what is a proforma business plan

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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.

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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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Pro Forma Financial Statements: A Comprehensive Guide for Businesses

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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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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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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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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 .”

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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 Forecast: What it is, How it Works, Example

Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.

Investopedia / Dennis Madamba

What Is a Pro-Forma Forecast?

A pro-forma forecast is a financial forecast based on pro-forma income statements, balance sheets, and cash flow statements. Pro-forma forecasts are usually created from pro-forma financial statements and are forecasted using basic forecasting procedures. When making these forecasts, revenues will usually provide the initial groundwork for the forecast, and expenses and other items are calculated as a percentage of future sales.

Key Takeaways

• A pro-forma forecast is a financial forecast based on pro-forma financial statements.
• The pro-forma forecast is intended to show the improved financial condition of a company if a beneficial change takes place.
• Pro-forma forecasts do not have to abide by generally accepted accounting principles (GAAP) rules.
• As pro-forma forecasts are hypothetical in nature, they can deviate from actual results, sometimes significantly.

Understanding a Pro-Forma Forecast

Pro-forma financials used in the pro-forma forecast will usually reflect the predicted state of the business after a large or important transaction has taken place. The inclusion of anticipated future events in the pro-forma financial statements allows the company a unique opportunity to sculpt the presentation of the company's financial situation in a way that normally wouldn't be allowed under generally accepted accounting principles (GAAP) rules.

Often, events depicted in the pro-forma financial statements have yet to occur, so the actual financial picture of the company may be very different from the picture presented. Forecasts made from these financial statements may or may not contain an even higher degree of deviation from the actual state of the company.

A pro-forma forecast, similar to any sort of pro-forma report, is not required to abide by GAAP. As a result, they often reflect the best-case scenario, which the firm would like to portray to investors. It takes a skilled analyst to unpack the marketing from the actual numbers. Of course, the analyst can always just use the audited financial statements in their analysis as opposed to pro-forma statements and forecasts; however, these forecasts can be a valuable clue as to how the company intends to increase its value and what type of growth they are aiming for.

Example of a Pro-Forma Forecast

For example, XYZ Company is a publicly-traded maker of widget presses. After many years of research and development (R&D), they have applied for a patent on a new type of widget press technology. If they are granted the patent, they will be the only company that can use this new technology for 10 years. This new technology will allow XYZ Company to manufacture widget presses at half their current cost and several times more quickly. This could potentially make them the preferred provider in the space and help them gain market share.

To demonstrate this potential good fortune on the company's financial statements, XYZ Company may draw up pro-forma financial statements that show the predicted effects of lower costs and increased sales on the company's financial situation. Pro-forma forecasts made off of the assumption that this patent will be granted might show larger than normal yearly sales increases as XYZ Company steals market share from its less technologically advanced and more expensive competitors. Of course, if the patent isn't granted, all of this would be highly inaccurate.

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What Are Pro Forma Financial Statements?

As we said, a pro forma statement is a what-if scenario. It's a tool that business owners, decision-makers, stakeholders, investors, creditors, and others use to examine hypothetical conditions. They can look forward or backward, revealing insights that standard financial statements simply cannot provide.

Further, while there's definitely a right way and a wrong way to format a pro forma ‒ just ask the good folks at the Securities and Exchange Commission, AICPA, and FASB ‒ the term pro forma could mean an income statement, cash flow statement, or balance sheet. In other words, the different types of pro forma statements are basically the same financials you're already accustomed to, just using hypothetical data for future periods. So, as you'll see once we discuss how to create pro formas in just a bit, they don't require you to recreate the financial reporting wheel, at least in terms of format.

However, we only feel it right to issue a big ol' caveat before we go any further. As you might've noticed, we've used the word hypothetical several times already. And while pro formas can be enormously helpful in looking at different financial models based on various assumptions, they're still – you guessed it – hypothetical.

Therefore, to paraphrase Merriam-Webster, pro formas involve or are based on a suggested idea or theory . Put another way, they use information that can vary substantially from actual data. So while pro formas are fantastic for looking at events from different angles, never take them as gospel, only well-informed conjecture.

When to Use Pro Forma Financial Statements

Now that we understand what a pro forma is and why they're so uniquely insightful, let's zoom in on how companies can use them.

Business Planning & Modeling

It's helpful for FP&A to provide business leaders with side-by-side comparisons based on different assumptions, better informing the entire decision-making process. If, for instance, management is deciding between two separate proposals or business plans, they can use pro forma statements for each scenario and see which might serve their goals and vision best.

