is much the same as preparing a normal balance sheet . The same holds true for the process of preparing income statements and cash flow statements. It differs when you begin forecasting various line items and calculating how those projections impact your bottom line.

Beyond the Numbers

The true value of pro forma statements goes beyond the numbers they show. 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.

Remember: There are limitations to pro forma financial statements. Since these documents are based on assumptions, they shouldn’t be taken as fact. Rather, they can inform decisions using hypothetical data based on historical trends.

Taking an online course like Financial Accounting can help you understand how to create and interpret different kinds of financial statements so you can find meaning in them. Learners enrolled in the course learn the language of accounting and how to create financial statements and forecasts to make strategic decisions.

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.

About the Author

Pro Forma Financial Statements (with Templates and Examples)

Bryce Warnes

Reviewed by

Janet Berry-Johnson, CPA

April 21, 2022

This article is Tax Professional approved

Pro forma definition

According to Merriam-Webster , “pro forma” means:

• Made or carried out in a perfunctory manner or as a formality
• Based on financial assumptions or projections

I am the text that will be copied.

Pro forma is actually a Latin term meaning “for form” (or today we might say “for the sake of form, as a matter of form”).

When it comes to accounting, pro forma statements are financial reports for your business based on hypothetical scenarios. They’re a way for you to test out situations you think may happen in the future to help you make business decisions.

There are three major pro forma statements:

• Pro forma income statements
• Pro forma balance sheets
• Pro forma cash flow statements

Pro forma statements look like regular statements, except they’re based on what ifs, not real financial results. As in, “What if my business got a $50,000 loan next year?” Your pro forma statements for that scenario would show what your income, account balances, and cash flow would look like with a $50,000 loan.

Since pro forma statements deal with potential outcomes, they’re not considered GAAP compliant . This is because GAAP compliant reports must be based on historical information.

Pro forma statements don’t need to meet the strictest accounting standards , but must be clearly marked as “pro forma” and can’t be used for things like filing taxes. Using pro forma statements that aren’t marked as such to misrepresent your business to investors, the IRS, or financial institutions can be penalized by the Securities and Exchange Commission).

However, pro forma statements are still extremely useful. They can help you make a business plan, create a financial forecast, and even get funding from potential investors or lenders.

Different but related: you can send clients pro forma invoices to let them know how much their order would be if they placed it today.

Why create pro forma statements?

Creating pro forma statements for future scenarios can help you:

• Get financed, by showing lenders or investors how you would use their money to sustainably grow your business.
• Plan for the future, by considering best, worst, and most likely case scenarios in detail.
• Anticipate changes that may affect your business as it grows, such as entering a new tax bracket.

For these purposes, pro forma statements are typically created as a part of a financial forecast in financial accounting. Big corporations who have in-house accountants use pro forma statements for financial modeling and forecasting different scenarios.

Pro forma statements vs. budgets

It may be tempting to think of a pro forma statement as the same as a business budget . After all, you create both in anticipation of the future. And both help you plan how you’ll use your money. But budgets and pro forma statements are two distinct financial tools.

Think of it this way: A pro forma statement is a prediction, and a budget is a plan. Your budget may be based on the financial information of your pro forma statements—after all, it makes sense to make plans based on your predictions.

For example: Your income this year is $37,000. According to your pro forma annual income statement, your financial projections show it will be $44,000 next year. So, when you create next year’s budget, you can include that extra $7,000—maybe spending $4,000 over the course of the year to pay down the principal on a loan , while adding $3,000 to savings.

Types of pro forma statement

There are four main types of pro forma statements. While they all fall into the same categories—income statement, balance sheet, and cash flow statement—they differ based on the purpose of the financial forecast.

1. Full-year pro forma projection

This type of pro forma projection takes into account all of your financials for the fiscal year up until the present time, then adds projected outcomes for the remainder of the year. That can help you show investors or partners what business finances could look like by the end of the fiscal year.

2. Financing or investment pro forma projection

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.

3. Historical with acquisition pro forma projection

This type of pro forma projection looks at the past financial statements of your business, plus the past financial statements of a business you want to buy . Then it merges them to show what your financials would have looked like if you made a business combination (or merger) earlier. You can use this scenario as a model of what may happen in the future if you buy the other business and restructure now.

4. Risk analysis pro forma projection

Looking at both best case and worst case scenarios helps you make financial decisions based on challenges you may face in the future. For instance, what happens if your main vendor raises their prices like they did last year? Or how will that proposed transaction of buying new equipment impact you long term? Risk analysis lets you take the future for a test ride, and try out different outcomes.

Pro forma templates

To create a pro forma statement, you can use the same template you’d use for a normal financial statement. You may want to use Bench’s free templates:

• Income statement
• Balance sheet
• Cash flow statement

How to create pro forma statements

The sample pro forma statements below may look different from the statements you create, depending on what your template looks like. But generally, these are the steps you need to take to create them—and the info your pro forma statements should include.

Creating a pro forma income statement

There are five steps to creating a pro forma income statement:

• Set a goal for sales in the period you’re looking at. Let’s say you want to increase your income by $18,000 over the course of one year.
• Set a production schedule that will let you reach your goal, and map it out over the time period you’re covering. In this case, you’ll want to earn an additional $1,500 income every month, for 12 months.
• Plan how you’ll match your production schedule. You could do this by growing your number of sales a fixed amount every month, or gradually increasing the amount of sales you make per month. It’s up to you—trust your experience as a business owner.
• It’s time for the “loss” part of “ Profit and Loss .” Calculate the cost of goods sold for each month in your projection. Then, deduct it from your sales. Deduct any other operating expenses you have, as well.
• Prepare your pro forma income statement using data you’ve compiled in the prior four steps.

One note: your pro forma statements will be much more accurate if your bookkeeping is up to date. That way, when you project future periods, you’re basing it off the reality of your business today.

How Bench can help

To predict the future, you first need to understand the past. 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. We may not be a crystal ball, but we’re the next best thing. Learn more .

Example pro forma income statement:

Rosalia’s Reliable Recordings

Creating a pro forma cash flow 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.

Your projected cash flow can give you a few different insights. If it’s negative, it means you won’t have enough cash on-hand to run your business, according to your current trajectory. You’ll have to make plans to borrow money and pay it off.

On the other hand, if net cash flow is positive, you can plan on having enough extra cash on hand to pay off loans, or save for a big investment.

Example pro forma cash flow statement

Mickie’s Murakami Museum

Creating a pro forma balance sheet

By drawing on info from the income statement and the cash flow statement, you can create pro forma balance sheets. However, you’ll also need previous balance sheets to make this useful—so you can see how your business got from “Balance A” to “Balance B.”

The balance sheet will project changes in your business accounts over time. So you can plan where to move money, when.

Example pro forma balance sheet

Daily Dumpling Deliveries

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. It’s time to create a small business budget .

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Pro Forma Business Plan Template & Financial Statements

Written by Dave Lavinsky

What are Pro Forma Financial statements?

A pro forma business plan is simply another name for a business plan. The term “pro forma” specifically means “based on financial assumptions or projections” which all business plans are. That is, all business plans present a vision of the company’s future using assumptions and projections. “Pro forma” most specifically refers to the financial projections included in your plan, as these are entirely based on future assumptions.

Pro forma financial statements are a type of statement that provides estimates or financial projections for a company. They are often used by businesses to plan for upcoming periods or quarters, assess new opportunities, or track progress against goals.

Why include a Pro Forma Statement in your Business Plan

A pro forma statement is important for your business plan because it gives investors and lenders an idea of your company’s potential financial health. They use your pro forma statements in determining whether to invest in your company or not. Among other things, they consider the likelihood your company will achieve the financial results you forecast, and their expected return on investment (ROI). Your pro forma financial statements also help you to identify and track key financial indicators and metrics over time.

Writing a Pro Forma Business Plan

When writing a pro forma business plan, you will need to include information such as your company’s sales forecasts, expenses, capital expenditure plans, and funding requirements. You should also include a pro forma income statement, balance sheet, and cash flow statement.

Importance of a Pro Forma Income Statement in Business Plans

The pro forma income statement is a crucial financial tool that can be used to assess the viability of your business. It shows a company’s expected revenue and expenses over a period of time and can help you to identify potential problems early on.

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Types of pro forma statements in business plans.

There are several types of pro forma statements, including the income statement, balance sheet, and cash flow statement.

Pro Forma Income Statement

A pro forma income statement is an estimate of your company’s financial performance over a period of time. It shows your expected revenue and expenses and can be used to assess the viability of your business.

Example 5 Year Annual Income Statement

Pro Forma Balance Sheet

A pro forma balance sheet is an estimate of your company’s financial position at a specific point in time. It shows your assets, liabilities, and equity, and can be used to assess your company’s financial health.

Example 5 Year Annual Balance Sheet

Pro Forma Cash Flow Statement

A pro forma cash flow statement is an estimate of how your company’s cash flows over a period of time. It shows your expected cash inflows and outflows and can be used to assess your company’s financial health and ensure you never run out of money.

Example 5 Year Annual Cash Flow Statement

Pro Forma Income Statements for a Business Plan

Pro forma statements for a business plan can take many different forms, but they all typically include information on sales forecasts, expenses, capital expenditure plans, and funding requirements. A pro forma statement that is included in a business plan template should also include financial projections and break-even analysis. 

Cash Flow Statements and Pro Forma Income Statements

The main difference between a cash flow statement and a pro forma income statement is that a cash flow statement shows your actual cash inflows and outflows, while a pro forma income statement shows your estimated future financial performance. For example, if you make a sale today, it will be considered revenue in your income statement. But, if you don’t receive payment for that sale for 90 days, that would be reflected in your cash flow statement. A cash flow statement can help you to manage your finances effectively, while a pro forma income statement can help you to assess the viability of your business.

Pro Forma Statements and Budgets

Pro forma statements and budgets are both financial tools that can be used to track the progress of a business. However, there are key differences between them.

A budget is a plan for how you will use your resources to achieve specific goals. It shows your expected income and expenses and can help you to stay on track financially.

A pro forma statement estimates your company’s future financial performance. It shows your expected revenue and expenses and can be used to assess the viability of your business.

Both pro forma statements and budgets can be useful tools for businesses. However, budgets are more focused on short-term planning , while pro forma statements are more concerned with long-term financial planning.

Business Plan Pro Forma Template and Example

The following is an example of a pro forma business plan:

Executive Summary

In this pro forma business plan, we forecasted our company’s sales, expenses, and capital expenditures over the next three years. We also estimated our funding requirements and outlined our plans for growth. Our pro forma income statement shows that we are expected to have positive net income each year of the forecast period. Our pro forma balance sheet shows that we will have a strong financial position, with increasing equity and minimal debt. Lastly, our pro forma statement predicts healthy cash flow throughout the three-year period. We believe that these results demonstrate the viability of our business and its potential for long-term success.

Our company is XYZ, a leading provider of ABC products and services. We have been in business for 10 years, and our products are sold in over 10 countries. We have a strong track record of financial success, and we are now looking to expand our operations into new markets. In order to do this, we need to raise $5 million in funding.

Business Plan Pro Forma

In this section of the business plan, we will provide pro forma statements for our company’s sales, expenses, capital expenditures, funding requirements, and cash flow. These statements will demonstrate the viability of our business and its potential for long-term success.

Sales Forecast

We forecast that our sales will increase by 20% in each year of the forecast period. This growth will be driven by our expansion into new markets, as well as our continued focus on innovation and customer service.

Expense Forecast

We expect our expenses to increase at a slower rate than our sales, due to our economies of scale. We anticipate that our expenses will increase by 15% in Year 1, 10% in Year 2, and 5% in Year 3.

Capital Expenditure Forecast

We forecast that our capital expenditures will increase in line with our sales, at a rate of 20% per year. We plan to invest heavily in research and development, as well as new product launches.

Funding Requirements

We estimate that we will need to raise $5 million in funding in order to expand our operations into new markets. We plan to use this funding to invest in research and development, as well as to cover the costs of marketing and new product launches.

Cash Flow Forecast

Our pro forma cash flow statement predicts healthy cash flow throughout the three-year period. We expect to have positive cash flow in each year of the forecast period.

This pro forma business plan demonstrates the viability of our company and its potential for long-term success. We have a strong track record of financial success, and we are well-positioned to continue growing our business. Our pro forma statements show that we are expected to generate positive net income, and have a strong financial position and healthy cash flow. We believe that this business plan provides a clear roadmap for our company’s future growth.

A pro forma business plan is an important tool for any business owner. By outlining your sales, expenses, and profit, you can get a clear picture of your company’s financial health and make informed decisions about its future. If you’re not sure where to start, we can help. Our team of experts has created a comprehensive business plan template that will guide you through the process of creating your own pro forma business plan. So what are you waiting for? Get started today and ensure your company’s success tomorrow.

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How a Pro Forma Statement Can Help Your Small Business

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As a business owner, you know the importance of financial planning and forecasting. 

Pro forma financial statements are powerful tools that can help you project future financial performance, assess potential investments, and evaluate the impact of business decisions.

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What does pro forma mean?

Pro forma is a Latin term that means "as a matter of form" or "for the sake of form." 

In business and accounting, it describes financial statements that are based on assumptions or estimates rather than actual historical data. 

Maybe you’re considering taking out a small business loan or merging with a larger company. A pro forma statement projects the impact of those decisions, showing whether your company’s financial health is expected to improve, decline, or remain the same after the event takes place. 

Pro forma statements can omit certain information. For example, a company may exclude one-time expenses, such as restructuring costs or a legal settlement, in order to present a more accurate picture of ongoing operations.

Pro forma statements, budgets, and invoices are typically used for planning, forecasting, or decision-making purposes.

What are pro forma financial statements?

Pro forma financial statements forecast estimated future financial performance rather than relying solely on historical data. 

Typically, these statements include a pro forma income statement, balance sheet , and cash flow statement , all based on hypothetical scenarios and assumptions.

Pro forma statements are usually preliminary or illustrative. They’re meant to give you a glimpse into a company's potential performance rather than strict adherence to the accounting rulebook.

Companies engaging in mergers and acquisitions often prepare pro forma financial statements to offer a picture of their future finances. These statements play a crucial role in negotiations and valuation discussions.

Sharing a pro forma statement also helps you communicate your growth strategy to lenders and investors. 

Critics of pro forma financial statements argue that companies use this freedom to cherry-pick what to include or exclude, molding the numbers to fit a desired narrative.

Pro forma invoices

Pro forma invoices are preliminary invoices sent to customers before the actual transaction takes place. Think of it as a "pre-invoice.” It outlines the products or services being offered, their quantities, prices, and other essential details

Pro forma invoices are the preferred method of doing international business, according to the U.S. International Trade Administration .

These invoices allow buyers to obtain necessary permits or secure financing before goods are shipped out.

Pro forma invoices also assist with customs clearance by providing necessary information to custom officials for the import and export process. It’s like a financial roadmap to ensure a smooth international trade journey.

While regular invoices are binding and indicate an actual sale, pro forma invoices are a prelude to the real deal. Pro forma invoices don't demand payment or initiate financial transactions.

You can find basic templates for creating pro forma invoices online, or you can create your own with a Microsoft Excel spreadsheet.

Many accounting software programs, such as Sage Accounting and FreshBooks , offer features and templates specifically designed for generating pro forma invoices.

With Sage , for example, you can select a pro forma template, input the information, save a copy for your records, and email it directly to the client. There’s also an option to convert it to a full invoice later.

Different billing and invoicing software also offers this feature. Companies like Zoho Books , for example, offer a pro forma template on their website you can download and use for free.

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Pro forma budgets

A pro forma budget is a projected financial plan that outlines anticipated revenue, expenses, and cash flows for a specific period. 

Pro forma budgets can be useful for assessing the financial feasibility of new projects or projecting the impact of cost-cutting measures.

So, how is it different from a traditional budget?

A regular budget focuses on your current financial situation and sets spending limits based on historical data. It helps you manage day-to-day operations. A pro forma budget, on the other hand, takes things a step further by considering future events or changes.

Let’s say you're planning to launch a new product line. With a pro forma budget, you can estimate the revenue and expenses associated with your new venture. You might consider costs like research and development, manufacturing, marketing, and distribution. 

By projecting the financial outcomes of your product launch, you can assess its viability and make adjustments before it goes live. 

Downsides of pro forma statements

While pro forma statements serve a purpose, they can also be misleading. Excluding certain expenses or items can paint an overly optimistic — or even unrealistic — picture of a company's financial health. 

Businesses have the freedom to use their own discretion when calculating pro forma earnings. They can include or exclude certain items based on what they believe truly represents their company's performance or future prospects.

Just remember, like any financial information, it's important to read between the lines and dig into the assumptions behind impressive pro forma numbers. 

The U.S. Securities and Exchange Commission (SEC) requires companies to provide clear explanations on pro forma statements and reconcile pro forma figures to Generally Accepted Accounting Principles (GAAP). 

Using pro forma projections to grossly misrepresent GAAP-based results and mislead investors is considered fraudulent and punishable by law under SEC regulations. 

Rachel Christian is a Certified Educator in Personal Finance and a senior writer at The Penny Hoarder. She focuses on small businesses, retirement, investing and taxes. 

