Pro forma financial statements include the same statements as those of an established business. They should include at least a balance sheet, a profit and loss statement, and a statement of cash flows. Those statements convey the future business activities and the future financial performance of the company.
- We won’t even know if everything balances until the cash flow statement is complete.
- However, as the increased sales begin to kick in, the future looks promising, with a return to healthy cash flow levels and profitability.
- In that case, you can use a financing pro forma projection to make your case.
- These scenarios can be run through the model to assess the impact on the financial statements.
- Pro forma statements allow management to perform a “what-if” analysis by removing one-time transactions in order to assess the financial impact.
Example pro forma balance sheet
For example, the best-case current asset forecast is a 12% increase over the next year, and the worst-case is a 5% decline. Cost of goods sold (COGS) includes costs directly related to producing the product or service. Direct labor and direct materials are posted to the cost of goods sold.
Creating a pro forma income statement
- Bea starts by gathering her sales data, costs, and cash flow statements from the past three years.
- You may be wondering why we calculated the interest, as we didn’t use it, and that’s very astute of you to notice.
- This way, retained earnings will continue to grow (or decline) based on future net profit.
- Pro forma financial statements are also used to assess worst-case financial decisions.
- Unexpected changes in the business environment, market conditions, or regulatory landscape can render pro forma projections inaccurate.
Pro forma financial statements reveal the financial impact of different scenarios. One scenario assumes that a company purchases a competitor, and the other does not. The financial forecast also impacts the balance sheet and the cash flow statement. Due to higher sales, accounts receivable will increase, and cash inflows will increase as customer payments are processed. With higher cash inflows, decision-makers can avoid borrowing from a line of credit.
Types of Pro Forma Financial Statements
This is where pro forma analysis comes into play; it’s like the GPS for your business, guiding you through the financial landscapes of the future. A new loan or issuing common stock to shareholders both produce cash inflows. When a company receives $100,000 from issuing new shares of common stock, the increase in equity is posted as a cash inflow in the statement of cash flows. Operating expenses are costs that are not directly related to production. These costs include advertising and marketing costs, rent, utilities, and administrative costs.
How do pro forma financials assist in cash flow forecasting and management?
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.
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. Imagine your pro forma statements as a detailed map of the terrain ahead. Just as a hiker uses a map to decide whether to cross a river at its narrowest point or take a bridge, you use your pro forma financial statement to navigate through business decisions. In many instances, pro forma statements are for management’s internal use and do not need to conform to accounting standards. Make sure to check with an attorney or expert to determine if any regulatory or other requirements may apply to your business (e.g., Regulation S-X Article 11).
Application Differences between GAAP and Pro Forma
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). Certainly, conditions will change, and that will impact your balance sheet. But these accounting tools can provide you (and your investors) peace of mind in knowing that a financial move is likely to pay off over time.
This can range from raw materials to labor directly tied to service delivery. A pro tip here is to always err on the side of caution; it’s better to be pleasantly surprised than caught off guard. Assume that one scenario discounts cash flows at 5%, and the second scenario uses 8% for discounted cash flows. The discount rate has an impact on whether or not the project is implemented. Managers often plan using best-case scenarios, worst-case scenarios, and other assumptions.
These financial reports are based on hypothetical scenarios, enabling business owners and managers to evaluate potential situations that could occur in the future. 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.
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). A traditional balance sheet is historical, a tabulation of what has already occurred.
This helps her anticipate an increase in sales with the introduction of new product lines and a renovated space. Bea projects a 20% increase in sales for the next year, keeping her estimates conservative to stay grounded. When projecting your assets, consider both your current resources and those you plan to acquire. Overestimating assets can lead to overly optimistic equity calculations, akin to thinking you can run a marathon without training. In this guide, I aim to be the mentor I had (and sometimes wished I had) during those early days, breaking down pro forma analysis into digestible, manageable parts.
For instance, a tech company might have shown pro forma profits by leaving out stock-based compensation expenses, even though these represent real costs to shareholders. 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. proforma balance sheet Another of the pro forma reports you should know about is the cash flow statement. It looks at the likely amount of cash flowing into and out of the business over a future period, based on different scenarios. Whenever you’re engaged in financial decision-making, you need to know best- and worst-case scenarios.
The projection starts with year-to-date cash flows from January 1st to August 31st (the current date). Managers then project cash activity for the last four months of the year to assess cash needs. Assume that an e-commerce company generates 50% of sales in the last two months of the calendar year. The business should spend large amounts of cash in September and October for inventory purchases. These events could include costs surrounding an acquisition or merger, or a write down of intangibles, such as depreciation and good will.
Luckily, cash has already been handled in our example template, so we’ll move on to the next item. Every business can use this sheet for their own purpose of forming the status sheet of the company. Smartsheet provides a better way to unify collaboration and automate workflows so you can spend more time on the work that matters. We accept payments via credit card, wire transfer, Western Union, and (when available) bank loan. Some candidates may qualify for scholarships or financial aid, which will be credited against the Program Fee once eligibility is determined. Please refer to the Payment & Financial Aid page for further information.