Pro Forma Financial Statements with Templates and Examples

what is pro forma statement

Short of having a crystal ball, pro forma financial statements can help you predict things like net income and gross profit in the future. Using these financial statements, you can plan for the future and lower your risk, as well as attract investors or get approved for financing. 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.

what is pro forma statement

A company may be seeking funding, and wants to show investors how the company’s results will change if they invest a certain amount of money in the business. An investment pro forma projection may result in several different sets of pro forma financial statements, each designed for a different investment amount. 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. A full-year pro forma is a projection of a company’s year-to-date results, to which are added expected results for the remainder of the year, to arrive at a set of full-year pro forma financial statements. This approach is useful for projecting expected results both internally to management, and externally to investors and creditors.

What are Pro Forma Financial Statements?

Generally, pro forma financial statements tend to portray a business as being more successful than it really is, and having more financial resources available than may actually be the case. Consequently, investors should be extremely cautious when evaluating these types of financial statements, and spend time understanding how they differ from the issuing firm’s normal financial statements. This approach is useful for seeing how a prospective acquisition could have altered the financial results of the acquiring entity.

You may want to create financial projections for different investment amounts to cover your bases. 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.

  1. While this provides insight into a company’s historical health, creating pro forma financial statements focuses on its future.
  2. This pro forma projection includes a business’s year-to-date results as well as forecasted income and expenses for the rest of the year to provide a full year view.
  3. 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.
  4. This discrepancy is part of the reason the distinction between pro forma and GAAP financial statements is important.
  5. You may be courting investors or trying to convince your business partners of the value of a capital investment or additional financing.

If, for example, it is preparing to produce new goods, the financial statements can help forecast if producing the new goods will cause expenses to increase. This enables the company to accommodate any potential for profit/loss by changing production strategy, materials, or even the rate at, or timing of, the production of the goods. 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.

The Securities and Exchange Commission takes a dim view of this kind of adjusted reporting, and has issued regulations about it in their Regulation G. 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.

Pro forma financial statements definition

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. Standard accounting statements like the balance sheet https://www.kelleysbookkeeping.com/how-to-do-payroll-accounting/ look at historical financial information, but pro forma documents look forward to help you predict future income through different types of accounting statements. A pro forma small business statement may include projected revenue, estimated expenses, and cash flow for three to five years. Used to show company results to investors, pro forma financial statements are often combined with generally accepted accounting principles (GAAP) adjusted statements.

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. 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. 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.

what is pro forma statement

Investors should be cautious when evaluating these types of statements because they present a considerably more favorable picture of the business. Accountants prepare financial statements in the pro forma method ahead of a proposed transaction such as an acquisition, merger, a change in a company’s capital structure, or new capital investment. Most businesses have limited resources, and pro forma reports can help you make better decisions with what you have. Pro forma statements are useful with regard to tracking future financial direction and occurrences, often including some historical numbers to help account for what the projected outcomes should look like.

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. Pro forma financial statements are used in a business plan to present the best-case, expected, and worst-case scenarios for a proposed transaction. With pro forma statements, businesses can better make assumptions on what decisions are best for the company, such as labor increases, production increases, or even expansion. All in all, the process of preparing a pro forma balance sheet is much the same as preparing a normal balance sheet.

AccountingTools

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. 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. For the effects of the business combination, only show the current and immediately preceding periods.

If, for example, you want to calculate the impact on the debt-to-equity ratio in future years, you can use the data from pro forma reports. Pro forma is a Latin term that roughly translates to “as a matter of form,” and is most often used to describe a document that is based on financial assumptions or projections, such as a pro forma balance sheet. 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).

Pro forma financial statements incorporate hypothetical numbers or estimates. They are built into the data to give a picture of a company’s profits if certain nonrecurring items are excluded. In financial accounting, a pro forma earnings report excludes unusual or nonrecurring transactions.

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 six strategies for fraud prevention in your business 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.

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