Pro forma frequently asked questions (FAQs)

Businesses use pro forma statements to examine the potential impact of future events based on certain assumptions. 

Pro forma statements allow companies to make informed decisions based on projections, attract investors, and assess the impact of mergers and acquisitions. 

By adjusting for these events, businesses can gauge potential financial impact and make smarter strategic choices.

Pro forma statements are not bound by the same rigorous standards as audited financial statements. As a result, their accuracy heavily depends on the integrity of the company preparing them.

Pro forma statements rely on forward-looking information, which can be incredibly difficult to predict. Economic conditions, market dynamics and other external factors outside a company’s control can throw even the most well-researched pro forma statements off course. 

That’s why you shouldn’t rely solely on pro forma financial statements.

Regular financial statements are prepared in accordance with Generally Accepted Accounting Principles and provide an accurate depiction of a company's historical financial performance. 

Pro forma statements, on the other hand, are more like "what if" scenarios. They’re created to show how a company's financials might look under different situations or to exclude certain non-recurring costs.

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Pro Forma Financial Statements: A Comprehensive Guide for Businesses

• Banking & Finance
• Bookkeeping
• Business Operations
• Starting a Business

Pro forma financial statements play a crucial role in business planning and decision-making processes. These financial reports are based on hypothetical scenarios, enabling business owners and managers to evaluate potential situations that could occur in the future. By utilizing pro forma statements, companies can project the financial impact of various business decisions, such as launching new product lines, expanding to new locations, or restructuring a department.

Understanding pro forma financial statements involves various components, such as income statements, balance sheets, and statements of cash flow. Each of these elements provides a financial snapshot of a company’s hypothetical future performance. By combining these components, it is possible to create a comprehensive financial projection that can help inform strategic decisions and evaluate the potential return on investment.

Key Takeaways

• Pro forma financial statements help businesses make informed decisions by evaluating hypothetical scenarios
• Components of pro forma statements include income statements, balance sheets, and statements of cash flow
• These statements are essential tools for strategic planning and assessing the impact of various business decisions

Understanding Pro Forma Statements

Definition and purpose.

Pro forma financial statements are hypothetical financial reports that project the future financial performance of an entity, based on expected income, expenses, assets, and liabilities. They are created using assumptions about future values and conditions, which serve to forecast financial performance over a period that has not yet occurred. Their primary purpose is to aid in business planning, investment decision making, and to show the potential impact of a proposed transaction on a company’s financial health.

Significance to Investors

Investors find pro forma financial statements valuable in evaluating a business’s potential for growth and profitability. These statements help investors to:

• Identify trends: Comparing the projected numbers with historical trends can reveal areas of opportunity or concern.
• Assess risk: By reviewing pro forma statements, investors can see how the business may be affected under various hypothetical scenarios, such as changes in the economy, market, or industry.
• Make informed decisions: Investors can use pro forma statements to estimate returns on investment or potential value of a company, and to decide whether to buy or sell securities.

Differences Between GAAP and Pro Forma

Financial statements prepared using Generally Accepted Accounting Principles (GAAP) are based on a company’s historical financial performance, whereas pro forma financial statements focus on future projections. The main differences include:

• Basis of calculations : GAAP financials use historical data, while pro forma financials use forward-looking data.
• Accounting standards : GAAP financial statements follow strict accounting standards, whereas pro forma financial statements may deviate from these standards, relying on a company’s assumptions.
• Usage : GAAP statements are used to assess past performance, make comparisons across different periods, and analyze trends; pro forma statements are used for planning, forecasting, and scenario analysis.

It is crucial to note that pro forma financial statements should be used in conjunction with GAAP-compliant financials to gain a comprehensive view of a company’s health and potential growth.

Components of Pro Forma Financial Statements

Pro forma financial statements are essential tools for businesses to plan and project their future financial performance. These statements are based on assumptions and estimates, helping companies understand the impact of various scenarios on their financial position. The three primary components of pro forma financial statements are the Pro Forma Income Statement, Pro Forma Balance Sheet, and Pro Forma Cash Flow Statement.

Pro Forma Income Statement

The Pro Forma Income Statement, also known as the projected income statement, provides an estimate of the company’s future revenues and expenses. This statement helps businesses plan for growth, identify potential risks, and make informed decisions based on expected profitability. The main components of a pro forma income statement include:

• Revenue : The projected sales generated by the company during a specific period.
• Cost of Goods Sold : The estimated cost of producing or purchasing the products sold.
• Gross Profit : The difference between revenue and cost of goods sold.
• Operating Expenses : The anticipated expenses associated with running the business, including salaries, rent, and marketing.
• Net Income : The estimated profit or loss, calculated by subtracting operating expenses from gross profit.

Pro Forma Balance Sheet

The Pro Forma Balance Sheet provides an overview of the company’s projected assets, liabilities, and equity. This statement helps businesses understand their anticipated financial position and evaluate their solvency and liquidity. The main components of a pro forma balance sheet include:

• Assets : The resources a company expects to own or control, such as cash, accounts receivable, inventory, and fixed assets.
• Liabilities : The obligations a company anticipates incurring, such as accounts payable, loans, and taxes payable.
• Equity : The residual interest in the company’s assets, representing the difference between assets and liabilities. This includes retained earnings and contributed capital.

Pro Forma Cash Flow Statement

The Pro Forma Cash Flow Statement offers insight into the company’s anticipated cash inflows and outflows, enabling businesses to plan and manage their liquidity. This statement presents an estimation of cash flows from operating, investing, and financing activities. The main components of a pro forma cash flow statement include:

• Operating Activities : The cash flows generated from a company’s core business operations, such as sales and expenses.
• Investing Activities : The cash flows associated with purchases and sales of assets, such as property, equipment, or investments.
• Financing Activities : The cash flows related to borrowing, repaying loans, issuing stock, or paying dividends.

By understanding and utilizing pro forma financial statements, companies can make more informed decisions, develop strategies, and improve their overall financial planning and management.

Creating Pro Forma Statements

Forecasting and assumptions.

When creating pro forma financial statements, the first step is to forecast future revenues, expenses, and other financial data based on a company’s past performance and experience. It is important to make reasonable and educated assumptions to provide an accurate projection of the company’s future financial performance. Some common assumptions used when creating pro forma statements include:

• Expected growth rates
• Changes in market conditions
• Alterations in the company’s strategy or operations
• Expected changes in costs or pricing

Preparing Hypothetical Scenarios

In addition to using historical data and assumptions, pro forma financial statements can incorporate hypothetical scenarios. These scenarios provide a range of possible financial outcomes based on various “what-if” situations. For example, consider a software company that plans to launch a new product in six months. The company can create multiple pro forma statements based on different launch scenarios:

• Scenario 1 : The software product has a successful launch, generating significant sales and revenue.
• Scenario 2 : The software product has a moderate launch, with sales and revenue matching current market conditions.
• Scenario 3 : The software product experiences a weak launch, with sales and revenue falling below market expectations.

Creating a variety of hypothetical scenarios can help gain insight into the potential financial impacts of different decisions, risks, and opportunities.

Projecting Future Performance

Once you have established a solid foundation of assumptions and hypothetical scenarios, you can begin projecting future performance using the pro forma financial statements. This process involves utilizing the following statements:

• Pro Forma Income Statement : Estimates future revenues, expenses, and net income.
• Pro Forma Balance Sheet : Reflects the company’s projected financial position, including assets, liabilities, and equity.
• Pro Forma Cash Flow Statement : Showcases expected cash inflows and outflows, helping a company plan for liquidity needs.

The information gathered from each of these statements can help a company make business decisions, secure funding, and drive strategic planning. In summary, pro forma financial statements serve as a valuable tool for forecasting, preparing hypothetical scenarios, and projecting future performance to ensure a company’s long-term financial success.

Analyzing Pro Forma Statements

Financial ratios and metrics.

When analyzing pro forma financial statements , it is essential to use various financial ratios and metrics to evaluate a company’s performance adequately. These ratios can provide valuable insights into the company’s financial health. Key ratios include:

• Liquidity ratios , such as the current ratio and quick ratio, help assess the company’s ability to meet short-term obligations.
• Solvency ratios , such as the debt-to-equity ratio, evaluate the company’s long-term financial stability and its ability to meet long-term debts.
• Profitability ratios , including the gross margin and return on equity (ROE), gauge the company’s earnings relative to its investments and equity.
• Efficiency ratios , like inventory turnover and the accounts receivable turnover, reveal the effectiveness of the company’s assets management.

These ratios, derived from balance sheets and income statements, can be compared to industry benchmarks to understand how the business is performing against competitors.

Evaluating Business Potential

To gain a clear understanding of a company’s potential for future growth, pro forma earnings must be examined in conjunction with the anticipated financial impact of various business decisions. This analysis enables investors and management to:

• Assess the potential profitability of new projects or investment opportunities.
• Estimate the effect of price changes for products or services.
• Evaluate the implications of business expansions—that may involve mergers, acquisitions, or entry into new markets.
• Gauge the potential impact of changes in cost structures, such as modifications in labor costs.

Using tools like forecasting and scenario planning, decision-makers can estimate the organization’s future financial position and determine actionable strategies to optimize performance.

Risk Analysis

An important aspect of analyzing pro forma statements is identifying potential risks that might affect the company’s financial performance. Risk analysis involves evaluating factors that could negatively impact revenue, increase costs, or alter the overall business dynamics. These factors include:

• Market risks: Changes in consumer preferences, increased competition, or market saturation.
• Operational risks: Disruptions in the supply chain, inefficient production processes, or employee turnover.
• Financial risks: Interest rate fluctuations, exchange rate volatility, or changes in credit terms.

A comprehensive risk analysis enables management to make well-informed business decisions and devise contingency plans to minimize the company’s exposure. This, in turn, helps safeguard the organization’s bottom line and ensure a robust financial standing in the long run.

Strategic Use of Pro Forma Projections

Pro forma financial statements are used by business owners and companies for various strategic purposes. These include business planning and budgeting, funding and investment attraction, and mergers and acquisitions.

Business Planning and Budgeting

Companies use pro forma projections to create a detailed budget, forecasting revenues, expenses, and cash flow, which usually span over three to five years. This provides insights into the financial health and growth potential of the business. It helps companies to:

• Make data-driven decisions
• Identify areas for cost savings
• Determine feasible growth strategies
• Allocate resources efficiently

By leveraging pro forma projections, businesses can test hypothetical scenarios and make informed decisions, effectively planning and structuring their financial activities.

Funding and Investment Attraction

Pro forma financial statements are critical in attracting funding and investments for businesses. These projections provide potential investors with a clear understanding of the business’s:

• Future growth potential
• Risk management strategies
• Financial stability

Investment pro forma projections showcase the company’s ability to generate returns on investments, giving investors the confidence to commit their capital. Business owners can tailor these projections to highlight their business’s unique strengths, ultimately appealing to a broad range of potential investors.

Mergers and Acquisitions

In mergers and acquisitions, pro forma financial statements play an important role in revealing the financial impact of a potential transaction. Companies create historical with acquisition pro forma projections that showcase combined financial position of both organizations. This helps in assessing:

• Expected synergies
• Post-acquisition financial performance
• Integration costs

By identifying these financial outcomes, companies can better evaluate the potential benefits and risks associated with mergers and acquisitions, ensuring that the decision to pursue the transaction is well-informed and in line with their strategic goals.

Real-World Application of Pro Forma

Public reporting and the sec.

Pro forma financial statements often play a significant role in public reporting, especially when dealing with the Securities and Exchange Commission (SEC). Companies may use pro forma statements to present their financial results, adjusted for specific events such as acquisitions or divestitures. This provides stakeholders with a clearer understanding of the company’s financial position and helps them make informed decisions.

Key aspects of pro forma financial statements in public reporting:

• Financial forecast based on hypothetical scenarios
• Used for decision-making by investors, creditors, and other stakeholders
• Adjustments for specified events, such as acquisitions

Case Studies of Successful Use Cases

1. Business Expansion:

A company plans to expand its operations by opening a new manufacturing facility. They prepare pro forma financial statements to estimate the impact on future revenue, expenses, and profitability, considering various factors such as initial investment, operating costs, and expected sales. This helps them align their growth strategy and make informed decisions on whether or not to proceed with the expansion.

2. Mergers and Acquisitions:

A company is considering acquiring a smaller competitor. They create pro forma statements combining their own historical financial information with that of the acquisition target. This enables them to better understand the combined entity’s future financial performance and potential synergetic effects.

3. Restructuring:

A company facing financial challenges decides to restructure its operations to improve efficiency. They use pro forma financial statements to analyze different restructuring scenarios, such as cost reduction initiatives, refinancing options, or divestitures. This assists them in evaluating the long-term viability and profitability of their restructuring plan.

Learning from Pro Forma Mistakes

While pro forma statements can provide valuable insights, they can also be subject to misuse or misinterpretation. Fraudulent activities may involve manipulating pro forma results to present a rosier financial picture than reality, potentially misleading investors and other stakeholders.

To avoid such pitfalls and maintain a neutral and clear stance, companies should:

• Clearly disclose the basis of any adjustments or assumptions made
• Ensure the use of consistent methodologies across multiple scenarios
• Conduct thorough sensitivity analyses, incorporating a range of possible outcomes
• Seek guidance from accounting or financial experts, when necessary

By understanding the real-world application of pro forma financial statements and learning from past mistakes, businesses can use these tools effectively to drive informed decision-making and achieve better outcomes.

Limitations and Criticisms of Pro Forma

Potential for misrepresentation.

Pro forma financial statements may present an optimistic picture of a company’s financial health, intentionally or unintentionally, that differs from the reality per Generally Accepted Accounting Principles (GAAP). The adjusted nature of pro forma statements allows management to exclude certain items that they consider non-recurring or extraordinary. This level of discretion opens the door for worst-case scenarios , where pro forma statements might be utilized to paint an overly favorable picture of the company’s performance, potentially veiling fraudulent activities or significant financial issues.

A relevant example of this issue can be observed in cases when companies release pro forma earnings and provide little or no reconciling information, making comparisons with audited GAAP financial statements difficult. Thus, it is essential for decision-makers, such as investors and analysts, to be aware of the potential for misrepresentation in pro forma disclosures and to remain vigilant in their research and due diligence.

Understanding Limitations in Decision Making

While pro forma statements provide valuable insights for companies’ internal management, their usefulness is limited for external decision-making by investors or other stakeholders. These statements often focus on estimates and projections, rather than actual financial data, which can result in an unclear picture of a company’s performance. Furthermore, pro forma statements might not take into account the full range of worst-case scenarios , increasing the risk inherent in making decisions based on these projections.

In order to navigate the limitations of pro forma statements, it is crucial for decision-makers to:

• Understand the basis : Scrutinize the methods used to create pro forma statements, such as non-recurring items excluded or other adjustments made by management.
• Compare with GAAP : Cross-check the pro forma disclosures with audited financial statements, ensuring a more comprehensive and accurate understanding of the company’s financial health.
• Evaluate risks : Assess the likelihood and potential impact of worst-case scenarios not captured by the pro forma statements, incorporating this knowledge into the decision-making process.

Despite their limitations, pro forma financial statements have a place in financial planning and forecasting. However, recognizing their limitations and staying cautious in the decision-making process is key to fully leverage their value while avoiding potential pitfalls.

Legal and Ethical Considerations

Gaap compliance.

Pro forma financial statements should adhere to Generally Accepted Accounting Principles (GAAP) in order to provide accurate and reliable information to investors and other stakeholders. While pro forma statements are used to illustrate the potential impact of a significant transaction on historical financial data, they must still adhere to GAAP requirements, which are designed to ensure consistency and comparability across different financial reports.

For example, when preparing pro forma financial statements, the following GAAP principles should be considered:

• Revenue Recognition : Ensure that revenue is recognized in accordance with GAAP standards, which typically means recognizing revenue when it is earned and realizable.
• Consistency : Apply accounting policies and methods consistently across all financial reports, including pro forma statements, to ensure comparability between different periods and scenarios.
• Conservatism : Exercise caution in making assumptions and estimates when preparing pro forma statements, to avoid overstating potential revenues or understating potential costs.

It is also important to keep in mind that the SEC (Securities and Exchange Commission) requires companies to provide a thorough and compliant pro forma financial information when significant business combinations or real estate transactions occur.

Addressing Fraudulent Pro Forma Practices

As with all financial reports, there is a risk that pro forma financial information could be used for fraudulent purposes. To mitigate this risk, companies should implement certain policies and procedures to ensure the accuracy and integrity of their pro forma statements:

• Internal Controls : Implement robust internal controls over the financial reporting process, including controls related to the preparation of pro forma statements. This may involve segregating duties between those who generate the data for the pro forma statements and those responsible for reviewing them.
• Documentation : Maintain detailed records supporting the assumptions and estimates used in the preparation of pro forma statements. This documentation should be readily available for review by auditors or regulatory authorities when necessary.
• Transparency : Clearly disclose the basis for any adjustments made in pro forma statements, such as one-time charges or non-recurring items. This includes providing a detailed reconciliation between historical financial statements and the pro forma information.
• Oversight : Establish a process for independent review and approval of pro forma financial information by individuals with appropriate expertise, such as an audit committee or external auditor.

