Pro Forma Definition

by | Aug 17, 2021 | Informasi | 14 comments


Pro Forma Financial Statements

Companies in the U.S. follow Generally Accepted Accounting Principles as a best practice. While GAAP standards set guidelines on reporting information accurately and transparently, sometimes it’s useful to include or exclude information. In particular, you might want to know how an anticipated change may affect a company’s earnings. For example, if an energy company is planning to build a new power plant, investors may wonder how that project will affect the company’s profits. For these purposes, pro forma statements are typically created as a part of a financial forecast in financial accounting. Big corporations who have in-house accountants use pro forma statements for financial modeling and forecasting different scenarios.

Combine projected net income to total assets to solve for total projected assets. Subtract total expenses from total revenue to obtain projected net income. Lastly, add the final amount to last year’s ending cash flow balance to find the net cash change. Estimate the total amount of out going cash (liabilities, cost of sales, salaries, etc.). The projections serve as windows of opportunities for startup founders to increase the production capacity and drive growth in a startup.

You have to assume that there is a real possibility that the projected figure may not be accurate. Often, founders are surprised how much pro forma income statement can be advantageous to their startup operations in the foreseeable future. At its core, you have to think of a pro forma income statement as a strategic planning tool to move forward in the right direction. Now the income statement, balance sheet, and other data can be used to create the statement of cash flows. This is when you take the financial statements of your business and merge them with financial statements of the other to see what your previous year might’ve looked like and what it may look like in the future. Finally, calculate the total cash payments, net cash change, and end cash position to arrive at your completed pro forma cash flow statement.

Business Checking Accounts

Financial statements, including the balance sheet, income statement, and cash flow statement, based on a set of assumptions. Simply put, it’s a future or projected income statement, or it can even be used to restate financial books in an unofficial way. For example, a business may use a pro forma financial statement to show what a businesses profit was if it sold off an arm of the company. Below is an example of a pro forma income statement for a proposed ice cream shop.

  • Therefore, there are many types of pro forma financial statements that a company can prepare for future reference.
  • A business will analyze old financial documents while considering any potential changes adjustments that will happen in the near future.
  • To illustrate the process of creating pro forma financial statements, meet Sally, the owner of Centerfield Sporting Goods.
  • Use the balance sheet template below to create your own balance sheet.
  • Pro forma statements are commonly included in the entrepreneur’s business plan.

As part of a business plan that an entrepreneur must make to receive a loan, the financial statement should project potential earnings and expenses over three years. Or your business is about to enter a new tax bracket, you can use pro forma financial statements to determine the effect that this decision will have on your business, enabling you to plan for the future as you move forward. 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. This approach may result in several different sets of pro forma financial statements, each designed for a different investment amount. Pro forma financials are not computed using standardgenerally accepted accounting principles and usually leave out one-time expenses that are not part of normal company operations, such as restructuring costs following amerger. Essentially, a pro forma financial statement can exclude anything a company believes obscures the accuracy of its financial outlook and can be a useful piece of information to help assess a company’s future prospects. Adjustment to reflect the addition to retained earnings related to the recognition of a net tax asset of $1,815 million under Statement of Financial Accounting Standards No. 109 at an effective tax rate of 41%.

Financial Statements

While pro forma financial statements project the future, there is no guarantee that those predictions are accurate. Unexpected events, bad assumptions, and other factors can lead to dramatically different results. This 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. The Securities and Exchange Commission consistently updates its stringent rules on preparing pro forma statements for the public. Still, pro forma financials are not regulated to the same extent as historical financial statements.

A change in the business entity resulting from the acquisition or disposition of an asset or investment, and/or the pooling of interests of two or more existing businesses. Below are the Pro Forma projections of the Income Statement of Alibaba. The projection of revenues is based on many assumptions, including growth rate, competition, market size, etc. A summary of the critical “bottom lines” from each pro forma statement (Figure 4.18 “Alice’s Pro Forma Bottom Lines”) most clearly shows Alice’s complete picture for each alternative. Let’s assume salaries and other expenses will increase by 5 percent.

You will need to think of all the ways that your organization will generate income and what costs you will need to incur to generate that income. Notice how the two reports, balance sheet and income statement, link together. A well-crafted pro forma is just as invaluable for small businesses looking for more or first-time funding as it is for the investor. From it, an investor or owner should be able to perform what-if scenario analysis, calculate financial ratios, potential profit after taxes, and determine future financial health.

We reserve the right to block IP addresses that submit excessive requests. Current guidelines limit users to a total of no more than 10 requests per second, regardless of the number of machines used to submit requests. Please declare your traffic by updating your user agent to include company specific information. Some firms exclude unsold inventory of their statements, which, in a way, portrays inefficient management to produce inventory that cannot be sold. And stock-based compensation, to correctly represent its Net Income. Let’s say your business manufactures and sells widgets to the general public.

Can You Compare Pro Forma Statements From Different Companies With One Another?

If you’re not sure how to create financial projections, your bank can likely provide you with a template or help you create accurate projections. The statement of cash flows is the only page where you do not need to make assumptions. If you have completed your income statement and balance sheet correctly, then the statement of cash flows solves like a sudoku. If you are willing to try to model on your own, focus on the goals of your operation and ask yourself where it will be in 5 years. You need to link where the company is now to where you want it to be. If you want to sell your company for $10 million in 5 years, then build the bridge to that exit via your pro forma, the projected financial statements. That depends on how she proceeds, but the pro forma balance sheets (Figure 4.17 “Alice’s Pro Forma Balance Sheets”) can give a glimpse.

