According to the SEC, when required for public 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. 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.

• It can reveal if your company will be in the negative or positive months and years from now.
• A pro forma balance sheet is a comparison of a business’ assets and liabilities.
• This type of statement outlines the expected income, expenses, and profits or losses over a specific period.
• 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.
• However, to comply with professional auditing standards, the documents can be audited at the request of the company or a third party.

Some might think it refers to a type of financial statement or projection made by companies, while others may assume that it relates only to real estate transactions. This can help predict how well the business is likely to perform in the future. If it’s negative, it means you won’t have enough cash on-hand to run your business, according to your current trajectory. There are no universal rules that companies must follow when reporting pro forma earnings. This is why it is important for investors to distinguish between pro forma earnings and those reported using generally accepted accounting principles (GAAP). These are models that forecast the expected result of the proposed transaction.

Everything to Run Your Business

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• Because pro forma statements aren’t GAAP compliant, these hypothetical numbers are just that.
• They are instrumental in forecasting future performance by calculating projected income, expenses, and profits.
• They are useful tools that business owners, investors, creditors, or decision-makers can use to examine different iterations of future events based on certain financial assumptions.
• The same holds true for the process of preparing income statements and cash flow statements.
• Pro forma income statements are important because of the information they can offer a company.

Internal teams can view the information in these statements to weigh multiple options for moving the business forward. Investors can look at these to see a glimpse of their potential impact if they were to finance a business. Business owners can also look at pro formas forecasting the outcomes of a merger or acquisition deal. Also, mention how you came to a certain conclusion in your pro forma statements. List your assumptions, cite your sources (market research, past financial statements, etc.), and make it all available to your investors. A pro-forma forecast, similar to any sort of pro-forma report, is not required to abide by GAAP.

It’s not called “amateur forma” for a reason

Together, the documents help you assess whether your business’s financial health improves, declines, or remains the same following the decision. Effective business planning hinges on the ability to foresee and navigate potential financial scenarios. More than just a reflection of a company’s current financial standing, pro forma financial statements illuminate the possible paths a business could tread in the future. By offering a ‘what could be’ outlook based on specific assumptions, they play a critical role in forecasting the financial outcomes of various business decisions or events. Creating pro forma statements requires knowledge of the company’s current finances and market trends.

Step 5. Tabulating the Balance sheet

For instance, what happens if your main vendor raises their prices like they did last year? Or how will that proposed transaction of how to choose the right payroll software for your business buying new equipment impact you long term? Risk analysis lets you take the future for a test ride, and try out different outcomes.

An example of pro forma

In summary, pro forma financial statements serve as forward-looking tools, offering insights into a company’s potential financial trajectory across different scenarios. Grounded in well-reasoned assumptions, these statements are invaluable for guiding management, investors, and stakeholders. Crafting such documents, however, can induce undue stress for business owners.

To make things easier for you as an entrepreneur or investor, you must be ready not only to understand what a pro forma statement entails but also be willing to master them. Here is your comprehensive guide on mastering the art of developing accurate pro forma statements. Businesses small and large should use pro-forma statements while reviewing significant opportunities or performing strategic planning activities involving potential change initiatives such as investment scenarios when considering external investment options. They’re an extremely helpful tool for business planning, as they enable you to conduct side-by-side comparisons based on different financial assumptions that can help you decide between two proposals or potential strategies. They are useful tools that business owners, investors, creditors, or decision-makers can use to examine different iterations of future events based on certain financial assumptions.

In conclusion, creating accurate pro formo financial statements is an important process for businesses of all sizes. By understanding the forecasting method, assumptions and potential risks, companies can identify opportunities to improve their financial health and make strategic business decisions. Regularly reviewing and updating these statements helps keep them accurate throughout any market fluctuations or critical changes that occur over the years. Pro forma financial statements are financial reports based on hypothetical scenarios that utilise assumptions or financial projections. 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.