In summary, ensuring legal and ethical compliance in pro forma financial statements is crucial to maintain investor confidence and uphold the integrity of financial reports. By adhering to GAAP requirements and implementing safeguards against potential fraudulent practices, companies can produce accurate and reliable pro forma information that effectively illustrates the potential impact of significant transactions on their financial position and results of operations.

Frequently Asked Questions

What is the purpose of pro forma financial statements in assessing a company’s financial health.

Pro forma financial statements provide a hypothetical look at how a company would perform based on a set of credible assumptions about one or more transactions it is contemplating. This enables businesses to evaluate the potential impact of new product launches, expansions, or other strategic decisions, making them essential tools for planning and decision-making.

How do pro forma and traditional profit and loss statements differ?

Traditional profit and loss statements are based on actual financial results, providing an accurate representation of a company’s past performance. Pro forma statements, on the other hand, are based on hypothetical scenarios, such as the impact of a specific business decision or a future event. In essence, pro forma statements are projections, while traditional statements are historical records.

What distinguishes pro forma financial statements from prospective financial statements?

Pro forma financial statements are projections that consider hypothetical situations, such as a proposed transaction or a new product launch. Prospective financial statements, on the other hand, provide a forecast of a company’s future financial position based on current business conditions and expected trends. While both types of statements involve predictions, pro forma statements focus on specific scenarios, whereas prospective statements provide a broader outlook on the company’s potential performance.

Are there specific instances where pro forma financial statements should not be utilized?

Pro forma financial statements are most useful when analyzing potential business decisions or anticipating the impact of future events. However, they should not be used as a substitute for traditional financial statements when assessing a company’s overall financial health or stability. Additionally, pro forma statements can be misleading if based on unrealistic or overly optimistic assumptions, and users need to scrutinize their underlying premises carefully.

Is adherence to GAAP required for pro forma financial statements?

While pro forma financial statements are not subject to the same strict adherence to Generally Accepted Accounting Principles (GAAP) as traditional financial statements, it is essential to maintain transparency and consistency in the presentation and preparation of these projections. Misleading or inaccurate pro forma statements can result in a loss of credibility and trust with stakeholders, making it crucial to approach them with integrity and objectivity.

How do pro forma financials assist in cash flow forecasting and management?

Pro forma financial statements, including cash flow statements, provide insights into a company’s anticipated cash inflows and outflows based on specific business scenarios. This allows management to anticipate potential liquidity issues, evaluate financing options, and make informed decisions regarding cash flow management. In essence, pro forma cash flow statements contribute to strategic planning and help minimize financial risks.

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Mastering Pro Forma Financial Statements: The Three You Need

By Andy Marker | November 26, 2018

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Using pro forma templates can save you valuable time when creating your own pro forma income statements. However, like any template, you need to adjust it to suit your needs.

In this guide, you will learn everything you need to know about pro forma financial statements: what they are, how they’re regulated, how they work with financial modeling, how to create them, and the problems with pro forma projections, statements, and sheets. We’ll show you what variables link the three sheets, along with equations, examples, and a sampling of free, downloadable pro forma templates.

What Are Pro Forma Financial Statements?

Pro forma financial statements present the complete future economic projection of a company or person. Often used to back up a lending or investment proposal, they are issued in a standardized format that includes balance sheets , income statements, and statements of cash flow. “Pro forma” literally means “as a matter of form.” In finance, this matter of form forecasts the future based on the present, using hypothetical budgeting. Pro forma data estimates are built in to show the company’s profits if certain, one-time items are taken out. Anything the company sees as a one-time only expense — or that does not show the company’s representative value — is removed. Instead of tracking the past exactly, such as would be reported in historical income statements, pro forma statements are used to guide big financial decisions, such as the following:

Debt Refinancing : How the short term is affected by refinance options.

One-Time Large Purchases : Purchases such as land or services, and how they affect the budget.

Company Mergers or Acquisitions : Complete as a part of due diligence to assess future business operating prospects and valuation. In startups, this is often a way to find venture capital.

Leases : How big leases, such as buildings or vehicles, will affect the budget with new accounting standards.

You can also use pro forma statements to do the following:

Develop various sales and budget projections.

Assemble results in profit/loss projections.

Translate data into cash flow projections.

Identify the company assumptions about their financial and operating characteristics.

Compare balance sheets.

Perform financial ratio analysis.

Make decisions about marketing, production, research, development, and projects.

Show the financial picture of a company sans a specific program or department may be floundering.

Show a more accurate picture of the company’s finance, as compared to GAAP or IFRS accounting frameworks.

Act as a benchmark.

Motivate your staff.

Used to show company results to investors, pro forma financial statements are often combined with generally accepted accounting principles (GAAP) adjusted statements. Pro forma financial statements are not computed using GAAP and are often called non-GAAP. GAAP-adjusted statements are uniform financial statements guided by rules of the Financial Accounting Standard Board (FASB). 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.

Pro forma analyses are meant to paint a better picture of what is happening with the company, irrespective of one-time events, but considering the specific industry’s standards. In some respects, this type of analysis is a more accurate depiction of the company’s financial health and outlook. Further, organizations may want to develop their pro forma financial statements while they are doing an annual review of their business plan.

Pro Forma Financial Statements and Regulation

The Securities and Exchange Commission (SEC), the United States’ regulator of its stock market, requires pro forma statements with any filing, registration, or proxy statement. They have articles governing the preparation of pro forma financial statements for public companies. These are Regulation S-X Article 11 , and Regulation S-X 8-05 for smaller companies from 17 CFR 210. According to the SEC, pro forma financial statements will be prepared for public companies when something happens that the investors should know, such as in the case of an acquisition, jettison of a business, real estate transactions, roll-ups, spin-offs, changes in accounting principles, changes in accounting estimates, or corrections of previously made errors. Additionally, the SEC may require that pro forma financial statements be submitted when a company is filing for an initial public offering (IPO). 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. The pro forma financial statements, including pro forma earnings per share calculated, must be submitted. Finally, if substantial changes to the firm’s capitalization (the sum of their stock, debt, and retained earnings) are assumed to change substantially after the offering’s close date, pro forma documents must reflect that.  

A financial forecast may be used in lieu of pro forma financial statements. According to the SEC, this does not take the place of the pro forma balance sheet, but the pro forma income statement may be withheld. The difference is that the financial forecast details the company’s expected results of operations as a single-point estimate or a range. 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.

Not only does the SEC regulate pro forma statements, but the FASB and the AICPA provide directives, especially when there are major changes in the business structure. To evaluate a new or proposed business structure in pro forma documents, these agencies say that the statements must conform with those of the predecessor business. For businesses that are going public and have to transform into a corporation, the predecessor business may not contain items relevant to a corporation, so the following adjustments must be made:

State the owners’ salaries as officers’ salaries.

Recalculate the federal taxes of the predecessor business as though it were a corporation.

Include corporate state franchise taxes.

Add the partner capital balance to the contributed capital instead of to retained earnings through pooling of interests.

Consider making pro forma provision for taxes that would have been paid if the company was a corporation in the past.        

For businesses that previously acted as a partnership or sole proprietorship that are being acquired into a corporation, the statements must reflect that of the acquiring business. This includes that business’ net sales, cost of sales, gross profit on sales, expenses, other income and deductions, and income before taxes.

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. If possible, show a five year projection of the businesses together. There’s no need to include overhead costs. For the effects of the business combination, only show the current and immediately preceding periods.

Financial Modeling Based on Pro Forma Projections

Since pro forma financial statements and financial projections are quite similar, they may be considered synonymous. However, financial projections can be built from nothing for a startup company, using specific industry-specific assumptions. By contrast, pro forma financial statements are based on current financial statements and change based on events and assumptions. In other words, pro forma financial statements start from real financial data.

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.

Industries That Use Pro Forma

Industries that use pro forma as a concept, whether for financial statements or not, include the following:

Accounting : Pro forma financial statements are compiled for other companies to show the health or true picture of an organization when the GAAP statements are insufficient. Companies are cautioned against using pro forma to obscure GAAP statements.

Business : There are many uses in business for pro forma financial statements. Anytime a transaction is scheduled, such as a merger, acquisition, capital investment, or change in capital structure, pro forma is used as a projection. The pro forma shows the projected cash flow, net revenues, or taxes expected. The business plan will include pro forma financial statements that show the effect of the proposed change, project, or new business. Some banks require pro forma statements to verify cash flow prior to issuing a line of credit.

International Trade : When used in international trade, pro forma invoices are a declaration to customs authorities about the details of the transaction. A pro forma invoice is a precursory bill of sale for buyers that is sent before the delivery of goods or services. The statement is a binding agreement, not just a quote, although the terms may be subject to change. The sale price is often precise and includes commissions, fees, taxes, and shipping costs, and benefits the buyer, so that they are not exposed to major changes during the final transaction. The invoice is not a demand for payment or a bill. In the U.S., a commercial invoice must follow a pro forma invoice for customers within 120 days. Sometimes the use of these pro forma invoices is referred to as “on a pro forma basis.”

Use this Excel pro forma invoice template to create your own pro forma invoices.

Download Pro Forma Invoice Template

Excel | Smartsheet

Law : In legal terms, pro forma means something that satisfies minimum requirements. Pro forma court rulings are made as formalities to facilitate the legal process.

Engineering : Pro forma drawings and templates are used to make agreements with customers and to project the financial basis of projects

Government : In Commonwealth systems, pro forma bills are first drafts of legislation that go through the reading stage. They are symbolic of the parliament’s right to discuss matters aside from those mandated by the head of state. They do not go further than the first reading. Pro forma bills are found in the United Kingdom, Canada, and Australia. In the United States, pro forma sessions are brief meetings of the Senate or House of Representatives. No votes are taken, and no legislative business is generally conducted during a pro forma session. Often, these sessions are held to ensure that both chambers of Congress uphold their requirement to meet every three days during a congressional session. Another reason these may be held is to ensure that the president does not make any recess appointments.

Problems with Pro Forma Analysis

Even though pro forma statements are meant to show a more accurate picture of the business’ profitability, there are many ways to manipulate the documents to give a more favorable representation, as there are no universal guidelines for their compilation. The following details are often left out of the pro forma:

Depreciation

Amortization

Restructuring and merger costs

Interest and taxes

Stock-based employee pay

Losses at affiliates

One-time expenses

Many of the items listed above are part of the GAAP, but not included in pro forma reporting, making it rife for possible deception. This discrepancy is part of the reason the distinction between pro forma and GAAP financial statements is important. Sometimes, in pro forma documents, unsold inventory is even excluded. Not all these things should be left off, but the decisions of what is left off should be well thought out and explained to potential investors, so they have a clear indication of what they are viewing. Knowing how the pro forma documents are compiled and what is left out is also critical when comparing different pro forma statements. Understanding this methodology and the decisions behind it will enable accurate comparisons and information to investors.

Be advised that issuing pro forma financial statements to the public can be problematic, especially since the pro forma statements and the GAAP statements can vary so widely.  Investors should be cautious when evaluating these types of statements because they present a considerably more favorable picture of the business.

Documents in Pro Forma Financial Statements

There are three main documents in pro forma financial statements: balance sheets, income statements, and statements of cash flow. Of the four main financial statements, only the statement of changes in equity is not used in pro forma. Further, the other three main financial statements are amended to project for the specific scenario, making them pro forma.

For publicly-held companies, the SEC requires an introductory paragraph showing the proposed transactions, the company, the period covered, and what the pro forma information describes. The SEC also requires the pro forma balance sheet, pro forma income statement(s), and explanatory notes that provide adjustment justifications and pertinent detail. The statement of cash flow is not required. The pro forma financial information should be presented in columns and show the condensed historical amounts, the pro forma adjustments, and the pro forma amounts. GAAP-conforming financial statements must be included with pro forma submissions.

Pro Forma Income Statement

Pro forma income statements , also called pro forma profit and loss (pro forma P&L), are projections based on your past income statements. Regular income statements, sometimes called statement of financial performance , are exacting, in that they reflect the exact income figures your company had in past years. The pro forma income statements considers past data, but its projections reflect the addition or subtraction of events or things. These statements are vulnerable to inaccuracies and changes.

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. According to the SEC, when required for public companies, pro forma income statements are required for the fiscal year, but not for interim periods. However, for all regular income statements presented in a filing, there must also be a pro forma statement. Use this pro forma income statement template to create your own. This form may also be used for corporate retail or wholesale companies.

‌ Download Pro Forma Income Statement Template

Pro Forma Balance Sheet

A pro forma balance sheet is a comparison of a business’ assets and liabilities. It provides a snapshot in time of the company’s finances. The pro forma part of the balance sheet is a projection that looks ahead, assuming certain things will occur. Pro forma balance sheets are difficult to compile, but banks generally ask for them and they are important for showing your potential financial picture. 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. Use the balance sheet template below to create your own balance sheet. This pro forma balance sheet can also be used for corporate retail or wholesale businesses.

‌ Download Pro Forma Balance Sheet

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.

Often, the difference between a past balance sheet and a pro forma balance sheet is that the pro forma balance sheet reports additional periods, sometimes even interim figures. Public companies that prefer to use a condensed combined balance sheet can use this template to create their own condensed balance sheet. A normal balance sheet covers two years, but it is reasonable for a pro forma balance sheet to cover four years of operations.

Download Public Company Pro Forma Balance Sheet Template

Pro Forma Statements of Cash Flow

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. 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.  

There are several methods to prepare a pro forma cash flow document, relative to the forecasting periods:

Short Term : A cash flow statement that represents a period of weeks, based on outstanding invoices and cash payments for existing accounts payable. This is considered the most accurate forecast.

Medium Term : Estimate the revenue from things that have not been billed yet by using the order backlog and the cash receipts for the next few months. The expenses from this time are also translated into cash payments.

Long Term : Budgeted revenue and expenses are translated to payments, costs, and cash receipts. This is the least accurate projection.

In the annual averages, the figures should not vary significantly. However, the information is affected by outstanding estimated days of sales, or the average number of days that payment has not been made by the customers. 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. Having knowledge of short-term sales sources help as well. 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.

Use the templates found here to create your own cash flow statement forecast. Change the dates and time periods to reflect the projection you need to create. This form may also be used for corporate retail or wholesale companies.

The Introductory Paragraph

If your company must produce an introductory paragraph with its pro forma documents, it should describe the content of your pro forma documents. This means that it should define the transaction, the entities involved, and the periods of time. In this paragraph, you should offer a high-level explanation of the limitations and assumptions the pro forma documents were produced under. For example, if your company recently acquired or dispensed with another company, the assumptions would be the changes in finance expected. The limitations should discuss the challenges of predicting the financial future of a company.

Explanatory Notes

The assumptions behind these adjustments should be explained in the explanatory notes, and the explanatory notes should be referenced in the column the adjustment is made. Explanatory notes are used to add explanations or more information in financial documents that explain the content. (These are put into the explanatory notes, or sometimes listed as references, because they would make the main content too long or awkward to read.)

Pro Forma Earnings Per Share

Pro forma earnings per share (EPS) are calculated by dividing a firm’s net income (and any adjustments) by its weighted shares outstanding, plus any new shares issued due to an acquisition. These are changes to the expected results of operations. This metric determines the financial outcomes of any acquisition or merger and tells the parent company whether the transaction will be accretive (good) or dilutive (bad) to the financial state of the company. Pro forma EPS are calculated in the pro forma income statement, but the figure is also used in the pro forma balance sheet and the pro forma cash flow statement, when necessary. According to the SEC, when the dividends from stock exceed or are planned to exceed the current earnings, the EPS must be calculated. The SEC assumes that that proceeds from any additional shares will be used to fund dividends.

Pro Forma Adjustments

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. These are factually supported by the data from the original financial statements.

It is important to disclose how the adjustments are made on pro forma financial statements. Below is the guidance that the SEC offers about making the adjustments:

Directly Attributable : Each adjustment on the financial statements must precisely correlate to the transaction or event from the original financial statements, and then describe how it is changed.

Continuing Impact on the Registrant : The SEC assumes that any adjustments to the financial statements reflect changes that are not temporary. The goal is to find the stream of earnings from core operations, which can be used to forecast. The adjustments you make for forecasting must impact your company for a minimum of one year. Non-recurring events, such as a one-time, big order for goods should be placed in the pro forma balance sheet as an adjustment to the retained earnings, but would be inappropriate in the pro forma income statement. In other words, you need to point out that the event or purchase is not a trend and therefore, that you cannot forecast based on it.

Factually Supportable : In order to consider adjustments, you must provide existing, factual documentation, such as contracts, letters of intent, or completed transactions. For example, management’s plans to revamp the business section and their estimated costs may not be considered factual support. Letters of intent from vendors for this project may be considered factual evidence.

Getting Auditors Involved

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. 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 auditor is not responsible for whether the statements are accurate and honestly prepared, but rather to ensure that there are no material errors, such as mathematical errors, oversights, inadequate disclosures, and clerical mistakes. The company’s management is responsible for the documents’ overall validity.

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.