  • Combine projected expenses to total liabilities to solve for total projected liabilities.
  • One of the most common uses of pro forma statements is projecting the impact of a significant event, perhaps a business combinationor refinancing debt.
  • The projection of revenues is based on many assumptions, including growth rate, competition, market size, etc.
  • You can also use pro forma statements to generate financial ratios.

Here’s a historical example of a pro forma income statement, courtesy of Tesla Inc.’s unaudited pro forma condensed and consolidated income statement for the year ended Dec. 31, 2016. Under the new rules, these costs are expensed through the income statement in the same period the services are received, typically around the transaction date. The balance sheet is one of the three fundamental financial statements. The financial statements are key to both financial modeling and accounting. Pro forma financials have their place, but some public companies have taken advantage of loose rules to mislead potential investors. Pro forma financial statements show the consequences of financial choices in the context of the financial statements.

Financial Modeling Based On Pro Forma Projections

There are many different periods that could be covered, as well as the different purposes for the pro forma financial statements. Additionally, pro-forma projections or pro forma reports are simply modified versions of actual financial statements that are made for the sake of showing what these documents would look like under certain hypothetical scenarios.

Assets, which include cash, inventories and accounts receivable, are divided into current and non-current assets. Non-current assets are those a company does not expect to use within 12 months. Entrepreneurs produce pro forma reports to attract investors, procure a line of credit or obtain loans. Next, add up all your operating expenses, as well as any other expenses like income taxes and cash disbursements. We’ll do one month of your bookkeeping and prepare a set of financial statements for you to keep.


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Pro Forma Financial Statements

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. 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 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. In this case, the entrepreneur would create pro forma projections of the various financial statements and present them to the investors. Unlike historical financial statements, you should be aware of the fact that there is no regulation in place on the pro forma income statement and balance sheet.

Further, while there’s definitely a right way and a wrong way to format a pro forma ‒ just ask the AICPA, FASB, and SEC ‒ the term pro forma could mean an income statement, cash flow statement, or balance sheet. In other words, they’re basically the same financials you’re already accustomed to, just using hypothetical data. So as you’ll see once we discuss how to create pro formas in just a little bit, they don’t require you to recreate the financial reporting wheel, at least in terms of format. While they all fall into the same categories—income statement, balance sheet, and cash flow statement—they differ based on the purpose of the financial forecast.

Income statements would show how much it would cost a company to pursue the project and how much revenues might improve after completion. Public companies release pro forma financials under the guise of clarifying their financial position after a business acquisition. They take out one-time or unusual costs to offer a fuller picture of the business’s operating profit. To some, pro forma financials feel like companies are creating their own financial accounting rules to engineer appealing financial results. Russell creates a pro forma income statement for next year to inform his decision. Russell follows The Blueprint’s guide to forecasted financial statements to generate the document.

Now the projected sale has not only put more income on the bottom line, it has also put more debt on the balance sheet. Estimating and projecting the balance sheet is also a common practice because investors and creditors want to use the balance sheet to analyze debt ratios, liquidity levels, and overall leverage of the company. Pro forma profit and loss statements can also be used to calculate Pro Forma Financial Statements the financial ratios. 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. Basically, it is a fancy word for “future” or “projected.” Sometimes, however, it is used to restate financial books in an unofficial way. Calculate your total cash payments, net cash change, and ending cash position.

What It Means For Individual Investors

Understanding this methodology and the decisions behind it will enable accurate comparisons and information to investors. There are several ways that a pro forma financial statement can be used incorrectly. These financial statements are based on what someone thinks will happen in the future. This is not an indication that what appears on pro forma statements will actually happen.

That’s why our editorial opinions and reviews are ours alone and aren’t inspired, endorsed, or sponsored by an advertiser. Editorial content from The Blueprint is separate from The Motley Fool editorial content and is created by a different analyst team. QuickBooks Online is the browser-based version of the popular desktop accounting application. It has extensive reporting functions, multi-user plans and an intuitive interface. I’d advise Russel to hire a part-time assistant to reduce the risk of sinking nearly $60,000 into a new position when he’s not sure he’ll see the increased revenue he’s expecting. He can always offer the person a full-time job after his projection actualizes. Businesses create annual budgets that fall in line with a company’s profitability and production goals.

You may also be interested in my course, How to Create a Business Plan. This course includes step-by-step video instructions, samples and fill-in-the-blank templates for both a one page business plan and a full length business plan. Take the following walk-throughs with a grain of salt as we provide them as a glimpse into the process. If you’re trying to attract investment capital or a buyer for your business, you’ll want to use something more detailed and tailored for the purpose. Fortunately, you already happen to know a team of expertsthat can do just that for you. Now that we understand what a pro forma is and why they’re so uniquely insightful, let’s zoom in on the different ways that companies use them. The cash balance is usually calculated using a model and policy decisions.

Pro Forma Profit After Taxes

And if it all seems a bit much, Embarkis always around to swoop in and save the day. Remember, what distinguishes these pro forma statements from your standard financials are the adjustments, not the calculations or even the format. As we said, certain regulatory bodies and scenarios will require specific information but, from a foundational perspective, the framework for each is essentially the same as what you already use when preparing your financials. Add back depreciation to capital expenditure, which is arrived at on the cash flow statement. This determines property, plant, and equipment on the balance sheet. Add net income from the income statement to the balance sheet and cash flow statement. It usually helps to build out a revenue model where you can add in your assumptions and sense check numbers to see if they make sense before you plug into your income statement.