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Pro Forma Financial Statements with Templates and Examples

By 18th January 2023November 8th, 2023No Comments

Taking an online course like Financial Accounting can help you understand how to create and interpret different kinds of financial statements so you can find meaning in them. Learners enrolled in the course learn the language of accounting and how to create financial statements and forecasts to make strategic decisions. They have multiple uses for multiple scenarios, ranging from sales growth projections and risk analysis to more intricate M&A or investment purposes. Unfortunately, most organizations don’t have a fleet of battle-tested CPAs to fully leverage pro formas, especially startups and small businesses. Therefore, we again recommend checking out our Ultimate Guide to Pro Forma Financial Statements, where you’ll find even deeper insights and best practices. And just remember – if it all still seems a bit much, Embark is always around to swoop in and save the day.

  • This hypothetical forecasting and budgeting can show them that you already have a plan for their ROI.
  • A pro forma invoice is required to state the same facts that the commercial invoice would and the content is prescribed by the governments who are a party to the transaction.
  • For this reason, professionals typically turn to forecasts and financial projections to guide their plans and answer critical “what if” questions.
  • The difference is that the financial forecast details the company’s expected results of operations as a single-point estimate or a range.
  • With that information, you can conduct ratio analyses using hypothetical numbers and gain insight into how projects might affect the value of your investment.
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They must also ensure they label all pro forma information as such, to avoid confusion with historical information, and list the specific assumptions and uncertainties about them they are making. On the other hand, pro forma statements are financial projections and forecasts. They also use historical data but account for hypothetical factors added and subtracted to these statements.

Types of Pro Forma Financials

Companies in certain industries tend to utilize pro-forma reporting more than others, as the impetus to report pro-forma numbers is usually a result of industry characteristics. For example, some cable and telephone companies almost never make a net operating profit because they are constantly writing down big depreciation costs. For example, net income doesn’t tell the whole story when a company has one-time charges that are irrelevant to future profitability. Another important thing to remember when preparing pro forma statements is to use credible data and not over-rely on hypothetical information, so your estimates are as close to accurate as possible.

Centerfield is a small firm that manufactures baseball gloves, and Sally is creating pro forma reports for the 2021 fiscal year. Most businesses have limited resources, and pro forma reports can help you make better decisions with what you have. They can help you make a business plan, create a financial forecast, and even get funding from potential investors or lenders. There are several other types of templates that could be helpful for a business other than the ones already presented here.

What Are Pro Forma Financial Statements?

It’s helpful for FP&A to provide business leaders with side-by-side comparisons based on different assumptions, better informing the entire decision-making process. If, for instance, management is deciding between two separate proposals or business plans, they can use pro forma statements for each scenario and see which might serve their goals and vision best. Pro-forma financial statements are also prepared and used by corporate managers and investment banks to assess the operating prospects for their own businesses in the future and to assist in the valuation of potential takeover targets. They are useful tools to help identify a company’s core value drivers and analyze changing trends within company operations. You might know a pro forma income statement by its other name, pro forma profit and loss.

Historical with Acquisition

These statements can show investors a breakdown of how their money can be used to improve operations. This hypothetical forecasting and budgeting can show them that you already have a plan for their ROI. 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. These statements are useful for making estimates and analyzing future risks, but they’re not foolproof. So it’s best to use them in combination with other tools such as balance sheets, income statements, economic audits, and more.

There are many different periods that could be covered, as well as the different purposes for the pro forma financial statements. 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.

Linking the Three Pro Forma Financial Statements

The most common pro forma financial statements are projected balance sheets, income statements, and cash flow statements. Together, the documents help you assess whether your business’s financial health improves, declines, or remains the same following the decision. The Securities and Exchange Commission (SEC), the United States’ regulator of its stock market, requires pro forma statements with any filing, registration, or proxy statement. 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.

If so, they may issue pro forma financial statements that include the corrections they believe are necessary to provide a better view of the business. 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. 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.

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 how long are checks good for 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. These projections and forecasts are crucial to demonstrate your business’s potential to stakeholders and investors. Because pro forma statements exclude one-off expenses and purchases, they can actually provide a more accurate look at your profitability.

Cash flow from operations includes cash inflows from customer payments, and cash outflow for material purchases and payroll costs. The limitation of these statements is that they show the business owner nothing more than a prediction. No matter how good or bad that portrayal may seem, it’s only a good guess as to what may happen.

Used to show company results to investors, pro forma financial statements are often combined with generally accepted accounting principles (GAAP) adjusted statements. Pro forma financial statements are not computed using GAAP and are often called non-GAAP. GAAP-adjusted statements are uniform financial statements guided by rules of the Financial Accounting Standard Board (FASB). They differ from pro forma statements in that they are not projections, but rather historical reports — therefore, they do not consider things like litigation costs, restructuring charges, and other one-time items.

This way, any information from these pro forma statements can be more reliable. They can not only actionably inform your other financial plans but also give investors peace of mind. 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.

However, creating and comprehending pro forma financial statements can be challenging, especially if you don’t have prior experience. This guide is designed to help you get a solid grasp of financial statements in general, making it easier for you to understand and master pro forma statements. Small business owners draft pro forma financial statements to quantify the impact of potential business decisions, such as taking out a loan to grow your business. Pro forma financial statements give you and your team something to consider before signing on the dotted line. After a major acquisition, a public company must prepare a secondary balance sheet and income statement as if the purchase occurred at the beginning of the year.

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