The conditions accountants take on include the notation that they may be associated with the statements’ outcomes (so they should consider how the information may be used) and to also submit a compilation report alongside the prepared documents. They are warned that they must have the historical financial information (not just condensed information) alongside their preparation, and that those statements should have been compiled, reviewed, or audited.

To ensure everyone is on the same page, the auditor and the organization’s management should write an understanding of the services being provided. These may include the following:

The objective of pro forma documents is to help management present their information.

The auditor is not responsible if the company made material modifications to the finance information.

Management is ultimately responsible for the pro forma information presentation.

Management is responsible for the internal processes used to garner information.

Management is responsible for any fraud.

Management is responsible for the company to obey the law.

Management is responsible for providing all the pertinent information to the auditor.

Management is responsible to ensure that the preparation rules by AICPA are followed.

A compilation is different from a review or audit of pro forma information. The auditor doing the compilation will not render an opinion.

The compilation will not be relied upon to figure out if there has been fraud, errors, or illegal activities.

If any fraud, material errors, or illegal activities are discovered, they may notify management, but are not required to do so if they are not relevant or if the management has already communicated their awareness.

The auditor must report if they are not independent, and the effect that relationship has on their reporting.

Use this Word template to create your own compilation report, as per the AICPA’s guidance.

‌ Download Compilation Report Template — Word

Before an auditor completes a company’s pro forma preparation, they must review the compilation report and consider any material errors and the appropriateness of the reports. Auditors are required to write a compilation report to protect themselves from liability. This report includes the following:

Title : The title should clearly indicate whether the report is a compilation or if the auditor is independent.

Addressee : As appropriate for the company.

Introductory Paragraph : This must include the company identity, that the pro forma information has been compiled, identify the information, specify the date covered, reference the historical financial documents, state that the auditor does not have an opinion of the finance, as well as note the dates of the historical documents (if applicable), and any departures from those statements.

Statement of Management’s Responsibilities : Management, not the auditor, must state that they are ultimately responsible for the outcomes of the pro forma financial statements.

Statement of Accountant’s Responsibilities : The accountant auditor must state that they will conduct the compilation based upon best practices in their industry.

Statement on Compilation Report Objective : This states that there will be no material modifications made to the pro forma statements.

Paragraph on Pro Forma Documents Limitations and Objectives : This is an explanation of the statements’ intent and why they are projections with limits.

Accountant signature : As appropriate.

Report date : As appropriate.

If the accountant is not independent, the report should reflect this. 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.

How to Create A Pro Forma Income Statement

To start producing your pro forma financial statements, begin with the pro forma income statement. There is a standard approach called “percent of sales forecasting” that gives you the sales or its growth forecast. From there, project the variables with a stable sales relationship using the forecasted sales and the estimated relations. Generically, the income statement includes the following variables:

Sales (or Revenue) - Cost of Goods Sold = Gross Income (or Gross Earnings)

Gross Income (or Gross Sales/Earnings) - Operating Expenses = Operating Income

Operating Income - Depreciation = EBIT

EBIT - Interest Expense = EBT

EBT – Taxes = Net Income (Net Earnings, EAT, Profits)

Whether you start here or elsewhere, sit down with an income statement from the most recent year. Prior to the end of the year, decide how each item on that statement can or should be changed going forward. The final sales and expenses for the current year should be estimated to get ready a pro forma income statement for the following year. Then, do the following:

Calculate pro forma gross profit . You need to consider all the changes that will be coming next year, including new products, promotions, price changes, and new customers. As a simple example, estimate the percent increase you expect for next year’s sales. For example, if you expect a 5% increase in your current sales of $50,000, you calculate $50,000 * 105% = $52,500. Assuming the cost of the item you sell is not increasing, you still need 5% more of the item you sell to meet your goal. Assuming this year’s cost of goods sold (COGS) was $10,000, you will also multiply it by the 105%, so $10,000 * 105% = $10,500. To get the pro forma gross profit: $52,500 - $10,500 = $42,000 (your projected gross profit).

Calculate pro forma total operating expenses . For pro forma expenses, you should consider every line item and whether it can be cut, and then determine the cost projection increase rate for salaries and expenses. If, for example, your salaries and expenses will increase 3% next year, start by adding both the historical salaries and expenses together and then multiplying that sum 103%, or as an example: ($25,000 + $5,000) *103% = $30,900. Your pro forma salaries next year will be $25,750 and your expenses will be $5,150 for a total of $30,900 in pro forma expenses.

Calculate pro forma net income before taxes . Calculate your pro forma profit before taxes by finding the difference between the pro forma gross profit and the pro forma total expenses. Continuing the example: $42,500 - $30,900 = $11,600 (pro forma profit before taxes).

Calculate pro forma taxes . Take your estimated tax rate, such as 20%, and multiply it by the pro forma profit before taxes. This would be $11,600 * 20% = $2,320 is the tax bill.

Calculate pro forma net income after taxe s. In this example, subtract the $2,320 tax bill from the pro forma before taxes profit of $11,600 to give you the pro forma after taxes.  This is $11,600 - $2,320 = $9,280 (pro forma profit after taxes).

There are other stable variables that aren’t influenced by sales on the income statement, including operating expenses, depreciation and amortization, and interest expense. The COGS figure does directly vary with sales; if it does not, something is wrong with your numbers. The COGS forecast is the COGS/Sales ratio from several years multiplied by the sales forecast.

Below is a sample of a filled out pro forma income statement:

‌ Download Pro Forma Income Statement Sample - Excel

How to Create a Pro Forma Balance Sheet

Once your pro forma income statement is completed and you have determined the change in retained earnings, transfer it to the pro forma balance sheet. Expect that the current assets and liabilities will vary directly with the sales variance. For the pro forma balance sheet, the variables include the following:

Accounts receivable

Prepaid taxes

Marketable securities - total current assets

Gross PP&E (property, plant, and equipment)

Accumulated depreciation

Net PP&E

Land - total assets

Liabilities + Owner’s Equity (Assets – all other liabilities) :

Accounts payable

Wages payable

Taxes payable

Current portion – long term debt - total current liabilities

Long-term debt

Preferred stock

Common stock

Retained earnings - total liabilities + equity

Ideally, the pro forma balance sheet is composed in columns. Here are some notes about the pro forma balance sheet variables:

The cash balance is usually calculated using a model and policy decisions.

The changes for Gross PP&E are also made using policy decisions.

The required new financing is often decided upon by the short-term or long-term debt residuals.

The interest expense comes from the interest-bearing debt.

Net income is affected by the interest expense, which also changes retained earnings, which also affects the amount of interest-bearing debt necessary.

How to Create A Pro Forma Statement of Cash Flow

Once you have completed forecasting both your pro forma income statement and your pro forma balance sheet, you can move on to the pro forma statement of cash flow. Start with the beginning balance, or the cash on hand. From there, add total all the cash receipts you have, including the following:

• Customer account collections
• Loan/cash injection
• Interest income
• Other cash receipts

Now, list all the outgoing cash payments. These include adding up all the following, as applicable:

Cost of goods sold (COGS)

Direct product/service costs

Payroll taxes/benefits (direct)

Salaries (direct)

Other variables as they pertain to your business

From here, add up all the operating expenses, including the following:

Account fees

Advertising

Continuing education

Dues/subscriptions

Licenses/permits

Meals/entertainment

Office supplies

Payroll processing

Payroll taxes/benefits (indirect)

Postage/shipping

Professional services

Rental fees

Salaries (indirect)

Subcontractors

Transportation

Web development

Web domain and hosting

Add any additional expenses together, as applicable:

Cash disbursements to owners

Charitable contributions

Interest expense

Income tax expense

Finally, calculate your formulas at the bottom of the sheet to get the sums of the analysis. These include Total Cash Payments, Net Cash Change, and Month Ending Cash Position. To calculate each:

Total Cash Payments = Total COGS + Total Operating Expenses + Total Additional Expenses

Net Cash Change = Cash Receipts – Cash Payments

Month Ending Cash Position = Cash on Hand + Cash Receipts – Cash Payments

Linking the Three Pro Forma Financial Statements

The pro forma income statement and the pro forma balance sheet are intimately linked. The pro forma balance sheet and the pro forma income statement must be forecasted together, not separately. The pro forma income statement displays the effect of a given year, while the pro forma balance sheet shows the situation at both the beginning of and time after that year. Between these two forms, the sheet must balance out. Some of the formulas between the two sheets bridge. These include the following:

Change in retained earnings (from balance sheet) = Net income (from income statement) – Dividends

Interest Expense (from income statement) = Interest Rate (from the balance sheet) * Interest-bearing debt

Some other criteria that cross sheets include the following:

Bank Loans (from balance sheet) goes into the Less interest expense (on the income statement).

Long-term debt (from balance sheet) goes to the Less interest expense (on the income statement).

Change in retained earnings (from income statement) goes to Retained earnings (on balance sheet).

The pro forma income statement equation is:

Change in retained earnings = [Revenue – Operating expenses – Depreciation & Amortization – (interest bearing debt * interest rate)] * (1- Tax rate) – Dividends

The pro forma balance sheet equation is:

Total assets = accounts payable + wages pay + taxes pay + interest bearing debt + common stock + change in retained earnings

For each of the above equations, the interest-bearing debt is the unknown variable.

Finally, you should link each of your three worksheets together. To do so, make sure you do the following:

Add net income from the income statement to the balance sheet and cash flow statement.

Add back depreciation to capital expenditure, which is arrived at on the cash flow statement. This determines property, plant, and equipment on the balance sheet.

The balance sheet and the cash from finalizing are usually affected by financing activities. Interest from financing is shown on the income statement.

The closing cash balance on the balance sheet is the sum of the last period’s closing cash and the current period’s cash from operations, investing, and financing.

Risk Analysis

In creating your pro forma documents, it is advisable to create multiple sets with different scenarios, especially when their purpose is to help make decisions. In this way, your management team (or C-suite) has all the information they need to make informed decisions. If you enable them, they have the best and worst-case scenarios that review the fiscal impact of their decisions and possible ways to mitigate risk. For more information on conducting risk analyses and the free templates to do so, see “ All the Risk Assessment Matrix Templates You Need .” As an example, your team might need to decide between the acquisition of two separate businesses. You could deliver to them two sets of pro forma financial statements, and two risk assessment templates to use to discover their best option.

Download Risk Assessment Matrix Template

Excel | Word | PDF | Smartsheet

Other Types of Pro Forma Financial Statement Templates

There are several other types of templates that could be helpful for a business other than the ones already presented here. There are many different periods that could be covered, as well as the different purposes for the pro forma financial statements.

Historical with Acquisition Pro Forma Template

This projection looks backward (at one or more years) at another company’s financial statements. For the same period(s), it also looks at the business they are acquiring.  Using this combination, the projections shows how they would have done together. This calculation gives you the the net acquisition costs. This type of projection could be shorter term (from the beginning of the current fiscal year). Use this free template to create your own historical with acquisition pro forma documents.

‌ Download Historical with Acquisition Pro Forma Template — Excel

Investment Pro Forma Projection

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. This can be either a fairly simple or complex process. 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.

Additional Terms Related to Pro Forma:

There are several terms to relate to pro forma and the finance concepts around it. These include the following:

Financial or Accounting Ratios : These figures are calculated from financial document figures, and they give a snapshot of a firm’s financial status and enable comparisons to other firms. Below are five frequently used financial ratios:

Debt-to-Equity Ratio : Total liabilities / stockholder’s equity

Current Ratio : Current assets / current liabilities

Quick Ratio : (Current assets – Inventories) / current liabilities

Return on Equity (ROE) Ratio : Net income / shareholder’s equity

Net Profit Margin : Net profit / net sales

• Pro-rata : This term describes a proportionate allocation. Used for dividend payments, insurance premiums, and interest rates, pro rata calculations determine the fractional payment from the whole. For example, in dividend payments each investor is paid according to their number of shares and based on the company’s number of shares outstanding. If the company has 400 shares outstanding at $2 per share, the maximum amount of dividends paid will be $800. The whole is $800. If one shareholder has 201 shares, their dividend will be: (the number of shares / the number of shares outstanding) * the total dividend payment In this case: (201/400) * $800 = $402

Pro bono : This comes from the latin term “pro bono publico,” meaning to work for the public good. It is voluntary work of no cost to the recipient. It often refers to free services from a professional to clients without the financial means to pay for them.

Quid pro quo : This term is a Latin phrase that means “something for something.” It occurs when two participants mutually agree to exchange something for something else. In business, this can take the form of goods, services, or tradable assets. These have also been called “favor for favor” arrangements, and the term can be used to describe unethical behavior such as the exchange of financial backing for political favors.

A quid pro quo contribution : This is a charitable contribution, but with one major difference. In a regular charitable contribution, the donor does not receive anything in return for their donation. In this type of donation, the Internal Revenue Service (IRS) allows the donor to deduct the entirety of their donation that is eligible. In a quid pro quo contribution, the donor receives something for their gift from the charity. The difference between what they have donated and the value of what they receive is the deductible amount. For example, a parent donates $500 at the school charity event to help them start a garden. In return, she receives a $50 gift card to the local grocery store. This is a quid pro quo contribution of which she may only claim $450 of as contributions for the tax year.

Budgeting : The plan created to balance expenses with revenue. The creation of this plan enables people and businesses to know whether they can afford to do the things they need to do and purchase the things they need. Following a budget ensures that people stay out of debt, can save, and pay their bills. Traditional budgets track expenses, payments to eliminate debt, and building an emergency fund as a buffer. Budgets should be compiled and reevaluated regularly.

Interim financial statements : These cover a period of less than one-year, interim financial statements may be issued for quarterly periods or any period. They usually contain the same documents that would be found in an annual statement, such as income statements, balance sheets, and statement of cash follows, and should match by line items. Some interim financial statements may be reviewed, such as in publicly-held companies, but they are not generally audited. Differences between interim and annual financial statements are in the following:

• Disclosures : Some disclosures are not required in interim financial statements, or may be presented as summaries.

Accrual basis : Accrued expenses may be reported within one reporting period or spread over multiple reporting periods. This variance can cause inconsistencies when interim reports are compared and should be defined for reviewers.

Seasonality : Season trends not seen in annual statements may be revealed by interim statements. These may be helpful in seeing seasons of major profit and loss.

Compilation : When financial statements are prepared or compiled by an outside agent, they are referred to as a compilation . The outside agent does not provide auditing or assurance services, just puts the data into financial statements. This type of service is less expensive than review or auditing services.

Notes to the financial statements : Also called the footnotes , and sometimes in the explanatory notes, notes to the financial statements explain how a company arrives at its numbers and any possible irregularities or inconsistencies. These are the details that explain the methodology, what decisions were made, and why to clarify the reports.  

External financial statements : When financial statements are distributed to people or organizations not involved in the company’s operations, they are considered external financial statements . They are often compared to other companies or to previously released external financial statements and follow GAAP. A complete set includes the following:

Income statement

Balance sheet

Statement of cash flows

Statement of comprehensive income

Statement of stockholder equity

Common-size financial statements : Common size financial statements display all the items as percentages of the common base figure instead of as numerical figures, enabling comparisons between different companies or periods. Though most companies do not report in this way as it is not required, this type of reporting decreases bias.

Free Cash Flow Analysis : A free cash flow (FCF) analysis calculates the amount of cash a company can put aside after it has paid its expenses at the end of an accounting period. Free cash flow shows a company’s ability to grow internally give profit back to its shareholders. The formula for assessing free cash flow is: Net cash flow – capital expenditures - dividends OR (Net income + amortization + depreciation + deferred taxes) – capital expenditures - dividends

Variance Analysis :  A variance analysis clarifies the difference between expected and actual results. Analyzing variances can improve operational efficiency. Using budgets as estimates and actual costs, the differences (called variances ) are calculated. The point of variance analysis is to determine if the project or business forecasts were accurate and to adjust based on this knowledge. For more information on cost variance and how to calculate it specifically for projects, see “ Hacking the PMP: Studying Cost Variance .”

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What are Pro Forma Financial Statements: Ultimate Guide

August 29, 2023

Adam Hoeksema

Effective business planning hinges on the ability to foresee and navigate potential financial scenarios. This is where Pro Forma Financial Statements come into play. More than just a reflection of a company's current financial standing, pro forma financial statements illuminate the possible paths a business could tread in the future. By offering a 'what could be' outlook based on specific assumptions, they play a critical role in forecasting the financial outcomes of various business decisions or events.

In this guide, we'll explore the following Pro Forma questions:

What are pro forma financial statements?

What are pro forma financial statements based on, what is the purpose of pro forma statements, how to create pro forma statements.

• What financial statements should be included in a pro forma statement?

Example Pro Forma Statements

Pro forma financial statements are financial reports that depict a company's hypothetical financial performance under certain assumed conditions or events. The term "pro forma" is Latin for "as a matter of form" or "for the sake of form". Unlike standard financial statements which reflect the company's actual historical performance, pro forma statements are based on certain adjustments or hypothetical scenarios. These could range from potential mergers and acquisitions to changes in the company's capital structure or a significant shift in its operations.

