Pro Forma Financial Statements: Main Types & How to Create Them

However, for all regular income statements presented in a filing, there must also be a pro forma statement. This form may also be used for corporate retail or wholesale companies. Running a small business comes with plenty of uncertainties, especially when it comes to finances. You spend most of the time wondering how to plan for the future, but it’s tough to make informed decisions, secure funding, or plan for growth without a clear financial forecast. 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.

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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. This pro forma balance sheet can also be used for corporate retail or wholesale businesses.

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 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. A financial forecast may be used in lieu of pro forma financial statements.

Step 1: Setting the Stage with Historical Data

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. It’s impossible to predict the future performance of your company, but a pro forma income statement is an asset that can help. A pro forma financial statement is a way to forecast your future earnings over a particular period. By using historical financial statements and your projected cash flow, you can help determine how your business will perform in various scenarios.

Additionally, creating visuals can also help to quickly interpret the data and allow for easy comparison of different analyses. When working with formulas in Excel to create a pro forma model, it is important to understand and use the Excel functions available. Formulas are used to perform calculations and modify data entries in the worksheet.

• Imagine we’re looking at “Bea’s Boutique,” a small but spirited clothing store nestled in the heart of a bustling neighborhood.
• They can show the projection of what money will be tied up in receivables, equipment, and inventory.
• For example, a business may use a pro forma financial statement to show what a businesses profit was if it sold off an arm of the company.

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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. Pro forma financial statements serve how to build a proforma to show how a company’s major changes, like selling off a brand or merging with another company, might affect its bottom line. While these projections can be valuable and clarifying, investors should treat them as educated guesses rather than guarantees. While this might give a clearer picture of regular operations, it could also make the company’s financial health appear better than it is. From here, too, it’s also pretty apparent how pro forma statements can be used to shift enough into supposed “one-time costs” so as to be misleading—which is against the law.

Modifying Assumptions to See Outcomes

Using this combination, the projections shows how they would have done together. 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. 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.

• A solid financial forecasting strategy helps you avoid cash shortfalls by showing where funds are coming from and how you’ll spend them.
• This chart of accounts will make up the pro forma statement for a 3 to 5 year period.
• This is known as sensitivity analysis, and basically shows how risky the company’s current position is.
• You’d answer these types of questions with pro forma income statements.
• Accelerate your planning cycle time and budgeting process to be prepared for what’s next.

There are four main types of pro forma statements that you can use to manage your cash flows and the financial health of your business. They help businesses anticipate future financial performance and make informed decisions. For instance, if you’re launching a new product, a proforma can help you estimate the costs, revenues, and potential profitability. It’s a valuable tool for assessing financial risks and opportunities before they happen.

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. Since pro forma financial statements and financial projections are quite similar, they may be considered synonymous.

Historical with acquisition pro forma projection

This wasn’t just any oven; it was the heart of the bakery’s expansion plan, significantly impacting both assets and liabilities. The oversight led to a considerable underestimation of future liabilities (since the oven was to be financed) and, by extension, equity. Needless to say, I had to redo the entire analysis, a humbling reminder of the importance of double-checking your work and considering all aspects of your business operations. Embarking on the journey of creating a pro forma analysis can feel akin to preparing for a grand culinary adventure. Just as a chef gathers all the necessary ingredients before beginning to cook, you too must assemble the right mix of data to craft your financial forecast. You wouldn’t just hop in the car and drive off without mapping your route, would you?

Developing a pro forma model in Microsoft Excel provides businesses with a powerful tool to analyze their financial performance. Investors and lenders use pro forma cash flow statements to evaluate a company’s financial viability before committing funds. These projections provide insight into how a business plans to use capital and generate returns, helping stakeholders assess risk and potential profitability. 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.

Don’t be discouraged if the numbers aren’t what you hoped for; this is why you create a proforma in the first place—to identify areas for improvement. With both revenue and expenses laid out, you can now calculate your net income. This is where you see the fruits of your labor—or the bitter reality, depending on how things shake out.

The statements are also created on the same sheet to reduce navigation time and the risk of linking to unintended cells. 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. 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.

Sometimes, you’ll need more tailored forecasts, like full-year projections or risk analysis. These specialized pro forma models help you prepare for specific scenarios, such as market downturns or expansions, allowing you to pivot when needed. They also provide valuable insights into the risks and opportunities tied to different financial strategies, helping you make informed decisions with greater confidence. This article will show you how to make a pro forma balance sheet in Excel.