Pro Forma Financial Statements

Since we used a sales-driven projection, other variables like operating expenses, depreciation & amortization, and interest expense were unaffected by our pro forma adjustments. 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.

• The sales total and customer payment history help the firm determine the accounts receivable balance.
• These statements facilitate a side-by-side comparison of the financials of both companies before and after the merger or acquisition.
• These reports are typically used for internal planning purposes, but many companies do issue them to the public for speculative purposes.
• 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.

A pro forma statement estimates your company’s future financial performance. Pro forma financial statements are valuable tools for forecasting potential financial outcomes based on hypothetical scenarios and assumptions. However, they come with their own set of challenges that need to be considered when utilizing them for decision-making and planning. As you can see, pro forma financial statements are a great tool that management can use to play out what if scenarios and future projects. They can be used to plan the future by evaluating upcoming cash requirements, credit terms on new debt obligations, and the logistics of entering into new contracts. 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.

Example of a Pro-Forma Forecast

Pro forma statements demonstrate to investors and lenders that a company is worth investing in. In addition, it’s easier to prove sustainability by presenting well-researched pro forma statements to a would-be stakeholder. 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.

Of course, if the patent isn’t granted, all of this would be highly inaccurate. To make that happen, you have to frequently make informed projections about sales, production, and costs. Pro forma financial statements are a great way to assess the financial impact of those assumptions. Since pro forma statements are not bound by strict accounting standards, there’s a risk of bias in the way certain items are adjusted or presented. Companies may be tempted to present pro forma statements in a way that paints a rosier picture than reality, potentially misleading stakeholders. For example, management might anticipate closing a distribution deal with Wal-Mart in the next six months that will lead to an additional $5M in sales.

What is the purpose of a pro forma statement?

We know early on that it’s impossible to predict the future, no matter how many people (like potential investors) seem to be pressing us to do so. But isolating our assumptions as the only variables that drive our financial projections, allows us to focus the conversation on just a few key areas. Therefore our financial projections give us an insight as to how certain parts of the business (like our sales forecast) will start driving other aspects of the business (like our staffing plan).

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. 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.” 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. 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. One of the most important uses of pro forma reports is related to decision-making and strategic planning efforts.

How Does a Commercial Invoice Differ From a Pro Forma Invoice?

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. Pro forma means “for the sake of form.” It’s used to announce that the information proforma example within a document is based on projections and isn’t final. Specific documentation is required before goods can pass through customs into the U.S. Pro forma invoices aren’t legally required but they’re generally a good idea because they can prevent disputes at the time of delivery. Pro forma invoices often come into play with international transactions, especially for customs purposes relating to duties on imports.

• When seeking loans or investments, potential financiers often require projections of financial performance.
• All in all, the process of preparing a pro forma balance sheet is much the same as preparing a normal balance sheet.
• Knowing how the pro forma documents are compiled and what is left out is also critical when comparing different pro forma statements.
• After reviewing the proforma invoice, the buyer gives the green light to the seller.
• Any revenue (income) items that we have, from product sales to consulting sales to partner income, will all be recorded in the revenue tab.
• If interim period balance sheets were submitted, the company should pick up from where they left off.
• A company may present a pro forma statement to inform investors about their internal assessment of the financial outcome of a proposed change in the business.

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. 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.

Pro forma financial statements are a common type of forecast that can be useful in these situations. 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. 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.