Pro forma financial statements are based on various assumptions and scenarios that a company believes might occur in the future or are contingent upon a certain event taking place. These assumptions might include:

• Sales and revenue projections based on market research.
• Anticipated costs and expenses.
• Projected capital expenditures.
• Expected changes in the industry or regulatory environment.
• Proposed business strategies, such as mergers, acquisitions, or expansions.
• Any known future events that may have a significant impact on the company's finances.

The main purpose of pro forma statements is to provide stakeholders, especially management and potential investors, with a forward-looking view of a company’s potential financial position. These statements offer a structured and organized way to assess the potential financial implications of certain business decisions, actions, or events before they occur. By previewing these hypothetical scenarios, a company can better prepare, strategize, and make informed decisions.

What are pro forma financial statements used for?

Pro forma financial statements serve multiple purposes:

Decision Making : Management teams use these statements to assess the potential outcomes of various business strategies and make informed choices.

Investor Relations : Companies can use pro forma statements to communicate potential changes to their investors, ensuring transparency and managing expectations.

Financing Activities: When seeking financing or undergoing mergers and acquisitions, pro forma statements can provide potential lenders or acquirers with a clearer picture of a company’s financial trajectory post-transaction.

Budgeting and Planning: These statements allow businesses to create more accurate budgets, foresee potential financial challenges, and make necessary adjustments in advance.

Risk Assessment: By visualizing different financial scenarios, companies can evaluate potential risks and develop contingency plans.

Creating pro forma statements requires a systematic approach, ensuring accuracy and the incorporation of all relevant assumptions. Here's a step-by-step process:

Step 1: Establish the Objective

Determine why you're creating the pro forma statements. Is it for a potential investment, a change in business operations, a potential merger or acquisition, or securing financing? Your objective will guide your assumptions.

Step 2: Gather Historical Data

• Start with your most recent financial statements. This includes the income statement, balance sheet, and cash flow statement.
• Analyze historical trends in revenues, costs, and other pertinent financial metrics.

Step 3: List Down Assumptions

• Clearly articulate and document assumptions that will be used in the pro forma. Common assumptions include projected sales growth, anticipated changes in costs, expected capital expenditures, or macroeconomic factors.
• Consider internal factors, like changes in operations or strategies, and external factors, like market conditions or regulations.

Step 4: Create the Pro Forma Income Statement

• Project revenues based on your sales forecasts and other assumptions.
• Estimate cost of goods sold (COGS) based on past percentages or any known changes in costs.
• Project operating expenses, considering historic trends and any anticipated changes.
• Estimate other income and expenses, such as interest or taxes.
• Calculate the net profit or loss by subtracting total expenses from total revenues.

Step 5: Develop the Pro Forma Balance Sheet

• Forecast assets:
• Current assets (cash, accounts receivable, inventory)
• Fixed assets (property, equipment)
• Intangible assets (patents, copyrights)
• Forecast liabilities:
• Current liabilities (accounts payable, short-term debts)
• Long-term liabilities (long-term debts, lease obligations)
• Calculate equity, which is derived from assets minus liabilities.

Step 6: Construct the Pro Forma Cash Flow Statement

• Start with the projected net income from the pro forma income statement.
• Adjust for non-cash expenses, like depreciation.
• Consider changes in working capital (accounts receivable, accounts payable, inventory).
• Factor in projected capital expenditures.
• Deduct any planned debt repayments or dividends to project the end-of-period cash balance.

Step 7: Integrate Contingent Events (If Applicable)

If your pro forma is centered around a specific event, such as a potential acquisition, merger, or introduction of a new product line, make sure you incorporate the financial impact of that event in the projections.

Step 8: Review, Adjust, and Validate

• Continuously compare the pro forma statements against actual financial results as they come in.
• Adjust your assumptions and projections if you observe significant variances.
• Validate your assumptions by seeking input from experts, such as industry analysts or financial consultants.

Step 9: Documentation and Presentation

• Clearly document all assumptions and methodologies used in the creation of the pro forma statements.
• Make the statements easily readable, incorporating charts or graphs if necessary.
• Remember, transparency is crucial. Ensure that stakeholders understand that these are projections based on assumptions, not guaranteed outcomes.

Step 10: Continual Updates

Business conditions change, and unforeseen events occur. Regularly update pro forma statements to reflect the latest information and insights.

Resource: Creating a Real Estate Pro Forma: A Step-by-Step Guide

Throughout this section, we will be referencing our pro forma templates. If you're searching for one tailored to your industry and spanning 5 years, we have 100+ different industry templates available for selection. 

Pro Forma Income Statement

This projects revenues and expenses to show the anticipated net profit or loss.

Pro Forma Balance Sheet

‍ This shows what the company's financial position might look like at a future date, given the assumptions made.

Pro Forma Cash Flow Statement

This projects how cash is expected to flow in and out of the business over a future period.

Pro Forma Graphs ‍

Visual tools are often the quickest way to grasp information. Our template offers a P&L at a glance, a monthly sales forecast, and graphs that highlight monthly sales, gross profit, and net income.

In summary, pro forma financial statements serve as forward-looking tools, offering insights into a company's potential financial trajectory across different scenarios. Grounded in well-reasoned assumptions, these statements are invaluable for guiding management, investors, and stakeholders. Crafting such documents, however, can induce undue stress for business owners. This is where our Premium Pro Forma Templates come in. Including our Free Pro Forma Template . 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.

About the Author

Adam is the Co-founder of ProjectionHub which helps entrepreneurs create financial projections for potential investors, lenders and internal business planning. Since 2012, over 50,000 entrepreneurs from around the world have used ProjectionHub to help create financial projections.

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Why You Need Pro Forma Financial Statements

How Pro Forma Financial Statements Can Help Your Business

Sakshi Udavant covers small business finance, entrepreneurship, and startup topics for The Balance. For over a decade, she has been a freelance journalist and marketing writer specializing in covering business, finance, technology. Her work has also been featured in scores of publications and media outlets including Business Insider, Chicago Tribune, The Independent, and Digital Privacy News.

What Are Pro Forma Financial Statements?

Types of pro forma financials, what pro forma financials do for your business, how to prepare pro forma statements, frequently asked questions (faqs).

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Planning and budgeting for business changes play crucial roles in operating a successful company. However, balance sheets, income statements, and similar finance-tracking documents focus only on the history of transactions and the current economic status of your company.

If you want to plan for upcoming economic changes, you need pro forma financial statements to predict future income, identify and control risks, and secure funding for your business.

Here’s a breakdown of what pro forma financials are, why they matter for your business, and the different types of pro forma financials you need to know about.

Key Takeaways

• Pro forma statements can help predict cash flow, analyze risks, and secure funding.
• There are three main types of pro forma statements: income sheet, balance sheet, and cash flow statement.
• You can create pro forma statements by using online sample spreadsheets, templates, or existing financial statements in your accounts process.

Pro forma financial statements help businesses estimate future cash flow and plan for major changes without upfront investment.

“Pro forma financial statements provide a hypothetical look at how a company would perform based on a credible set of assumptions about one or more transactions which a company is contemplating,” said finance coach Tanya Taylor in a video interview with The Balance. “For example, what would a company's financials look like if it merges with another company to create new synergies, or alternatively if it sold one of its lines of business?”

These projections are generally made several years out into the future and are used as inputs into the valuation process, said Robert R. Johnson, professor of finance, Heider College of Business, Creighton University, in a separate email interview with The Balance.

Pro forma statements do not follow the generally accepted accounting principles (GAAP), because reports that comply with GAAP must rely on historical data and not anticipated cash flow .

There are three main types of pro forma statements, each with a different purpose. Taylor explained these as:

• Pro forma income statement : Also known as profit and loss (P&L) statements , these include predictions of upcoming revenues, cost of goods or services, and the company’s net profit .
• Pro forma balance sheet : These include any changes in the assets and liabilities of the business, including cash, receivables, inventories, account payables, and debt.
• Pro forma cash flow statement : These show the cash coming in and going out of the business as a result of the different hypothetical scenarios.

Pro forma statements can significantly benefit businesses by offering data for planning and predicting future economic changes, analyzing risks, securing funding, and making merging/selling decisions.

Here are some ways pro forma financials can benefit your company, no matter which stage of operation you’re at.

Securing Financing for Your Business

Pro forma financials offer businesses ways to make realistic assumptions about future growth rates and costs. According to Johnson, this is useful when you’re seeking outside capital (either debt or equity) to grow. “Potential capital suppliers will carefully examine pro forma financial statements (and the critical assumptions used in creating them) before committing capital to the firm,” Johnson said.

Assessing Potential Mergers

Pro forma statements offer a realistic estimate of what a merger would look like. For instance, “They can help you identify redundancies, and any new addition that needs to be made,” said Taylor. For example, through pro forma statements, you can identify that you may not need two accounting departments and two HR functions in a merger. The statements can also help you predict the economic changes that will come with the merger and how to ensure your business is ready for those.

Analyzing Risks and Planning for the Future

The hypothetical scenarios in pro forma financials can help analysts predict risks early and prepare for them before making any concrete changes.

“A key element of pro forma financials is that they allow analysts to change one or more key variables and see how the financial statements appear if certain variables are more or less optimistic than the base case,” Johnson said.

As an example, he explained that if the base case is that revenue grows by 20% over the next few years, one may want to lower that projected growth rate to, say, 10%, to see how the firm's financials look.

“This is called sensitivity analysis (determining the sensitivity of the firm's performance to different variables) and can help both firm insiders and potential suppliers of capital determine the risks of the firm,” Johnson added.

Using this as a tool, your business can come up with optimistic, realistic, and pessimistic future scenarios for the future of the company.

Creating pro forma statements is easy with dozens of free and paid tools available online.

You can use pro forma sample spreadsheets or work with an existing template in your accounting process. “There’s no need to over-engineer it,” Taylor said. “Start building the pro forma financials using the format of your current financial statements. If new lines are required, or certain lines need to be removed, make that adjustment.”

Another important thing to remember when preparing pro forma statements is to use credible data and not over-rely on hypothetical information, so your estimates are as close to accurate as possible. 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.

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.

Remember pro forma financials are only a tool. These statements are useful for making estimates and analyzing future risks, 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.

Why do banks require pro forma financial statements?

Pro forma financial statements give banks information about your ability to make payments while continuing to run your business. “The statements also provide them with the assurance that you understand the operations of your business and what can cause fluctuations in your earnings,” said Taylor.

What do I use to create a pro forma statement?

Here are some prime examples of tools you can use to create a pro forma statement: 

• Excel spreadsheets
• Sample pro forma spreadsheets
• Pro forma templates
• Existing templates in your accounting process

U.S. Securities and Exchange Commission. “ Cautionary Advice Regarding the Use of 'Pro Forma' Financial Information in Earnings Releases .”

U.S. Securities and Exchange Commission. “ Beginners’ Guide to Financial Statement .”

Pro Forma Financial Statements: Understanding Their Role in Business Planning and Analysis

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Pro Forma Financial Statements Definition

Pro forma financial statements are hypothetical financial reports that project the future financial performance of a company, based on expected income, expenses, assets, and liabilities. They are used for business planning, investment decision making, and to show the potential impact of a proposed transaction on the company’s financial health.

Purpose of Pro Forma Financial Statements

Perspective of business management.

From the angle of business management, pro forma financial statements serve multiple purposes. First, they assist in strategic planning. By providing forward-looking financial data, they aid businesses in setting realistic goals, forecasting possible scenarios, examining the potential impact of different strategies, and planning ongoing operations or new projects.

Second, pro forma statements are tools for risk management. They can help identify potential financial risks involved in future business activities. For example, if the pro forma statement shows a potential cash flow problem in the short-term future, managers can take proactive measures like securing a line of credit or cutting costs.

Third, they are vital for communicating with stakeholders. Pro forma financial statements can be shared with stakeholders like board members, investors, or lenders to inform them about the anticipated future state of the company’s finances. This transparency clarifies expectations and reduces the possibility of misunderstandings.

Perspective of Potential Investors

From an investor’s point of view, pro forma financial statements can serve as a valuable resource for evaluating investment opportunities. They offer a snapshot of the company’s future financial health, providing insight into projected revenues, expenses, and net earnings.

Investors can utilize these statements to make more informed decisions. Pro forma statements offer a basis for comparison between companies or industries. If, for example, a company’s projected profits are significantly higher than those of its peers, it might signify innovation, market dominance, or potentially aggressive accounting.

However, it’s crucial for investors to bear in mind that pro forma financial statements present a hypothetical scenario. They rest on a set of assumptions which may or may not come to pass. As a result, while they’re a helpful tool in decision-making, they should not be the sole basis for investment decisions, and should be paired with thorough due diligence.

Understanding Pro Forma Adjustments

When pro forma adjustments are made, it’s to present a more accurate picture of a company’s financial state by eliminating non-recurring transactions, fixing irregularities in the financial statements and providing a standardized view of the company’s economic status. They are particularly useful in mergers and acquisitions, for making future projections and for correcting irregularities.

To make pro forma adjustments, the first step is to identify and quantify potential irregularities and non-recurring transactions. These could include one-time costs or incomes, such as the sale of assets, expenses or income from litigation, restructuring costs, or asset write-offs. These transactions don’t reflect the company’s ongoing business activities and thus should be excluded for the purpose of conducting a fair analysis.

From an accounting perspective, there are specific guidelines on how these adjustments should be made. The Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS) provide a framework for how financial statements should be prepared. However, since there’s discretion involved in making pro forma adjustments, companies should ensure that their adjustments comply with these standards where possible and are not misleading.

On the business side, management needs to consider the company’s past, present, and projected performances to decide on adjustments. They should assess the company’s operational capabilities and growth prospects, and make adjustments that give a fair representation of its financial health. It’s important to maintain transparency and objectiveness while making these adjustments.

Regarding taxes, the adjustments might affect the tax expense reported on the income statement. If a tax-related transaction is excluded or included during adjustment, it should be reflected on the effective tax rate applied in the pro forma statement.

Consideration should also be made for impact on depreciation, as changes in asset base or disposals might influence the net income after adjustment. Similarly, if the interest expense incurred on existing liabilities is to be removed, the changes should be reflected in the profit before tax.

Lastly, share-based compensations, which are not cash transactions, yet affect the stockholders’ equity, should be considered. They are often excluded from operational expenses for calculating adjusted EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization).

In summary, making pro forma adjustments involves a balance between consistency with accounting standards, objectivity, and relevance from a business perspective. Above all, the ultimate goal is to provide a clear, comprehensive, and useful financial statement for investors, lenders, and analysts.

Interpreting Pro Forma Financial Statements

Interpreting pro forma financial statements successfully requires a solid understanding of accounting principles and financial reporting standards. It also requires keen analytical skills that allow for the comparison of current and past financial data, and the ability to identify potential future trends.

The first step in interpreting pro forma financial statements is to identify the adjustments that have been made to standard financial statements to generate the pro forma versions. These adjustments may include non-recurring items such as gains or losses from the sale of assets, expenses related to natural disasters or other unforeseeable events, or profits and losses from discontinued operations.

To account for these non-recurring items and events, they are often removed from the income statement so that the focus is on income from regular business operations. This adjustment can facilitate comparison of financial performance over time.

Accounting for Non-recurring Items

Non-recurring items or events are not part of a company’s typical business operations and are therefore excluded in pro forma financial statements. For example, let’s assume a company sold a branch of its business, resulting in a large one-time gain. In the company’s pro forma income statement, this gain would be excluded as it’s not expected to recur in future years and is not a reflection of ongoing business performance.

Accounting for non-recurring items can involve adding back expenses or losses that have been deducted on the traditional income statement or deducting gains that have been included. The aim is to provide a financial overview of the company that focuses on operations likely to continue in the future, giving potential investors a clearer picture of predictable income streams.

Attention should be given to the nature of each non-recurring item, as some of them might be strategically significant and their exclusion might misrepresent a company’s true financial position. Therefore, while non-recurring items are typically stripped out in pro forma financial statements, their impact should still be analyzed and deemed irrelevant for future profitability.

Pro Forma vs. GAAP Financial Statements

Let’s delve into the critical comparison between Pro Forma and GAAP Financial Statements.

Differences

Pro Forma and GAAP Financial Statements both serve unique roles in the financial world and operate under different principles.

Most notably, GAAP financial statements are more rigid, adhering to guidelines established by regulatory bodies like the Financial Accounting Standards Board (FASB). As the name suggests, these follow ‘Generally Accepted Accounting Principles,’ which advocate for consistency, accuracy, and transparency. Hence, GAAP statements provide a reliable yet somewhat “constrained” view of a company’s financial status.

On the other hand, Pro Forma financial statements offer more flexibility and creative license. They provide an important ‘what-if’ perspective on a company’s financial status by allowing manipulations and adjustments that wouldn’t be permitted under GAAP. They might exclude one-time charges or unusual events, project potential future transactions, or scenario outcomes. While this flexibility gives Pro Forma statements a unique utility, it opens them to potential manipulation that may misrepresent a company’s financial health.

Purposes Served

GAAP financial statements tend to serve the need for compliance, accuracy and standardization. These are mainly used for official financial reporting, regulatory compliance and to inform investors and creditors about a company’s financial position. As they follow regulated principles, they promote a standardized, apples-to-apples comparison across different companies and industries.