Further, the mere act of creating the pro forma statements for different scenarios is a useful exercise on its own, letting the decision-makers:

• Identify the different assumptions driving each of the scenarios
• Create sales and budget projections for each
• Collect the results in P&L projections
• Use the data to generate cash flow projections
• Compare the resulting pro forma balance sheets
• Gauge the effectiveness of each scenario against industry benchmarks using financial ratio analysis

In a sense, pro forma financial statements allow management to A/B test different strategies without any real-world impact. Using historical financial statements and a veritable cornucopia of assumptions, pro formas let you look at worst-case scenarios, best-case financial results, and everything in between, ultimately lending your business decisions more precision and confidence.

Gauge the Impact of Financial Decisions

Businesses commonly use pro forma statements to project the impact of a significant event or initiative, maybe a business combination , new line of credit, revamped accounts receivable processes , or possible restructuring costs . Harkening back to the previous section, a company can use a pro forma income statement, balance sheet, and cash-flow statement to project how these events might affect its financial position.

In this case, pro forma statements are like dipping your toe into the water before diving into the pool. If the water feels too cold – the pro forma financial projections and expected results aren't favorable – it's probably not a great idea to take a dip. But if the water is to your liking, you might benefit from a nice swim.

Financial Reporting

Of course, pro forma financial information isn't just useful for internal purposes. Companies also use pro formas in external reports for stockholders, creditors, and potential investors. Publicly traded companies must include pro forma statements with any SEC filing , registration statements, or proxy statements. This only makes sense given the stockholders' need to understand the impact of significant changes – relative to the company's financial statements – that have either already occurred or will occur. Such changes might include:

• The impact of a change in newly adopted financial accounting standards
• An updated estimate on the economic life and net residual value of an asset
• A business combination from an acquisition, disposition, investment, or combined interests of two or more existing business lines
• Correcting errors made in previously filed reports

Also, it's important to remember the SEC, AICPA, and FASB have specific guidelines regarding the form, content, and necessity of pro forma financials under particular circumstances. Therefore, whatever prompts the need for them, you must adhere to any mandatory guidelines involved. For instance, SOX regulations state that a company must file a set of statements that conform to GAAP (generally accepted accounting principles) in conjunction with any pro formas to avoid giving the public a false impression of a company's actual financial status.

Creating Pro Forma Statements

We're going to take you through the steps necessary to create a basic full-year pro forma projection using an income statement, cash flow statement, and balance sheet. However, we’re lobbing another caveat your way – take our walk-throughs with a grain of salt since they’re only a glimpse into the basic pro forma process.

In other words, if you're trying to attract investment capital or have an M&A transaction on your mind, you'll want to use something more detailed and tailored for the purpose. Fortunately, you already happen to know a team of experts that can do just that for you. Wink, wink.

Pro Forma Income Statement

Let's begin with the income statement, using a percent of sales forecast to keep everything straightforward. Start with an income statement from your most recent fiscal year and identify which items you’ll adjust for the projection.

As a slight aside, for more in-depth insights on pro forma adjustments as well as some handy best practices and examples, we urge you to look at our Ultimate Guide to Pro Forma Statements . For these walk-throughs, however, we're assuming you've already looked over the different events and scenarios that can prompt pro forma adjustments.

Anyhoo, back to our regular programming. Now that you have your income statement in hand and adjustments on the ready, it's time to begin the pro forma calculations. These should look incredibly familiar since it's the same process you use when creating your typical income statements. The same holds true for the cash flow statement and balance sheet.

• Gross profit : Take your expected revenue adjustments – i.e., price changes, new product lines & customers, promotional offers – and inflate them by the expected amount. Do the same with the cost of goods sold (COGS) to arrive at your pro forma gross profit.
• Total operating expenses : Look through every line item and identify what costs you will cut in the following year. Make those cuts and then inflate your expenses by your projected rate for your pro forma total operating expenses.
• Net income before taxes : Net your gross profit and total operating expenses
• Taxes : Multiply your estimated tax rate by your net income
• Net income after taxes : Subtract your tax bill from your net income before taxes to arrive at your pro forma profit after taxes.

Since we used a sales-driven projection, other variables like operating expenses, depreciation & amortization, and interest expense were unaffected by our pro forma adjustments. This won't necessarily be the case in a real-world application.

Pro Forma Balance Sheet

Given the relationship between your income statement and balance sheet, you'll want to create the pro formas for each in conjunction with one another, using the following steps to generate your pro forma balance sheet:

• Transfer the change in retained earnings from your hot-off-the-presses pro forma income statement to the balance sheet.
• Identify adjustments to your current assets and liabilities that will vary according to the sales variance used in the projection.
• Use the usual suspects – total assets, total liabilities, owner's equity – to complete the balance sheet.

Remember, what distinguishes these pro forma statements from your standard financials are the adjustments, not the calculations or even the format. Certain regulatory bodies and scenarios will require specific information but, from a foundational perspective, the framework for each is essentially the same as what you already use when preparing your financials.

