Blog

Sometimes, pro forma financial statements are simply altered or restated actual financial statements to show the impact of one-off financial decisions. Assuming Bob wants to open a new shop in the future, but he anticipates that he will not have the capital to do so. Bob will prepare his pro forma financial statements to determine the impact of this decision on the profitability, financial position and cash flow position of his business. He will make certain assumptions, estimations and projections under likely, best and worst-case scenarios and see if he should go for the option of taking more debt onto the company.

• Do you want to learn more about what’s behind the numbers on financial statements?
• Use this Excel pro forma invoice template to create your own pro forma invoices.
• The purpose of pro forma is to analytically predict how well a business will perform in the future to help business owners make the best decisions.
• We’ll first cover the process for existing businesses, so if you’re only interested in new companies, feel free to skip ahead.
• Pro forma taxes are figured by taking your estimated tax rate—in this case, 30 percent—and multiplying it by the pro forma profit before taxes of $235,000.
• Pro forma financial statements are projections of future expenses and revenues, based on a company’s past experience and future plans.

The pro forma financial statements, including pro forma earnings per share calculated, must be submitted. Pro forma financial statements are usually prepared with the future in mind, so the best time to prepare these statements is before a major transaction. These transactions can include an acquisition, merger, restructuring of the company’s capital structure, or a new capital investment ahead.

Other Types of Pro Forma Financial Statement Templates

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. When it comes to accounting, pro forma statements are financial reports for your business based on hypothetical scenarios. They’re a way for you to test out situations you think may happen in the future to help you make business decisions. Primarily, it uses the same format as a regular income statement with projections for future performance. Nonetheless, below is an example of how the pro forma income statement may look.

• A savvier way to handle costs is to consider the differences between fixed and variable costs.
• It shows your expected cash inflows and outflows and can be used to assess your company’s financial health and ensure you never run out of money.
• In other words, it is a means of indicating what the profits of the company could be if certain costs were eliminated.
• If material costs increase sharply, or there is a shortage of labor, the cost of sales will increase.
• There are several different types of financial statements that a company will create to understand how well they are performing financially.
• 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.

Pro forma statements of cash flow estimate how much cash inflow and outflow is expected in one or more future periods. Often requested by banks, they may also be prepared as a part of the annual budgeting or forecast and estimate where cash shortages may occur in order to obtain additional funding. In the case of estimated cash overages, the company can produce a plan for investment. Arguably, the statement of cash flow is the most important of the pro forma documents. If the pro forma balance sheet and income statements lead to a statement of cash flow that shows inadequate funds for what management has planned, the other documents will be invalid and may need to be reworked. 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.

What is Pro Forma Income Statement?

It is always advisable to analysts that Proper scrutiny regarding the Projections should be done while reading this Income statement. It helps management to form an opinion regarding the future profitability of the company. Several estimations need to be kept in mind while preparing the Projected Pro forma Income statement. Expenses in the income statement are divided into operating expenses, financial expenses and exceptional expenses. Let’s take an example of the owner of our widget seller’s business who wants to look back at historical profits and losses.

For the effects of the business combination, only show the current and immediately preceding periods. A regular income statement, also known as a historical income statement, presents the revenues, expenses, gains, and losses incurred by a company during a specific period. It provides a retrospective view of the company’s financial performance and reflects the results based on past transactions and events. This approach is useful for seeing how a prospective acquisition could have altered the financial results of the acquiring entity. If you want to plan for upcoming economic changes, you need pro forma financial statements to predict future income, identify and control risks, and secure funding for your business.

Business Plan Pro Forma

For best practices on efficiently downloading information from SEC.gov, including the latest EDGAR filings, visit sec.gov/developer. You can also sign up for email updates on the SEC open data program, including best practices that make it more efficient to download data, and SEC.gov enhancements that may impact scripted downloading processes. If you https://www.bookstime.com/ read the first section describing how to forecast revenue for existing businesses, you might have noticed that this is precisely the opposite approach. Instead of focusing first on revenue (top-down) and then backing into how many customers we need, we’re focusing on getting new customers and then arriving at some amount of revenue (bottoms up).

Revenue drivers are activities we, or the business, do that “drives” revenue (a fantastic explanation, I know). These are often activities like digital advertising, cold calling, content marketing (wink, wink), or any number of other initiatives used by companies to create new sales. These costs can be rent, salaries, insurance, and other expenses that don’t fluctuate much with a given level of revenue.

How to create pro forma statements

Pro-forma statements are created when there’s an anticipated change in the company’s circumstances. According to the SEC, for public companies, a pro forma balance sheet should have the same dates, plus one year from the last submitted balance sheet. If interim period balance sheets were submitted, the company should pick up from where they left off. If it is an annual period, the document should also align with the company’s filed GAAP-approved financial statements. A pro forma balance sheet is a comparison of a business’ assets and liabilities. The pro forma part of the balance sheet is a projection that looks ahead, assuming certain things will occur.

Managerial accounting is the process of collecting, analyzing, and communicating financial information directly to managers and decision-makers of an business. In managerial accounting, pro forma financial statements are meant to help managers make business decisions. By doing so, managers can decide which business decisions look more beneficial and which ones to avoid. 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. This metric determines the financial outcomes of any acquisition or merger and tells the parent company whether the transaction will be accretive (good) or dilutive (bad) to the financial state of the company.

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. Simply put, pro forma financial statements are financial reports that are created on hypothetical assumptions. For example, in creating a pro forma income statement, you would need to forecast revenue for future periods. This can be done by analyzing past sales, orders for products or services in the current period or any backlog orders yet to be fulfilled.

This is because GAAP compliant reports must be based on historical information. Now categorize each cost from our list into the appropriate section of the pro forma income statement. Now https://www.bookstime.com/articles/pro-forma-financial-statements we’re done with the hard part, and all we have left is to add each cost to our pro forma income statement. A pro forma income statement is simply a future version of an income statement.

Business Plan Pro Forma Template and Example

A pro forma income statement uses the pro forma calculation method, mainly to draw the attention of potential investors to specific numbers when a company issues its quarterly earnings announcement. QuickBooks accounting software allows you to create pro forma statements and make changes as needed. You can make pro forma adjustments based on new information and use these statements to find opportunities, reduce risk, and increase profits. Unfortunately, there are also disadvantages that accompany pro forma financial statements. Here is the free pro forma income statement template for Excel that we have prepared for your business. If your company must produce an introductory paragraph with its pro forma documents, it should describe the content of your pro forma documents.

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. 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. Pro forma income statements, also called pro forma profit and loss (pro forma P&L), are projections based on your past income statements.

Pro forma statements typically only forecast operating items on the income statement such as sales and EBIT, and not any items generated by financing or investing flows. Pro forma financial statements are used by a variety of people for different reasons. Investors and creditors use it to analyze the financial position and health of a company. Management uses it to make informed decisions about events or transactions. And lastly, analysts use pro forma statements to forecast future performance and trends.

On the other hand, our fixed costs stay the same no matter how much we’re selling. The simplest example is a customer giving the business money in return for some product or service. In more complex scenarios, payment may occur over multiple installments after negations, contracts, and delivery timelines. The characteristics both situations have in common is that there is an exchange of value (money) at some point in time (transaction cadence) in return for receiving something of value (goods, services, or both).