Pro Forma financial statements, by contrast, are primarily used for internal company planning, decision-making and forecasting. For instance, they might be used to project the potential financial impact of a planned merger or acquisition. They also play a significant role externally, by helping investors gain insight into future earning potentials and facilitating comparisons between historical and projected performances.

In summary, both Pro Forma and GAAP financial statements serve critical roles, with GAAP statements providing a regulated and standardized snapshot of a company’s financial position and Pro Forma statements offering a flexible tool for planning and forecasting.

Benefits of Pro Forma Financial Statements

Pro forma financial statements provide a wealth of information that is useful to businesses, investors, and potential buyers, particularly during the process of mergers and acquisitions. To understand why these documents are so beneficial, let’s delve into some of their specific advantages.

Insight Into Future Performance

First and foremost, pro forma financial statements can offer a detailed preview of a company’s expected financial performance. By adjusting certain financial line items, these documents can illustrate how operational changes, market conditions, or strategic decisions may impact the company’s future revenue, expenses, and overall profitability.

Better Decision Making

Given their predictive nature, pro forma financial statements are an essential tool for corporate decision-making. They can guide strategic planning, revealing the potential effects of various operational scenarios on a company’s financial health. Therefore, businesses can use these statements when deciding on investments, restructuring, or any other significant corporate actions.

Tailored Communication

Businesses can use pro forma financial statements to communicate specific narratives to stakeholders. By highlighting certain aspects and excluding non-recurring items, these documents can focus attention on core operating results. This way, businesses can better explain their financial position and strategy to shareholders, analysts, or potential investors.

Enabling Fair Price Negotiation

In the context of mergers and acquisitions, pro forma financial statements can offer crucial insights. Potential buyers can analyze these documents to understand the target company’s projected financial status, which can enable them to negotiate a fair price. At the same time, these documents allow sellers to justify their valuation, ensuring a balanced negotiation process.

Mitigating Risks

Lastly, for investors, pro forma financial statements serve as a risk assessment tool. By previewing potential financial outcomes under different scenarios, investors can make a broad risk assessment before making an investment. This way, they can determine whether the potential returns justify the associated risks.

Criticisms and Controversies around Pro Forma Financial Statements

Misuse for manipulation.

One common criticism of pro forma financial statements is their potential misuse for manipulation. Unlike standard financial statements which are constrained by strict accounting regulations, pro forma financial statements allow for a degree of flexibility. This allows companies the freedom to present financial performance in a particular light, but it also opens the door for unscrupulous individuals to manipulate data and present an inflated or otherwise distorted image of a company’s performance. Such manipulation is often flagged by regulatory bodies, but discovering these misrepresentations can sometimes take time. In the interim, investors and other stakeholders might make decisions based on inaccurate information.

Misinformation and Lack of Transparency

Besides the risk of manipulation, pro forma financial statements can also be a source of misinformation due to their lack of uniform standards. While their adaptability is what makes them appealing, it can also lead to inconsistent and non-comparable data. It’s often challenging for stakeholders like investors to compare companies if they choose to exclude different operating costs.

Additionally, companies could present a misleading financial picture by focusing on positive metrics while downplaying or eliminating negative aspects. This lack of transparency can lead to inefficient decision-making, creating a trust deficit.

Regulatory Concerns

Owing to the potential risks of manipulation and misinformation, pro forma financial statements have been at the center of several regulatory controversies. Critics argue that without stringent regulations, these statements can be used to create artificial growth stories and mask problems with core business operations. In response to these concerns, regulators around the world have worked to establish guidelines for the creation and use of pro forma financial statements, but striking the right balance between flexibility and rigidity remains a contentious issue.

Increasing Skepticism

Finally, the controversies surrounding pro forma financial statements have led to increasing skepticism from investors and market analysts. Many professional investors have grown more cautious in their use of these supplemental statements and more demanding of rigorously audited standard financial statements. As a result, the degree to which businesses can rely on pro forma statements when interacting with investors may be somewhat limited.

In summary, while pro forma financial statements can provide useful insights, users must be aware of their pitfalls, particularly the risk of manipulation and misinformation. Robust understanding and cautious interpretation of these statements is required for accurate economic decision-making.

Pro Forma Financial Statements, CSR and Sustainability

The intersection of pro forma financial statements and CSR is becoming increasingly significant as businesses recognize the growing relevance of sustainability and responsibility in corporate actions. Pro forma statements, offering an in-depth look at hypothetical scenarios based on certain assumed variables, can assist in providing a multi-faceted perspective on how sustainability efforts impact a company’s bottom-line.

Using Pro Forma Statements to Highlight CSR Efforts

One way of integrating pro forma financial statements and CSR is by illuminating the potential impact of CSR initiatives on a company’s financial performance. Pro forma statements could vary variables to model projections under sets of environmental, social, and governance (ESG) conditions. This aids decision-making processes and helps build a compelling narrative about the organization’s commitment to sustainable and responsible business models.

Higher expenses may be expected in initial stages of CSR implementation. Given this, financial projections that show the potential of those costs being offset in the long run could reassure stakeholder apprehension.

Using Pro Forma Statements to Understand Sustainability Trade-offs

Moreover, pro forma financial statements can help businesses understand the trade-offs involved in meeting sustainability goals. They help quantify the potential impact on profitability, enabling companies to weigh the pros and cons of various strategies effectively. Such insights can be invaluable in determining the pace and scale of sustainability initiatives, allowing companies the foresight to balance their immediate financial health with their long-term CSR commitments.

Informing Stakeholders about Financial Implications of CSR Activities

Lastly, pro forma financial statements can play a key role in communicating with stakeholders – including investors, employees, and the broader public – about the financial implications of sustainability strategies. They offer a transparent mechanism for depicting potential changes to operating expenses, revenues, and overall profitability. This can foster broader understanding and buy-in for CSR initiatives, an important aspect in today’s socially-conscious business environment.

In conclusion, the use of pro forma financial statements in CSR and sustainability planning can offer valuable insights and transparency. They exemplify how such commitments are not just beneficial on an ethical level, but can also inform and positively impact a company’s financial standing.

Regulations Governing Pro Forma Financial Statements

Concerning regulatory compliance, the preparation and presentation of pro forma financial statements is principally influenced by the Securities and Exchange Commission (SEC) in the United States and the International Financial Reporting Standards (IFRS) globally.

SEC Regulations

The SEC issued Regulation G and Article 10 of Regulation S-X to govern the use of non-GAAP financial measures, which include pro forma financial statements. These regulations aim to promote transparency, complete information, and to avoid misleading investors.

As per Regulation G, companies using pro forma financial statements must present the most directly comparable GAAP measures alongside and do a reconciliation of the differences. It should not contain misleading or untrue statements and should not omit data to make the pro forma measures seem more significant.

Article 10 of Regulation S-X, on the other hand, deals with the specific presentation requirements applicable when pro forma financial information is included in filings such as registration statements, or proxy statements.

IFRS Guidelines

On the global stage, the preparation and presentation of pro forma financial statements fall under the purview of IFRS. IFRS 3, “Business Combinations,” contains the primary guidance on pro forma information.

According to IFRS 3, pro forma information may be included in the financial statement disclosures relating to a business combination. However, it is optional and not a requirement. If included, the information should give effect to the combination as if it had occurred at the start of the annual reporting period.

To achieve consistency and comparability, IFRS 3 also requires pro forma information to be calculated on the same basis as the historical financial information of the acquirer. This denotes using common accounting policies and adjustments necessary to reflect the effects of the business combination.

These regulatory guidelines ensure both the relevance and credibility of the pro forma financial presentation to the variety of stakeholders who rely on this information for decision-making.

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Pro Forma Financial Statements: What They Are and Why You Need Them

So your business is chugging right along, and you’ve had great financial results for years. You have no problem proving to a potential investor or lender that your company is doing well. But…you’ve got big things in the works. Maybe you’re selling off part of the company, or acquiring another. Now you need an accounting tool that will help you see how the numbers will change with this transition.

But generally accepted accounting principles (known as GAAP) only look at historical financial statements and don’t help you predict the future.

Short of having a crystal ball, pro forma financial statements can help you predict things like net income and gross profit in the future. Using these financial statements, you can plan for the future and lower your risk, as well as attract investors or get approved for financing.

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What are Pro Forma Financial Statements?

Pro forma financial statements essentially forecast the future. Standard accounting statements like the balance sheet look at historical financial information, but pro forma documents look forward to help you predict future income through different types of accounting statements. A pro forma small business statement may include projected revenue, estimated expenses, and cash flow for three to five years.

Types of Pro Forma Statements

• Full-year pro forma projection
• Historical with acquisition pro forma projection
• Financing or investment pro forma projection
• Risk analysis pro forma projection

There’s no single pro forma income statement. In fact, there are several pro forma financial statements, and you may want to use more than one to get a full financial picture of your business.

Full-Year Pro Forma Projection

This pro forma projection includes a business’s year-to-date results as well as forecasted income and expenses for the rest of the year to provide a full year view. This pro forma projection is useful to investors and lenders, who want reassurance that your business is slated for profitability.

Historical with Acquisition Pro Forma Projection

If you plan to acquire another business, this is the right pro forma statement for you. It combines your business’s accounting results with that of the business you want to acquire, subtracting acquisition costs and synergies, and therefore shows a rough sketch of how the acquisition will blend into your balance sheet.

Financing or Investment Pro Forma Projection

If you plan to seek funding from investors or  small business loans , you may be asked for revenue projections. This statement specifically deals with how your company’s results will change if you receive an infusion of capital. You may want to create financial projections for different investment amounts to cover your bases.

Risk Analysis Pro Forma Projection

Whenever you’re engaged in financial decision-making, you need to know best- and worst-case scenarios. That’s where pro forma risk analysis comes in handy. By creating pro forma reports for a variety of scenarios, you can see the expected results of how a decision will have an impact on your bottom line and make your decisions accordingly.

Three Most Important Pro Forma Financial Statements

In addition to the pro forma financial statements listed above, there are others that you will find useful in your company, even if you’re not planning a major change like taking on investments or acquiring another company.

• Pro forma income statements
• Pro forma balance sheets
• Pro forma cash flow statements

Pro Forma Income Statements

Also known as a profit and loss statement or P&L, this accounting document shows sales transactions and expenses, as well as cost of goods sold (COGS)/cost of services sold and projected net income and profit.

Pro Forma Balance Sheets

The pro forma balance sheet looks at a forecast after a change or proposed transaction, like financing, adding a line of credit, a big capital investment, or acquisition. It includes current assets and total liabilities, as well as accounts receivable, cash and cash equivalents, accounts payable, and inventories.

Pro Forma Cash Flow Statements

Another of the pro forma reports you should know about is the cash flow statement. It looks at the likely amount of cash flowing into and out of the business over a future period, based on different scenarios.

Why Create Pro Forma Statements?

So if you’re already using GAAP financial statements and financial reports, why would you go to the trouble of creating pro forma financial information? There are several situations where having a pro forma income statement or other report can come in handy.

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Seeking Financing

Whether you’re applying for an SBA loan or looking to bring investors on, the individuals you want to work with want reassurance that your business is a good investment. Looking back at historical financial statements is helpful, but if you’re planning big changes, the past may not be an accurate portrayal of what the future holds. 

Lenders and investors want reasonable assurance that their investment will not only be paid back, but that they will see a positive return on it. Pro forma financial information can help them assess that likelihood.

Planning for the Future

While we can never know what the future holds, we can make some educated forecasts about what it might look like with pro forma income statements. Looking at a few scenarios ranging from worst case to best, you can see what the impact of these changes might be and use this information to guide your decisions.

Anticipating Changes

If you are considering acquiring another company or pivoting the direction your business is headed, you’ll want to understand how that will impact your income. Creating a pro forma cash flow statement can help you determine how quickly you will become liquid after this transaction, and you can also determine how many more liabilities it will create.

Nav’s Final Word: Pro Forma Financial Statements

Yes, creating pro forma statements requires more work, but it pays off in showing you exactly what your future net income, liabilities, and cash on hand would be under certain circumstances.

Pro forma projections aren’t written in stone. Certainly, conditions will change, and that will impact your balance sheet. But these accounting tools can provide you (and your investors) peace of mind in knowing that a financial move is likely to pay off over time.

To create pro forma financial statements, you can enlist the help of a certified public accountant (CPA) or use a template.

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Frequently Asked Questions About Small Business Pro Forma Statements

What is the difference between an income statement and a pro forma income statement?

The word “pro forma” means “as a matter of form” in Latin. A pro forma income statement is a type of income statement that serves as a financial forecast, using financial modeling based on  past financial reports and your future business plans.

What are two items that are excluded from pro forma income?

Pro forma income statements may not include expenses that aren’t recurring or expenses that aren’t considered normal to the company’s operations. This can include charges for restructuring, write-offs or paydowns for intangible assets, or expenses that the company uses equity to pay with. Because these aren’t part of regular operating income, they don’t factor into the future that your pro forma income statements are projecting.

What are examples of pro forma financial statements?

Common pro forma financial statements include: – Pro forma income statements – Pro forma balance sheets – Pro forma cash flow statements Each of these can be used for the following purposes:  – Full-year pro forma projection – Historical with acquisition pro forma projection – Financing or investment pro forma projection – Risk analysis pro forma projection

Is a pro forma the same as a P&L?

A P&L (or profit and loss statement) is the same as an income statement, but they are not the same as a pro forma financial statement. You can have a pro forma P&L just as you would a pro forma income statement. Business owners use pro forma income statements to make projections on their financial position in the future and help them make better business decisions.

This article was originally written on June 2, 2020 and updated on October 7, 2022.

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Susan Guillory

Susan Guillory is an intuitive business coach and content magic maker. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.

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Pro-Forma Earnings: What They are, How They Work

Investopedia / Dennis Madamba

What Are Pro-Forma Earnings?

Pro-forma earnings most often refer to earnings that exclude certain costs that a company believes result in a distorted picture of its true profitability. Pro-forma earnings are not in compliance with standard GAAP methods and are usually higher than those that comply with GAAP. The term may also refer to projected earnings included as part of an initial public offering or business plan (in Latin pro forma means "for the sake of form").

Understanding Pro-Forma Earnings

Pro-forma earnings in the first sense are sometimes reported by publicly traded companies that want to present a more positive picture of their financial condition to investors. Pro-forma earnings may be either higher or lower than GAAP earnings , but typically they are higher.

Pro-forma earnings may exclude items that don't normally occur as part of normal operations, such as restructuring costs, asset impairments , and obsolete inventories. By excluding these items, the company hopes to present a clearer picture of its normal profitability.

However, some companies have been known to abuse this practice by repeatedly excluding items that should normally be included. Investors should, therefore, exercise caution when using pro-forma earnings figures in their fundamental analysis . Unlike GAAP earnings, pro-forma earnings do not comply with standardized rules or regulations. As a result, earnings that are positive in a pro-forma scenario can become negative once GAAP requirements are applied.

Following GAAP guidelines, a company may, for example, report a net loss for a quarter. But if that loss came as a result of one-time litigation expenses or restructuring, the company may prepare pro-forma statements that show a profit.

U.S. Securities and Exchange Commission. " Cautionary Advice Regarding the Use of 'Pro Forma' Financial Information in Earnings Releases ." Accessed Nov. 16, 2020.

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Telling the future – the power of the pro forma in small business.

As business owners, we have many unique skills and talents. But did you know you also have the ability to tell the future? Okay, so, you’re not likely to predict the next winning lottery numbers. However, you can predict (or project) your company’s financials over the next few years with pro forma. You see, knowing what the future could bring, empowers you to take immediate action that can hasten or prevent certain scenarios from taking place. That’s exactly what pro forma statements can do for your business. Think of them like the Polaroid photo in the film, Back to the Future. Just like Marty McFly, you can use that snapshot (pro forma) to see how the actions taken today will affect the future. In this entry, I want to dig deep into the power and value of pro forma.

Follow Along With The Financially Simple Podcast!

This week on The Financially Simple Podcast:

• (1:48) What is Pro Forma?
• (2:35) Pro Forma calculation
• (5:03) Budget documents
• (5:24) Company income statements
• (6:24) Earnings projections
• (10:53) Secure funding
• (11:51) Inspire confidence in prospective buyers
• (13:38) Assessing M&A and risk analysis

Tapping into the Future of Your Business with Pro Forma

Before we dig in to the heart of the subject, let’s get the academics out of the way. What is pro forma? Put simply, it’s a Latin term meaning, “for the sake of form” or “as a matter of form.” Investopedia describes it as “A method of calculating financial results using certain projections or presumptions.” However, it’s important to note that they aren’t always calculated using generally accepted accounting principles (GAAP). They could contain adjustments to emphasize important factors of the company’s operating performance. So, how are pro forma statements calculated?

To make your calculations, follow these steps:

• Pro Forma Forecasting . Estimate your total monthly income. You can adjust this for seasonal sales cycles (i.e. higher or lower sales volumes). Remember, it’s best to be conservative with these estimates.
• Estimate expenses based on industry-specific ratios, then multiply your sales total by the percentage of sales for each expense category. This will yield your future net income (NI) .
• Review each line and determine how many transactions you would need to execute to achieve your projected numbers. Repeat this process until the numbers make sense for your business.

