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. 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. A pro forma income statement projects your business’s revenue, expenses, and profits over a set period. It provides a better understanding of future profitability, helping with pro forma valuation and decisions like pricing or cost-cutting. By using a pro forma model, you can simulate how changes in sales or expenses will impact your bottom line, making it easier to choose a strategy for growth.
📆 Date: May 3-4, 2025🕛 Time: 8:30-11:30 AM EST📍 Venue: OnlineInstructor: Dheeraj Vaidya, CFA, FRM
Pro forma financial statements reveal the financial impact of different scenarios. Assume that a commercial builder is bidding on a three-year project to construct an office building. The business produces a pro forma cash flow statement based on project costs and progress payments made by the customer. To get the most from your pro forma statements, base your assumptions on solid research and update them regularly.
Strategies for Integrating Pro Forma Statements into Business Planning
- This pro forma projection is useful to investors and lenders, who want reassurance that your business is slated for profitability.
- Let’s roll up our sleeves and dive into a case study that brings the mystical art of pro forma analysis down to earth.
- Accordingly, the Company’s management can include or exclude line items that they feel may not accurately measure its estimates.
- A Pro Forma Income Statement is a financial statement that projects the future income and expenses of a business based on certain assumptions.
Bench simplifies your small business accounting by combining intuitive software that automates the busywork with real, professional human support. To illustrate why this distinction matters, let’s imagine you and I start a business, and in the beginning, we expect sales to be relatively low; say one hundred units. Fixed costs stay relatively constant – at least for a while – and are more important in the beginning because they’ll make up a higher percentage of overall costs. Remember that our chosen methods for generating new business will need to change as the business grows. We may bring in $15K per month, making 300 cold calls a day, but we won’t be able to make $150K per month making 3,000 cold calls each day because it probably isn’t possible.
This projection takes the year-to-date cash flow results and adds a cash flow forecast for the remainder of the year. Many SMBs use financial tools to forecast business performance based on assumptions. Publicly traded companies must use GAAP statements for official reporting to investors, regulators, and tax authorities, as required by law. These statements must follow strict accounting rules to ensure transparency and consistency. Businesses that provide stock-based compensation have to record expenses for the value of the compensation over time.
The builder’s cash outflows for labor and materials are compared to the cash inflow from the payment. We expect to offer our courses in additional languages in the future but, at this time, HBS Online can only be provided in English. Use this Excel pro forma invoice template to create your own pro forma invoices. Get free guides, articles, tools and calculators to help you navigate the financial side of your business with ease.
They are used by management to project financial results based on assumptions. 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. 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.
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. 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.
What’s the purpose of a pro forma financial statement?
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. 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.
This might involve considering capital investment, anticipated market changes, or changes in operations. Pro forma adjustments should reflect both internal strategies, such as cost-cutting measures, and external factors, such as new regulations or economic conditions. This includes both fixed and variable costs, such as salaries, rent, utilities, and raw materials.
The SEC guides auditors to ensure that they do not take on too much responsibility for the company’s claims. 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. Unlike regular financial statements that follow generally applicable accounting principles (GAAP), companies have considerable flexibility in preparing these numbers.
Big corporations who have in-house accountants use pro forma statements for financial modeling and forecasting different scenarios. VF Corporation began with its existing balance sheet, showing $11.5 billion in total assets. Companies occasionally create pro forma versions pro-forma income statement of past financial statements that leave out unusual events to show what they think the picture would have looked like otherwise.
- New businesses are the perfect candidate for using what is known as a bottom-up forecast (in contrast to top-down).
- The financial information should determine the time required to recover the cash invested in additional inventory and higher accounts receivable.
- This enables them to better understand the combined entity’s future financial performance and potential synergetic effects.
- The projection of revenues is based on many assumptions, including growth rate, competition, market size, etc.
Attracting Investors and Securing Loans
However, such statements could vary substantially from actual events and may be inaccurate. Although, using these assumptions is not fraudulent as pro forma earnings are not regulated. The investors should be careful while using pro forma statements and rely on the GAAP figures and financial statements to analyze the Company’s performance. Analysts and investors should dig deep and try to find the reasons for the variance between the pro forma and GAAP financial statements.
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. 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.
How to create pro forma statements
In other words, pro forma financial statements start from real financial data. Entrepreneurs launching startups or managing small businesses rely on pro forma cash flow statements to forecast cash needs and secure funding. These projections help them plan for inventory purchases, marketing campaigns, or operational expansions. While we can never know what the future holds, we can make some educated forecasts about what it might look like with pro forma income statements. Looking at a few scenarios ranging from worst case to best, you can see what the impact of these changes might be and use this information to guide your decisions. Pro forma financial statements are very informative to the investors as it shows the various assumptions and projections for the Company’s financials.
As tech stock prices increased in the mid to late 1990s, many investors relied on pro forma statements to make investment decisions. Among other things, the SEC has specific rules that govern how pro forma reports are created, and how they are presented to investors. Goodwill is recorded when a business purchases an intangible asset or another company for more than the asset’s book value.