Pro Forma Cash Flow Statement

Finally, with the pro forma income statement and balance sheet complete, we can now knock out the cash flow statement.

• Start with your cash-on-hand, then add all cash receipts like sales, loans, cash injections, interest income, and others.
• List your outgoing cash payments like cost of sales, salaries, supplies, etc.
• Add up your operating expenses as well as any other expenses, including cash disbursements to owners, interest expense, income taxes, etc.
• Calculate your total cash payments, net cash change, and ending cash position. Once again, this is the same process you follow for your normal cash flow statement.

Putting Them Altogether

Now that you've done the brunt of the heavy lifting, you’ll want to make sure you've correctly linked the data between the pro formas. Double check you’ve:

• Added net income from the pro forma income statement to the accompanying balance sheet and statement of cash flows.
• Added depreciation back to capital expenditure on the cash flow statement, which then feeds PP&E on the balance sheet.
• Included interest from financing on the income statement since financing activity affects the balance sheet and cash.
• Correctly calculated your balance sheet's closing cash balance – the sum of the previous time period's closing cash and the current period's cash from operations, financing activities, and investing.

Other Pro Forma Scenarios

As we said earlier, pro forma statements are instrumental, allowing a company to look at the potential impact of a proposed transaction or investment capital. In the case of a business combination, for instance, you can use a pro forma statement to combine the financial reports of the two companies to calculate the net acquisition costs, as seen in the following:

Alternatively, when you want to demonstrate the impact of different capital investment amounts, you can create multiple pro formas so a potential investor can see the varying effects on, as an example, the pro forma balance sheet.

Our point is, pro formas aren't a one-trick pony. They have multiple uses for multiple scenarios, ranging from sales growth projections and risk analysis to more intricate M&A or investment purposes. Unfortunately, most organizations don't have a fleet of battle-tested CPAs to fully leverage pro formas, especially startups and small businesses. Therefore, we again recommend checking out our Ultimate Guide to Pro Forma Financial Statements , where you'll find even deeper insights and best practices. And just remember – if it all still seems a bit much, Embark is always around to swoop in and save the day. It's what we do.

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

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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.

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.

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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.

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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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What Is a Pro Forma Operating Budget?

• Small Business
• Accounting & Bookkeeping
• Business Budgets
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Accurate budgeting can make or break a business. An operating budget provides an overview of the costs of running your business, predicting your company's daily expenses and income. A pro forma -- Latin for "as a matter of form" -- budget is a predicted budget based on unusual circumstances or possible changes to your company's structure, revenues, profits or expenses. A pro forma operating budget can help your company prepare for changes such as mergers, investments, loans or acquisitions.

Operating Budget

Businesses divide their budgets into two general categories -- an operating budget and a capital budget. An operating budget lists the costs of running your business, including salaries, equipment, services, interest payments, rent, utilities, loans, advertising, travel and training expenses. Most businesses create an annual operating budget to predict recurring, regular expenditures, and some businesses go back and record actual expenditures in the operating budget to compare the predictions with actual costs. An accurate operating budget can help your business manage funds in order to have capital to pay for expenses.

Pro Forma Operating Budget

A pro forma operating budget is a budget prepared in advance of possible changes to your company that would affect your business's operating structure or finances. A pro forma budget forecasts revenues and expenses in advance for a particular project, such as a merger, loan, bankruptcy, new debt or equity payments. A pro forma operating budget depicts the anticipated results of the proposed change, including the projected cash flows, net revenues and taxes.

A pro forma operating budget allows you to plan for your business's future by predicting the financial impact of proposed changes on your company. Pro forma budgets also help your company prepare for projected changes in the market or economic downturns that may affect your industry. Pro forma budgets can be useful for showing to projected buyers or shareholders as well as for helping your business make decisions on mergers and acquisitions. Some banks also ask for pro forma budgets when businesses apply for loans.

Considerations

Pro forma budgets can help you plan for your company's future, but as with any predictions, your budget may not be 100 percent accurate if you proceed with the proposed changes. Factors such as the economy, labor market, changes in your industry or technology, and unforeseen disasters or other circumstances may affect the accuracy of your pro forma budget. A pro forma operating budget can still be useful for your company, however, when used as part of a comprehensive planning and decision-making process.

• Inc.: Is Your Budget Ready for Worst Case Scenario?
• Entrepreneur: Small Business Encyclopedia: Budgeting

Marnie Kunz has been an award-winning writer covering fitness, pets, lifestyle, entertainment and health since 2003. Her articles have been published in "The Atlanta Journal-Constitution," "Alive," "The Marietta Daily Journal" and other publications. Kunz holds a Bachelor of Arts in creative writing from Knox College and is a Road Runners Club of America-certified running coach and a certified pole dance instructor.

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