Types of Pro Forma Documents

There are several types of Pro Forma documents. Each one can tell a different story and provide unique benefits. These common types can help you get a crystal clear look at your business.

Budget Documents

Budgets aren’t anything new. The principles remain the same regardless of the type of budget you’re creating. Start with a set amount of funds and direct them where to go. It really is as simple as that. However, you can create pro forma budget documents to help you plan for specific projects or departments. The only real difference is that you’ll use some hypothetical scenarios when creating your budget.

While based on some assumptions, pro forma budgets also look at past expenses and revenue to inform your company’s fiscal plans for the year.

Company Income Statements

Company income statements are another area where pro forma can help. If you’re trying to attract potential investors with your growth, you could use pro forma to show how you’re poised to increase revenues. Typically, you would use the pro forma calculation method and draw their attention to specific numbers. For example, you might report your actual numbers from the previous quarter while also highlighting your projections for the current quarter.

Earnings Projections

You can also use pro forma to inform your investors of how changes to the business are expected to impact its earnings and expenses. This is especially useful when you’re considering a merger, acquisition, or making a change to the leadership in your company. Forecasting your earnings will show you and investors how the business could benefit from such a move. Conversely, if you find that it could negatively impact the business, you can make an informed decision to back out of the deal.

But what is the real power of pro forma in your business?

Just like Marty McFly, you can use that snapshot (pro forma) to see how the actions taken today will affect the future.”— Justin Goodbread

Additional Benefits to Your Business

It may seem obvious that pro forma statements can provide the necessary data for planning, but they can impact your business in much larger ways. Let’s look at some of the potential benefits of pro forma.

Secure Funding

Through the pro forma calculation, you’re able to make realistic projections surrounding the potential growth of the organization. Potential investors will pay close attention to your pro forma numbers to get an idea of your business’s trajectory. If you use correct assumptions in creating your pro forma, you can demonstrate viable growth, making your business attractive to investors. Pro forma statements are often required by banks because they show that you have a keen understanding of the operations of your business, as well as provide crucial information about your ability to make payments while running the business.

Instilling Confidence

A well-done pro forma also inspires confidence in prospective buyers. As you probably know, I sold my business recently. As the buyers examined my financials, they keyed in on my five-year pro forma projections. I had accurately projected the business’s growth and revenue to within $30K. As a result, the buyers were extremely confident that the company could reach its future growth goals. In fact, they thought it was funny to see that I was upset about my projections being off by a “meager” $30K.

Making Sound Decisions

Similarly, pro forma statements can help you determine when a merger or acquisition makes sense. If you’re considering a strategic M&A, pro forma can help you identify redundancies and additions that will need to be made. For example, you probably won’t need two HR departments. But pro forma can also show you what a merger might look like from a financial perspective, therefore, allowing you to proactively develop solutions to problems that could arise from combining the two entities.

Risk Analysis

Finally, pro forma statements are a powerful tool in risk analysis. Because pro forma deals with some hypothetical (yet well-informed) situations, it gives you the unique ability to test different scenarios. By changing a few key factors, you can identify risks in your planning well before they have the chance to be realized. This enables you to come up with best and worst-case scenarios for your business. Likewise, you can apply your findings to your strategic plans to mitigate potential risks or even turn them into opportunities.

Wrapping Up…

Friends, I bet you didn’t know you could see the future! With the power of pro forma, you can. As you can see, taking stock of your historical financial data to project the trajectory of your business can help in many ways. If you haven’t used pro forma in your business, there’s no better time than now. Using the principles of the pro forma calculation method, you can take a glimpse into the future and create or adjust plans to reach your business goals.

Look, life is hard but it’s still so good. Tracking the future of your business can be frustrating but it doesn’t have to be. With the power of pro forma , we can at least make forecasting at least, financially simple. Let’s go out and make it a great day!

Do you have questions about this or other business and financial topics? Could you benefit from an expert review of your pro forma calculations? Reach out to our team . We’re here to help.

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Pro Forma Template: What Are They? How To Use Them

Jump to Section

What is a pro forma template.

A pro forma template, also known as a pro forma financial statement, is a document used to project future financial performance based on hypothetical scenarios. In the context of accounting, pro forma templates will help you make decisions based on hypothetical scenarios as well.

They can also help you formulate a business plan , obtain investor funding, and more. By having a pro forma template ready, you can create your financial documents faster and more uniformly every time you need them.

Understanding A Pro Forma Statement

There are numerous types of pro forma documents. They may be required in certain situations, such as for public companies or during mergers and acquisitions. More or less, pro forma templates exist to give you a jumpstart on understanding your company’s financial health at a glance or when presenting to board members and stockholders.

You can use a template to create the following types of financial documents:

• Income statements
• Balance sheets
• Cash flow statements
• Owner’s equity statements
• Notes to financial statements
• Annual pro forma projections
• Investment projections
• Risk analysis

While pro forma templates are relatively straightforward to use, ensure that you seek legal advice from corporate lawyers to help you develop the right set of templates the first time you draft them. For some pro forma templates, ensure that they meet all applicable accounting rules, including GAAP principles and state laws.

Benjamin W.

Using A Pro Forma Template

The first step you should take with a pro forma template is to save a master copy of it in a safe, accessible location. There is always a chance for deletion across numerous duplications and file changes, which means that you should save it on a flash driver, external hard drive, or in the cloud. In case it gets deleted, you always have the original to back you up.

After saving your pro forma template, you will then take the following steps when using it:

• Use a form to help you automatically collect information entered into the template
• Enter financial data to help forecast income and cash flow
• Create different scenarios to map out how cash flow is affected as variables change
• Share it with an expert to make sure you are using it properly
• Make a copy of the original to avoid an accidental deletion
• Consider naming conventions for your files by statement type

The use of a pro forma template depends upon the type you are using. Some provide you with blank space to enter specific values, while others are just a set of guidelines. By inputting these variables, you can calculate your profit and loss under the template’s author’s guidelines.

As you can see, pro forma templates are simply financial documents that you can use for everyday business needs. It is imperative that you hire incorporation lawyers for specialized projects or one-time needs. Not addressing the critical details of business documents can negatively impact you.

Image via Pexels by Lukas

Pro Forma Template Samples

There are numerous resources available online regarding the development of pro forma templates that you case use to report on your business’s financial health. Spend some time looking for the right sample since several do not always address specific business needs.

Here are three templates that you can view online:

• Smartsheet pro forma template sample
• Freshbooks pro forma template sample
• Spreadsheet 123 pro forma template sample

When using these templates, you can generally input the data you need to populate complete financial statements. However, you will not own the software that stores the templates, which means you need to download updates every time. There are several ways and methods available to make your own pro forma template to consider.

You should also be able to easily edit your pro forma template since you will need to update your associates, employees, and investors on-the-fly occasionally. The most straightforward way to make your pro forma is by ensuring that you have your business objectives in mind first.

How Do You Make Your Own Pro Forma?

The best way to make your own pro forma statement template is by starting with the right type of document in the first place. You can find samples online or hire corporate lawyers to draft the templates you use to create financial statements.

However, here are the next steps forward that you can take to make your own pro forma templates:

• Review pro forma template samples to establish what should go into your financial documents
• Consider the elements that should be included in every statement
• Set a goal for sales over certain period of time
• Figure out how much the cost of production will be to support those sales
• Consider all other costs associated with running the business
• Add all of these financial data points to the model to predict net cash flow
• Set-up periodic reviews of your pro forma templates to ensure that they are still up-to-date

If you decide to find a pro forma template online, seek advice from a trusted colleague or attorney. Online templates tend to miss some critical notes when it comes to personalization and customization of your needs. However, some can be customized to your needs. The process of finding the right pro forma template can be frustrating, especially when there are question marks in your mind.

Simply put, it is more cost-effective to hire corporation lawyers the first time around you are drafting pro forma templates. Doing so will save you money, time, and stress over the long-run. You can even use planning with pro formas to start your business by hiring corporate lawyers to draft your documents instead of relying on templates created for hypothetical organizations or those serving other industries.

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Planning With Pro Formas To Start Your Business

In the previous section, we addressed the importance of legal advice. However, the cost of hiring an attorney or vetting one can turn many business owners away from engaging in this critical part of the process. Keep in mind that legal mistakes can come back to haunt you later, which means that it is essential to get your pro forma templates right from the first day you use them.

ContractsCounsel has made this process as easy as possible on business owners:

• Sign up for our service at no cost
• Post your project to our platform
• Begin receiving proposals from licensed and vetted attorneys

That is it. From one single location, you can receive numerous proposals and prices for your pro forma template project. Not only is the process convenient, but it also satisfies the need to draft your templates correctly and adequately for your jurisdiction while keeping your financial statements more uniform.

Working With A Lawyer For Business Formation

When starting a business, you will need to file Articles of Incorporation with your secretary of state’s office to receive a Certificate of Incorporation . However, there may be other entities that are better suited for your situation, and other legal requirements may apply, including the drafting of an operating agreement .

Working with a lawyer for a business formation is smart since you will effectively and efficiently avoid making legal mistakes, negatively impacting your company’s future. Corporate lawyers also have the experience and capacity to determine which documents you may need to stay compliant and prevent future disputes with clients, contractors, partners, and other third-parties you serve.

Get Pro Forma Template Help with ContractsCounsel

Instead of leaving your pro forma templates to basic internet searches and best guesses, get the right document that you need the first time around. Sign up for ContractsCounsel today with no upfront cost to you and start receiving proposals today.

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18.3 Pro Forma Financials

Learning outcomes.

By the end of this section, you will be able to:

• Define pro forma in the context of a financial forecast.
• Describe the factors that impact the length of a financial forecast.
• Explain the risks associated with a financial forecast.

In this section of the chapter, we will move beyond the sales forecast and look at the general nature, length, and timeline of forecasts and the risks associated with using them. We’ll look at why we use them, how long they generally are, what the key variables in a forecast are, and how we pair those variables with common-size analysis to develop the forecast.

Purpose of a Forecast

As mentioned earlier in the chapter, forecasts serve different purposes depending on who is using them. Our focus here, however, is the world of finance. In this realm, the key purpose of pro forma (future-looking) financial statements is to manage a firm’s cash flow and assess the overall value that the firm is generating through future sales growth. Growing just for the sake of growing doesn’t always yield favorable income for the firm. A larger top-line sales figure that results in lower net income doesn’t make sense in the grand scheme of things. The same is true of profitable sales that don’t generate enough cash flows at the right time. The firm may make a profit, but if it doesn’t manage the timing of its cash flows, it could be forced to shut down if it can’t cover the costs of payroll or keep the lights on. Forecasting helps assess both cash flow and the profitability of future growth. Managers can forecast cash flow using data from forecasted financial statements; this allows them to identify potential gaps in cash and plan ahead in order to either alter collection and payment policies or obtain funding to cover the gap in the timing of cash flows.

Link to Learning

Pro forma financial statements.

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.

Length of a Forecast

Forecasts can generally be for any length of time. The length generally depends on the user’s needs. A one-year forecast, broken down by month, is quite typical. A firm will often go through a formal budgeting process near the end of its calendar or fiscal year to project financial plans and goals for the coming year. Once that is done, a rolling financial forecast is then done monthly to adjust as time moves on, more information becomes available, and circumstances change.

To be useful, the future forecast for financial planning purposes is almost always calculated as monthly increments rather than one total figure for the next 12 months. Breaking the data down by month allows finance managers to more clearly see fluctuations in cash flows in and out, identify potential gaps in cash flow, and plan ahead for their cash needs.

Forecasts can also be done for several years into the future. In fact, they commonly are. However, once the firm is looking out beyond 12 months, it gets difficult to forecast items with a great degree of accuracy. Often, forecasts beyond a year will be completed only to quarterly or even annual figures rather than monthly. Forecasts that far into the future are often strategic in nature, made more to communicate future plans for the firm than for more detailed decision-making and cash flow planning.

Common-Size Financials

As we saw earlier in the chapter, common-size analysis involves using historical financial statements as a basis for future forecasts. Financial statements provide a great starting point for analysis, as we can see the relationships between sales and costs on the income statement and the relationships between total assets and line items on the balance sheet.

For example, in Figure 18.6 , we saw that for the past two years, cost of goods sold has been 50% of sales. Thus, in the first draft of a forecast for Clear Lake, it’s likely that managers would estimate cost of goods sold at 50% of their forecasted sales. We can begin to see why forecasting sales first is crucial and why doing so as accurately as possible is also important.

Select Variables to Use

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. It’s a logical way to begin a very rough draft of the forecast. However, several variables should be taken into consideration. First, managers must address the cost of an account and determine if it’s a variable or fixed item. Variable costs tend to vary directly and proportionally with production or sales volume. Common examples include direct labor and direct materials. Fixed costs, on the other hand, do not change when production or sales volume increases or decreases within the relevant range. Granted, if production were to increase or decrease by a large amount, fixed costs would indeed change. However, in normal month-to-month changes, fixed costs often remain the same. Common examples of fixed costs include rent and managerial salaries.

So, if we were to approach our common-size income statement, for example, we would likely use the percentage of sales as a starting point to forecast variable items such as cost of goods sold. However, fixed costs may not be accurately forecast as a percentage of sales because they won’t actually change with sales. Thus, we would likely look at the history of the dollar values of fixed costs in order to forecast them.

Concepts In Practice

Covid-19 makes forecasting difficult for big 5 sporting goods.

Big 5 Sporting Goods announced record earnings in the third quarter of 2020, attributing its huge success that quarter to the impact of people’s reactions to the COVID-19 pandemic. With so many people in quarantine still wanting to make healthy lifestyle choices, sporting goods stores were making record sales. Record-breaking sales, however, are not certain in the future. The impacts of the pandemic are extremely difficult to predict, making it a challenge for Big 5 Sporting Goods and other companies to assemble pro forma financial statements.

(sources: https://www.globenewswire.com/news-release/2020/10/27/2115470/0/en/Big-5-Sporting-Goods-Corporation-Announces-Record-Fiscal-2020-Third-Quarter-Results.html; https://finance.yahoo.com/news/investors-want-big-5-sporting-054658521.html; https://www.cpapracticeadvisor.com/accounting-audit/news/21206691/four-ways-covid19-will-impact-2021-financial-forecasting-and-planning)

Determine Potential Changes in Variables

So far, we have focused on using historical common-size statements to create a draft (not a final version) of the forecast. This is because the past isn’t always a perfect indicator of the future, and our finances don’t always follow a linear pattern. We use the past as a good starting point; then, we must assess what else we know to fine-tune and make adjustments to the forecast.

Many items impact the forecast, and they will vary from one organization to another. The key is to do research, gather data, and look around at the market, the economy, the competition, and any other factors that have the potential to impact the future sales, costs, and financial health of the company. Though certainly not an exhaustive list, here are a few examples of items that may impact Clear Lake Sporting Goods.

• It has an old product line that was discontinued in early October, contributing to a 2% reduction in monthly sales that will likely continue into the new year until a new line begins arriving in stores.
• It will be adding a new brand to its collection of fishing supplies in March. The manufacturer plans to begin running commercials in late February. Managers anticipate that this will increase Clear Lake’s monthly sales by about $500 in March, $1,000 in April, $1,400 in May, and $2,000 per month in June, July, and August.
• The company has just finished updating its employee compensation package. It goes into effect in January of the new year and will result in an overall 4% increase in the cost of labor.
• The landlord indicated that rent will increase by $50 per month starting July 1.
• Some fixed assets will be fully depreciated by the end of March. Thus, depreciation expense will go down by $25 per month beginning in April.
• There are rumors of new regulations that will impact the costs of importing some of the more difficult-to-obtain hunting supplies. Managers aren’t entirely sure of the full impact of the new legislation at this time, but they anticipate that it could increase cost of goods sold for the affected product line when the new legislation goes into effect in the last quarter. Their best estimate is that it could increase the overall cost of goods sold by up to 2%.

We will use all of this data later in the chapter when we are ready to compile a complete forecast for Clear Lake.

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• International

April 24, 2024 - US university protests

By Adrienne Vogt, Christina Zdanowicz, Elise Hammond, Samantha Delouya, Chandelis Duster, Tori B. Powell, Emma Tucker, Elizabeth Wolfe and Kathleen Magramo, CNN

"Tense interactions" and "physical struggles" erupt at UT-Austin campus amid pro-Palestinian protest

From Ashley Killough in Dallas

Texas State troopers in riot gear, including some on horseback, began breaking up a group of pro-Palestinian protesters at the University of Texas at Austin shortly after a demonstration began Wednesday.

The Palestine Solidarity Committee in Austin organized the walkout and occupation on the school's South Lawn. According to an Instagram post announcing the event, students were encouraged to bring "blankets, food and water, face masks, and lots of energy."

Amelia Kimball, associate managing editor at The Daily Texan, told CNN there were no plans for an encampment like on other university campuses across the country.

Kimball said students gathered in a central area of campus and within minutes were ordered to disperse. Kimball said she's seen law enforcement form multiple blockades in the area to keep the crowd dispersed.

She also described "tense interactions" and "physical struggles between police and students." Some of those scenes, including an arrest, were captured by CNN affiliate KEYE.

"I don't think students were expecting this kind of a response," she said on CNN, saying some students have spread out while others remain in the crowd.

Kimball said she started noticing a large law enforcement presence earlier in the day before the protest began. 

CNN has reached out to the Texas Department of Public Safety, the University of Texas and Austin Police.  

USC says there is "significant activity" on campus amid protest

From CNN's Chandelis Duster

There is "significant activity" at the University of Southern California's University Park Campus due to a demonstration, according to an alert sent by the school on Wednesday.

"There may be difficulty accessing that area," according to the school.

Tuesday's protest on campus was peaceful this morning and protesters had set up tents, according to CNN's Nick Watt, who is on the scene.

Police seen pushing back protesters at University of Texas at Austin

From CNN's Christina Zdanowicz

Texas State Police were seen pushing back pro-Palestinian protesters on the University of Texas at Austin campus Wednesday afternoon, as witnessed by CNN affiliate KEYE.

Footage aired on CNN showed a chaotic scene, with what appeared to be shouts of “disperse” from law enforcement officers and a large crowd of student protesters shouting back. 

“There does seem to be some escalating levels of distress, and protesters are continuing to chant, and the police are forming multiple blockades to keep protesters from moving,” Amelia Kimball, associate managing editor at The Daily Texan, said on air with CNN. 

Secretary Buttigieg urges campus protesters to demonstrate "safely"

From CNN's Sam Fossum

Transportation Secretary Pete Buttigieg reacted Wednesday to the ongoing pro-Palestinian protests that are taking place on university campuses across the country, calling for protesters to “safely” make their voices heard.

He also highlighted the importance of distinguishing between peaceful protests and harassment. 

“It is important when people are exercising those rights to free speech, to protest, to assembly, that they do so safely,” Buttigieg said on Fox News Wednesday afternoon, adding later: “We have to make a distinction between what is legitimate free speech, inquiry, protest, debate, ferociously contested ideas. That’s one thing. And of course, also a recognition of the pain that is driving so much of the passion around the issues in the Middle East.”  

Buttigieg also condemned any expressions of antisemitism or threats of physical violence or harm against Jewish students. 

“Any expression of antisemitism or hatred is unconscionable, it must be called out, it must be confronted. And that’s certainly what President Biden has done in unambiguous terms,” Buttigieg said, continuing: “Especially disturbing [is] the idea that a student would be targeted and harassed simply because they are Jewish, or simply because they look Jewish.”

Columbia student protesters say administrators made written commitment to not call in NYPD or National Guard

From John Towfighi and CNN's Matt Egan

Columbia University student protesters issued a statement on X Wednesday afternoon claiming that university administration provided a written commitment Tuesday night to not call in the New York Police Department or the National Guard to break up the encampments after students refused to stay at the negotiating table.

"The University's previous threats of an imminent sweep by the NYPD or the National Guard had severed negotiations. The administration's threats backfired when student negotiators refused to stay at the table," according to the statement.

Susan Ellingwood, assistant vice president of public affairs at Columbia, told CNN earlier Wednesday that “deploying the National Guard was never on the table.”

The students' statement was posted on behalf of Columbia University Apartheid Divest, the student group responsible for organizing the original encampment on the East Lawn. It has also been involved in organizing the West Lawn encampment and negotiating with Columbia's administration. 

"Columbia's reliance on the threat of state violence against peaceful protestors has created an unstable ground for the negotiations process which will continue over the next 48 hours. However, Columbia's written commitment and concession not to call the NYPD or the National Guard signifies an important victory for students," the statement continued.

Student protesters said they plan to hold a news briefing at 2:30 pm ET outside the university's Butler Library.

2 arrested during protest at Ohio State University on Tuesday

From CNN's Nicquel Ellis and Rebekah Riess

Two arrests were made during a pro-Palestinian protest on Ohio State University’s campus on Tuesday, according to a university spokesperson.

“When yesterday’s demonstration became disruptive to the students, faculty and staff in Meiling Hall, the university issued multiple warnings. When the disruptive activity continued, two individuals were arrested,” OSU spokesperson Benjamin Johnson said. “Ohio State has an unwavering commitment to freedom of speech and took this action in alignment with our space use rules to provide for the orderly conduct of university business.”

In a  message  to faculty and students on Monday, Ohio State University President Walter “Ted” Carter Jr. said the university would “consistently enforce” its space rules, “which do not allow for intentional disruptions of university events, classes, exams or programming, including commencement.”

“When protected speech becomes incitement or threats of violence, Ohio State has and will always move quickly to enforce the law and university policy. I will not compromise on this,” the president wrote, noting that OSU would continue to have university police on site for student demonstrations.

Any violation of university policy will get a warning, but may be “cited, referred to Student Conduct and/or arrested” should they continue, Johnson told CNN.

When asked if OSU would consider the students’ demands for divestment from Israel, Johnson said state law “prohibits the university from divesting any interests in Israel and prohibits adopting or adhering to a policy that requires divestment from Israel or with persons or entities associated with it.”

President Biden not planning to visit Columbia protests

From CNN's MJ Lee

President Joe Biden will be in New York City Friday, but White House and campaign officials told CNN Wednesday there have been no internal discussions about him visiting Columbia University.

Some demonstrators say the Biden administration is complicit in the deaths of the many thousands of civilians in Gaza.

Groups of senior White House officials have traveled to cities with large Muslim and Arab populations in recent weeks to meet with local community leaders and hear their concerns – gatherings that have at times prompted calls for boycotts.

White House spokesman Andrew Bates said Tuesday that the White House was monitoring “closely” the protests on college campuses and that he takes seriously the conversations he has had with community leaders about the current “painful moment.”

Speaker Johnson says he will call on Columbia president to resign

From CNN's Haley Talbot

House Speaker Mike Johnson says he will call on Columbia University President Nemat "Minouche" Shafik to resign when he joins Jewish students on campus Wednesday. 

“We'll be hosting a press conference there with some of my colleagues from the House Republicans from New York to call on the president of the university to resign. It's unconscionable. This President Shafik has shown to be a very weak leader. They cannot even guarantee the safety of Jewish students. They're expected to run for their lives and stay home from class,” he said on Hugh Hewitt’s radio show Wednesday morning.

Johnson added that “what we're seeing on these college campuses across the country is disgusting and unacceptable.”

While at the university this afternoon, Johnson will have a meal with Jewish students before the event. He will be joined by New York Reps. Mike Lawler, Nicole Malliotakis and others in the New York Republican delegation. 

“We're relying on and calling upon and demanding these university officials to control of the situation, which is just completely out of control right now,” Johnson said. 

Johnson also proposed revoking federal funding and "student visas for these violent protests" in the wake of the unrest.

Columbia University says final exams must include a remote option

From CNN's John Towfighi

Columbia University notified students and faculty Wednesday morning that the hybrid model for classes will extend to final exams.

Provost Angela Olinto said in an email that all final course assessments, including exams, presentations and projects, "must include a remote option for students who have requested support for virtual assessment."

The move was made "in order to address the concerns of our members in an evolving campus environment" on the main Morningside Heights campus, Olinto said.

The university announced classes, which end Monday, would be hybrid for the remainder of the academic year. Final exams take place from May 3 to May 10. 

Olinto said that final assessments at Columbia's Medical Center and Manhattanville campus will continue as scheduled.

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‘Thunder Run’: Behind Lawmakers’ Secretive Push to Pass the TikTok Bill

A tiny group of lawmakers huddled in private about a year ago, aiming to keep the discussions away from TikTok lobbyists while bulletproofing a bill that could ban the app.

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By Sapna Maheshwari ,  David McCabe and Cecilia Kang

Sapna Maheshwari reports on TikTok. David McCabe and Cecilia Kang cover tech policy.

Just over a year ago, lawmakers displayed a rare show of bipartisanship when they grilled Shou Chew , TikTok’s chief executive, about the video app’s ties to China. Their harsh questioning suggested that Washington was gearing up to force the company to sever ties with its Chinese owner — or even ban the app.

Then came mostly silence. Little emerged from the House committee that held the hearing, and a proposal to enable the administration to force a sale or ban TikTok fizzled in the Senate.

But behind the scenes, a tiny group of lawmakers began plotting a secretive effort that culminated on Wednesday, when President Biden signed a bill that forces TikTok to be sold by its Chinese owner, ByteDance, or risk being banned. The measure, which the Senate passed late Tuesday, upends the future of an app that claims 170 million users in the United States and that touches virtually every aspect of American life.

For nearly a year, lawmakers and some of their aides worked to write a version of the bill, concealing their efforts to avoid setting off TikTok’s lobbying might. To bulletproof the bill from expected legal challenges and persuade uncertain lawmakers, the group worked with the Justice Department and White House.

And the last stage — a race to the president’s desk that led some aides to nickname the bill the “Thunder Run” — played out in seven weeks from when it was publicly introduced, remarkably fast for Washington.

“You don’t get many opportunities like this on a major issue,” said Representative Steve Scalise of Louisiana, the Republican majority leader. He was one of 15 lawmakers, aides and officials directly involved in shaping and passing the bill who were interviewed for this article.

“This fight’s been going on for years,” Mr. Scalise said. “We learned a lot from each step, and we wanted to make sure we had strong legal standing and a strong bipartisan coalition to do this.”

Their success contrasts with the stumbles by other lawmakers and American officials, starting during the Trump administration, to address national security concerns about TikTok. They say the Chinese government could lean on ByteDance to obtain sensitive U.S. user data or influence content on the app to serve Beijing’s interests, including interfering in American elections.

TikTok has pushed back against those accusations, saying that the Chinese government plays no role in the company and that it has taken steps and spent billions of dollars to address the concerns. It has also fought back aggressively in the courts against previous actions by federal and state governments.

But the strategy employed by the lawmakers in recent weeks caught TikTok flat-footed. And while the app is unlikely to disappear from Americans’ phones as next steps are worked out, the measure stands out as the first time a U.S. president has signed a bill that could result in a wide ban of a foreign app.

In a statement, Alex Haurek, a TikTok spokesman, said the bill “was crafted in secret, rushed through the House and ultimately passed as part of a larger, must-pass bill exactly because it is a ban that Americans will find objectionable.”

He added that it was “sadly ironic that Congress would pass a law trampling 170 million Americans’ right to free expression as part of a package they say is aimed at advancing freedom around the world.”

From Tiny Huddle to Big Majority

The effort around a TikTok bill began with Mr. Scalise, who met with Representative Cathy McMorris Rodgers, a Republican from Washington, in March last year about their desire to see a measure that took on the app.

They began talking with other Republican lawmakers and aides across several committees about a new bill. By August, they had decided to shepherd a potential bill through a House committee focused on China, the Select Committee on the Chinese Communist Party, led by Representatives Mike Gallagher, a Wisconsin Republican and its chairman, and Raja Krishnamoorthi, an Illinois Democrat.

The bipartisan committee swiftly embraced the effort. “What we recognized was that there were so many different approaches and the technical issues were so complex,” Mr. Krishnamoorthi said.

So the committee hatched a strategy: Win the support of Democrats, the White House and the Justice Department for a new bill.

Its efforts got a lift after lawmakers including Mr. Gallagher accused TikTok of intentionally pushing pro-Palestinian and anti-Israel content to its users last year. Mr. Krishnamoorthi and others said the Israel-Gaza conflict stoked lawmakers’ appetites to regulate the app.

In November, the group, which then numbered fewer than 20 key people, brought in officials from the Justice Department, including Lisa Monaco, the deputy attorney general, and staff from the National Security Council to help secure the Biden administration’s support for a new bill.

For years, the administration had weighed a proposal by TikTok, called Project Texas , that aimed to keep sensitive U.S. user data separate from the rest of the company’s operations. The Justice Department and National Security Council officials agreed to support the new bill partly because they saw Project Texas as inadequate to handle national security concerns involving TikTok, two administration officials said.

In conversations with lawmakers, White House officials emphasized that they wanted ByteDance to sell TikTok rather than impose a ban, partly because of the app’s popularity with Americans, three people involved in the process said.

The Justice Department and Ms. Monaco provided guidance on how to write the bill so it could withstand legal challenges. TikTok previously fended off efforts to ban it by citing the First Amendment rights of its users. The officials explained how to word the bill to defend against those claims, citing national security.

With the administration’s support in hand, the group quietly solicited more supporters in the House. The Justice Department joined members of the Office of the Director of National Intelligence and F.B.I. to brief House committees on the threats posed by TikTok’s Chinese ownership. The briefings were later delivered in the Senate.

Ms. Monaco also met individually with lawmakers, warning them that TikTok could be used to disrupt U.S. elections.

“She built out a powerful case, and we agreed that not only was data gathering taking place, she shared that you have 170 million American that were vulnerable to propaganda,” Senator Mark Warner, Democrat of Virginia, said of a meeting with Ms. Monaco in Munich in February.

On March 5, Mr. Gallagher and Mr. Krishnamoorthi announced the bill and named around 50 House members who endorsed it. The Energy and Commerce Committee, which is led by Ms. McMorris Rodgers, took the bill up that week.

TikTok, which had been negotiating with U.S. officials over its Project Texas plan, was caught off guard. It quickly sent information to members of the Energy and Commerce Committee outlining TikTok’s economic contributions in their districts, according to documents viewed by The New York Times. It also used a pop-up message on its app to urge users to call legislators to oppose a ban.

But when hundreds of calls flooded into some lawmakers’ offices, including from callers who sounded like minors, some of the lawmakers felt the bill was being misrepresented.

“It transformed a lot of lean yeses into hell yeses at that point,” Mr. Krishnamoorthi said.

Former President Donald J. Trump, the presumptive Republican presidential nominee, voiced opposition to the bill, causing panic. But Mr. Scalise said he had urged Mr. Trump to reconsider, and a vote proceeded.

Two days after the bill was unveiled, Ms. McMorris Rodgers’s committee voted 50 to 0 to advance it to the full House, where it passed the next week by 352 to 65.

There were tears of joy in Mr. Krishnamoorthi’s office, two people said. Mr. Gallagher’s staff members celebrated with a cookie cake sent by Mr. Scalise, one of his signature rewards for successful legislation.

A Less Certain Future

Even with the bill’s swift passage in the House, its future in the Senate was uncertain. Some senators, including powerful committee chairs like Maria Cantwell, a Democrat of Washington, and Mr. Warner, considered changes to the bill in a process that could significantly slow it down.

The House bill gave ByteDance six months to sell TikTok. Senators wanted to extend the timeline and detail the government’s national security concerns about TikTok in the bill, to make it clear to courts how it justified the measure.

As the Senate worked on the bill, TikTok contacted lawmakers’ offices and spent at least $3 million in ads to defend itself. It blanketed the airwaves in key states with commercials depicting how users — like nuns and ranchers — make a living and build communities through the app.

TikTok also had support from conservative groups like Club for Growth and the Cato Institute, both backed by Jeffrey Yass, a prominent investor in the app , and liberal organizations like the American Civil Liberties Union, which said the bill would violate Americans’ First Amendment rights.

A Club for Growth spokesman said Mr. Yass “never requested Club to take a position or action on his behalf.”

Some deep-pocketed groups on the right mobilized to support the bill. One was the American Parents Coalition, backed by Leonard Leo, a conservative activist, which ran an ad campaign called “TikTok Is Poison” in March. A spokesman for Mr. Leo said he was “proud to support” the group’s efforts.

Some in Silicon Valley also spoke out in favor of the bill, including Vinod Khosla, a venture capitalist, and Jacob Helberg, a senior policy adviser to Palantir’s chief executive.

Bijan Koohmaraie, a counsel in Mr. Scalise’s office who helped drive the bill, said a main reason to keep the process secret for so long had been to keep lobbyists away.

“No company had any influence or was helping draft this bill on the outside,” he said.

A New Opportunity

As the bill sat in the Senate, a new opportunity presented itself. The House speaker, Mike Johnson, announced an attempt last week to pass foreign aid for countries including Ukraine. To ensure he had the votes, Mr. Johnson took the unusual step of attaching a package of bills popular with Republicans, including the TikTok measure.

Senators scrambled now that the House had forced their hand. Ms. Cantwell’s office asked the House for multiple edits to the measure, a person with knowledge of the matter said.

House lawmakers made just one change the Senate wanted. The version of the bill in the aid package extended the deadline for a TikTok sale to nine months from six months. The president can add another 90 days if ByteDance has made progress toward selling TikTok.

“The most important thing is to have enough time to effect a sale,” Ms. Cantwell said.

The change was enough. Late Tuesday, the Senate passed the bill overwhelmingly, 79 to 18. On Wednesday morning, Mr. Biden signed it into law.

An earlier version of a picture caption with this article misidentified the date of the photo. It was last year, not last month.

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Sapna Maheshwari reports on TikTok, technology and emerging media companies. She has been a business reporter for more than a decade. Contact her at [email protected] . More about Sapna Maheshwari

David McCabe covers tech policy. He joined The Times from Axios in 2019. More about David McCabe

Cecilia Kang reports on technology and regulatory policy and is based in Washington D.C. She has written about technology for over two decades. More about Cecilia Kang